{"id":24765,"date":"2017-11-15T19:17:50","date_gmt":"2017-11-16T00:17:50","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/pg-china-reinventing-the-offline-b2b-distribution-network\/"},"modified":"2017-11-15T19:17:50","modified_gmt":"2017-11-16T00:17:50","slug":"pg-china-reinventing-the-offline-b2b-distribution-network","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/pg-china-reinventing-the-offline-b2b-distribution-network\/","title":{"rendered":"P&G China: Reinventing the Offline B2B Distribution Network"},"content":{"rendered":"

First entering China in 1988, P&G saw two decades of exponential growth in this rapidly evolving consumer market, with China becoming P&G\u2019s 2nd<\/sup> largest market after the U.S. and contributing 8% of its global revenue [1]. In its 3rd<\/sup> decade, however, P&G China has been posting disappointing sales figures and losing market share in most categories, which P&G\u2019s CEO, David Taylor, considers \u201cunacceptable\u201d [2].<\/p>\n

While P&G established a small online presence in China, its strength and focus have largely been offline distribution. Despite being one of the most mature ecommerce markets in the world, China still has an online retail penetration rate of only 13.5% [3]. Offline will remain the bread and butter for P&G and other large CPG companies. How does P&G defend its market position offline in the digital era by taking advantage of the latest information and data technologies?<\/p>\n

 <\/p>\n

The Offline Challenge in China and P&G\u2019s 20-year-old Solution <\/u><\/strong><\/p>\n

Historically, P&G owed a large part of its success in China to the offline B2B distribution network it built over 20 years. Unlike online retail, offline retail in China is inefficient and fragmented. There are 6.8 million independent mom-and-pop stores [4] spread across China. P&G\u2019s B2B distribution network consists of thousands of distributors, wholesalers and channel vendors, which, in its heyday, was capable of supplying P&G products to 1.2 million such stores.<\/p>\n

Despite its scale, the 20-year-old network has obvious drawbacks. By design, it only allows one-way information flow \u2013 P&G fills the distribution network with whatever products are in demand, but never receives any data from the shops and consumers. The network is further handicapped by rising operating costs in China, and has shrunk significantly.<\/p>\n

 <\/p>\n

The LST Program \u2013 Digitizing the Brick Mortar B2B Distribution Network<\/u><\/strong><\/p>\n

Starting from 2015, P&G pursued a digitization strategy to reinvent its offline B2B distribution network. P&G joined forces with Alibaba and became a launching customer for Alibaba\u2019s \u201cLingshoutong (LST)\u201d program [5]. The LST program enlists mom-and-pop stores to become \u201cLST stores.\u201d LST store owners can order some or all of their assortments through the LST mobile app at wholesale price. Alibaba consolidates the demand, sources the products directly from brand partners such as P&G or their designated distributors, and ships the products to the stores through Cainiao Logistics, an Alibaba affiliate that links a network of logistics providers, warehouses and distribution centers [6]. In the past, many store owners had to drive hundreds of miles every other week to source products from different physical wholesale marketplaces, which are typically characterized by limited selection, high costs and low quality (even expired or fake products in some cases).<\/p>\n

\"\"<\/a>
\nA store in Hangzhou before and after joining LST [7]<\/em><\/p>\n

The LST program further helps store owners by providing customized assortment and placement recommendations based on Alibaba\u2019s consumer data. For example, it can suggest a store owner to stock dog food because there are 100 dog owners living within walking distance of the store [8]. The LST program also provides stores with connected smart POS systems (for data collection), Alipay terminals (for accepting e-payments), store improvement plans, service standards, etc.<\/p>\n

The benefits for P&G are enormous:
\n–\u00a0 \u00a0 \u00a0The cost of using the LST network is significantly lower than maintaining a proprietary distribution network due to the use of technology and economy of scale.
\n–\u00a0 \u00a0 \u00a0P&G can push its new products to stores more quickly and control what to promote to certain regions or customers.
\n–\u00a0 \u00a0 \u00a0P&G can collect real time data on store orders and consumer purchases.<\/p>\n

 <\/p>\n

Bigger Concerns Looming on the Horizon<\/u><\/strong><\/p>\n

While LST addresses many of P&G\u2019s near-term challenges, P&G still faces one fundamental issue.<\/p>\n

Distribution had been one of the P&G\u2019s core competencies in China. Going forward, however, if a large portion of P&G\u2019s distribution network is controlled by platforms like Alibaba, how does P&G remain competitive as a company? In the same way LST can sell P&G products to LST stores, it can also promote competing products from Unilever. Even worse, will there be a day when LST starts selling private label products and disintermediates P&G completely?<\/p>\n

\"\"<\/a><\/em>The spicy Snickers chocolate bar developed by Mars in partnership with Tmall [9]<\/em><\/p>\n

For P&G to stay competitive and valuable as a company, my recommendation is that it should focus on reinforcing its strengths in R&D, production and brand building. As a benefit of digitization, P&G now has access to an enormous amount of data which creates a great opportunity to develop a nimbler R&D and production process that can respond to changing consumer demand quickly and cost effectively. As an example, Mars conducted a pilot product development program in partnership with the ecommerce platform Tmall, which shortened the product development cycle from 18 to 9 months through an iterative process driven by quick consumer feedback and big data [10].<\/p>\n

 <\/p>\n

What will Keep P&G Awake at Night<\/u><\/strong><\/p>\n

No large CPG companies has made the transition successfully. Is it possible to create a CPG business model without an edge in distribution network? The answer remains to be seen.<\/p>\n

[Word Count: 800]<\/p>\n

 <\/p>\n

Reference:<\/p>\n

    \n
  1. Proctor & Gamble, 2017 Annual Report, p. 2, http:\/\/www.pginvestor.com\/Cache\/1001226614.PDF?O=PDF&T=&Y=&D=&FID=1001226614&iid=4004124<\/a>, accessed Nov. 2017.<\/li>\n
  2. Sharon Terlep, \u201cP&G CEO Says Company Hasn\u2019t Been Delivering,\u201c Wall Street Journal, Feb. 18, 2016, https:\/\/www.wsj.com\/articles\/p-g-ceo-says-performance-in-china-unacceptable-1455809323<\/a>, accessed Nov. 2017.<\/li>\n
  3. Deloitte, \u201cChina E-Retail Market Report 2016,\u201d https:\/\/www2.deloitte.com\/content\/dam\/Deloitte\/cn\/Documents\/cip\/deloitte-cn-cip-china-online-retail-market-report-en-170123.pdf<\/a>, accessed Nov. 2017.<\/li>\n
  4. Kanter Retail, 2016 China FMCG Internet B2B Market Research, p. 12, https:\/\/cn.kantar.com\/media\/1476077\/kantar_retail_2016_________b2b_________.pdf<\/a>, accessed Nov. 2017.<\/li>\n
  5. \u201cAlibaba 1688.com Launches LST Program. P&G Joins Quietly,\u201d May 9, 2015, Ebrun.com, http:\/\/www.ebrun.com\/20150309\/126685.shtml<\/a>, accessed Nov. 2017.<\/li>\n
  6. Di Lin, \u201cLST Covers over 500,000 Stores. Alibaba will Help Over 6 Million Stores Embrace the DT Era,\u201d Huanqiu Tech, Aug 28, 2017, http:\/\/tech.huanqiu.com\/original\/2017-08\/11190231.html<\/a>, accessed Nov. 2017.<\/li>\n
  7. \u201cA Visit to the First Tmall Xiaodian: The Revolution at the Wei Jun Supermarket,\u201d Linkshop, Aug 30, 2017, http:\/\/www.linkshop.com.cn\/web\/archives\/2017\/386067.shtml<\/a>, accessed Nov. 2017.<\/li>\n
  8. Jihui Shen, \u201cFirst Tmall Store Opens in Hangzhou. The Mom-and-pop Store in Your Neighborhood will Understand You Better,\u201d Finance China, Aug. 30, 2017, http:\/\/finance.china.com.cn\/industry\/20170830\/4372548.shtml<\/a>, accessed Nov. 2017.<\/li>\n
  9. \u201cSpicy Chocolate Debuts on Tmall. Do You Dare to Try?\u201d Huanqiu Tech, Aug 18, 2017, http:\/\/tech.huanqiu.com\/internet\/2017-08\/11147493.html<\/a>, accessed Nov. 2017.<\/li>\n
  10. Xiaoming Lu, \u201cTmall Strives to Become 5th<\/sup> Ave of New York by Helping Mars to Develop Spicy Chocolate and Helping Estee Lauder to Develop New Eye Cream,\u201d Aug. 16, 2017, 36Kr, https:\/\/36kr.com\/p\/5088268.html<\/a>, accessed Nov. 2017.<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

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