The Internet Destroyed the Personal-Care Giants: How Do They Sell Now, and to Whom? | From Tier-1 to Tier-5 Cities, What's Happening (Part One)

Over roughly the past two months, we interviewed 11 people who work in this industry, drawn from every kind of role at the personal-care giants and in their distribution channels. This series runs to three articles, and tries to answer one question: why did the traditional distribution systems of the personal-care giants collapse?

Everything has slipped out of control.

The big companies have begun to give ground.

"Ten years ago, Procter & Gamble and Unilever could control the price in a store. They told you what to sell it for, and that's what you sold it for." That held even when the only hypermarket in Wuhu was a single Century Lianhua. "Now you have to talk things through. Ten years ago you rarely saw their promotional packs. Now there are plenty of them." That is the ground the big companies have given to supermarkets and hypermarkets.

At fast-moving consumer goods giants like P&G and Unilever, Century Lianhua sits in the same category as hypermarkets such as Walmart, Carrefour and RT-Mart: they are all KAs, short for "key account." KA is the most important part of the traditional distribution system — nothing in between, just direct supply and direct transactions.

You probably also know that getting products into the hands of consumers everywhere else depends on something called the distributor network. The tiers — gold, silver, bronze, or first, second and third class — mark how much business a distributor can handle.

"Now some very strong distributors will bang the table at the manufacturer. It isn't like before, when distributors kept each other in check. Business is hard now, and distributors push us, the manufacturer, into giving up margin." This is not something the big companies like to do, but they have given ground to some distributors.

The retreat — the loss of control — is even plainer in e-commerce, the new channel.

"E-commerce platforms have their own holidays: Double 11, 618. If we'd planned to launch a new product in August or December, the platform would ask us to move it up. E-commerce is growing fast, so we usually give them what they ask for." For big companies with rigid processes, that would once have been unthinkable.

Put the problem plainly: the traditional sales-channel system of the big companies has collapsed. This is not alarmism. The almost mythical standing P&G and Unilever once had in the Chinese market rested on a stable, powerful distribution system. The management-trainee programs that once drew so many university graduates existed, at bottom, to train and stockpile talent for that system.

In a privately owned supermarket in Mianyang, Sichuan, Zhou Tian is walking the shelves of shampoo, shower gel, laundry powder and other household and personal-care goods, talking with the shop owner while typing something into his phone. Zhou Tian is a field sales manager for Unilever, and every week he tours a handful of stores.

Dozens of salespeople work under him. Unilever employs them all, and distributors manage them on Unilever's behalf. Every day these salespeople visit the retail stores in their territory — mostly grocery stores, private non-chain supermarkets and cosmetics shops of 100 to 1,000 square meters. If a store is out of stock, the information goes into a mobile order system, and from there into the DMS, the distributor management system.

The DMS records the orders placed by a distributor's downstream retailers. The data it exports tells the distributor's warehouse staff whether to pick goods and where to send them. Unilever can see into the system too, and uses the data to decide when to restock. The DMS is how the big companies keep track of a distributor's sales and inventory, and how they manage distributors from a distance.

Where an area is too remote for that, salespeople fall back on "van selling": one salesperson loads a vehicle with goods and tours the stores, restocking and closing the sale on the spot when something has run out. In extreme cases, where transport costs too much, the distributor decides on the basis of local sales volume whether to set up a sub-warehouse or instead find a wholesaler to break bulk in the remote area. In the second case the distributor usually has no systematic view of sales at the retail end, and to get those numbers the big companies typically hire market research firms such as Nielsen to run their own studies.

The data coming back through the distribution system drives the decisions of the big companies' sales departments. If sales in an area are weak, the sales department may propose pulling a category out of that market; if inventory is piling up, it will consider promotions, sometimes with subsidies and cash incentives for distributors and retailers.

If you take a bottle of shampoo off the shelf at a hypermarket like Walmart or Carrefour, the transaction the POS checkout system logs from the barcode goes straight into Unilever's back-end system.

All of that data reaches Unilever's head office in Shanghai, where it is pooled with the numbers from every region to decide how to organize production, whether factories need more capacity, whether to hire more workers. In the end it becomes a performance figure.

Farther away, Unilever's global headquarters in Rotterdam and London see the same numbers. They are counting on emerging markets for profit, counting on a bright spot to appear in a world where the economy is sluggish and demand keeps falling. As growth slows, China matters more and more to the profit and loss of many multinationals.

This sales network, spread across the globe like capillaries, is the lifeline of the big companies.

"For a multinational to succeed in China, the first step is the distribution network," Ma Ruchao, president of Mondelez China, said this past April at an industry innovation forum in Shanghai. He came to China in 1990 and has worked at Procter & Gamble, Colgate and Cadbury, building their China business. In his view, putting that distribution system in place comes before a good product, the right price or the right product mix.

Ten years ago P&G's sales in China grew by close to 20%. Mondelez, which owns Oreo, grew fourfold in China in 2007. Unilever, too, once posted double-digit growth here. All of it ran on a distribution system that worked.

Now most of the news out of the fast-moving consumer goods industry is about decline, layoffs and marketing budget cuts. In fiscal 2015, sales volume fell in every one of P&G's business units, revenue was down 5% year on year, and net earnings fell as much as 40%. Mondelez had "no growth" in China in 2014. In its first-quarter 2016 briefing, Unilever said growth in China was driven almost entirely by e-commerce.

"The first thing we noticed was the fragmentation of distribution, and at the same time some brand values falling, which left the pricing system unstable," Ma Ruchao said. It is a row of falling dominoes, and the problems may be arriving faster than the big companies expected.

Over roughly the past two months we interviewed 11 people who work in this industry directly; counting more distant contacts like Ma Ruchao, the number comes to around 20. They work, or have worked, in the sales, marketing or e-commerce departments of P&G and Unilever; some are distributors, some are sales managers on the hypermarket channel side, others come from e-commerce and from other roles tied to the big companies' distribution systems. We also traveled to Xuancheng, Anhui, to see how far the big companies' channels have actually pushed into tier-4 and tier-5 cities.

The people we interviewed know exactly what is happening, and what we felt most in talking with them was confusion — at times something closer to helplessness. Most asked to remain anonymous, or asked that nothing pointing to their employer appear here. At their request, most of the people quoted in this article are unnamed or given pseudonyms.

We have gathered these conversations into a series. In it we try to answer the following questions:

• How did the big companies lose their bearings once the channels through which consumers get information changed?
• Why are their products no longer popular?
• What did they run into when they tried to move into tier-3 and tier-4 markets after tier-1 and tier-2 markets filled up?
• Why do distributors no longer trust them, to the point of banging the table?
• Advertising spending hasn't dropped, so why won't sales rise?
• What does e-commerce actually mean for them? Is it the future of this industry?

All of these questions are attempts to answer why the big companies' traditional channels collapsed. This may not be the whole picture, but it is enough to show the industry's problems. The collapse of a distribution system that reaches from China's tier-1 cities down to tier-5 cities — some of which it has not reached at all — did not happen overnight, of course. In this series you can watch small changes add up to a large one.

This is the first article in the series. The other two will be published later this week.

"Traditional" only means anything as the opposite of "internet"; another way to put it is offline versus online. The people we interviewed don't think the internet explains everything, but when pressed to name the one thing that set the change off, they all pointed to the internet.

Let's start with how the internet destroyed their confidence.

How much the big companies like to talk about the internet these days is a measure of how frightened and anxious they are.

The force that broke the standard, rigorous processes of years past is widely taken to be the internet, or more precisely e-commerce. Without e-commerce — this is the assumption they make — the big companies could have copied their distribution system methodically from the United States to China, then from China's tier-1 and tier-2 cities down to tier-3, tier-4 and tier-5 cities, winning new markets and growing all the while.

That basic commercial logic broke, and the internet threw them into confusion. In the talent pipelines and database systems the big companies built for their sales operations over more than 20 years, the internet was simply missing — or at least, nobody took it seriously.

Here is the simplest example. "Say it's '99 yuan off orders over 199 yuan' versus 'the first 100 orders are free.' It might cost us the same either way, but sales volume can differ a lot," Li Leihan, who works at Unilever, told QDaily. "We need Tmall to tell us which promotion mechanism works better. They have a lot of data."

The big companies have never lacked data; they are said to spend hundreds of millions of yuan a year collecting and analyzing it. Worse than being at a loss over how to run a promotion online is the feeling that consumers have become unreadable.

At an industry summit Alibaba held last September, P&G Greater China CEO Matthew Price, who was there to lend his support, said that P&G's main consumers in China now are young white-collar women who are also expectant mothers, and that how they spend is far more complicated than in P&G's home market in the United States.

The complication comes from the variety of what people buy, which sits badly with the mass-market products a fast-moving consumer goods company makes. Underneath that is a more basic problem: the channels through which consumers get information have changed.

Walmart, RT-Mart and stores like Watsons once played the part of "consumption educator." Many people went to them not only to restock daily necessities but also to see "what's new." A curious shopper would try switching products just to find out. In that setting, the occasion, where a product sat on the shelf, the color of its packaging and whether it was on promotion became the main things that decided a purchase.

That is why fast-moving consumer goods are called an "impulse" purchase, and also why companies like P&G and Unilever are known for being marketing-led: it is how the world's No. 1 and No. 2 advertisers spend their money. Even after cutting the budget, P&G's global marketing spend last year still came to $8.2 billion.

Inside these companies a "consumer truth model" circulates. The traditional version goes: reach the consumer (they see an ad) — the consumer buys the product offline — the consumer uses it.

Li Leihan told us their marketing process used to run like this. Buy the television slots half a year ahead of the launch. Over the following months the marketing department handles the design and production of materials — shelving, display stands, promotional cards — making sure every visual matches the brand's positioning. Talks with the sales department start at the same time, with sales getting every detail of the product from marketing so that when they push it out to the buying departments of stores nationwide and to distributors, they can convey the selling points accurately and consistently. Finally, the two departments plan a budget together to secure good shelf placement when the product hits the stores.

The big companies once used television advertising plus hypermarkets to fence in an enormous body of consumers. In their experience, the path a consumer took to a purchase was predictable.

Not anymore. Young consumers behave without any pattern. They pick up information about what to buy while traveling or on business trips abroad, on the promotion pages of shopping sites, in the featured picks of curated-shopping apps and overseas-shopping sites, even in a friend's enthusiastic recommendation. All of this comes on top of consumption upgrading.

The reason someone finally buys has become far more arbitrary: the packaging, the novelty, or just a feeling. Yet what fast-moving consumer goods companies, P&G included, have always been good at is the functional pitch.

"Consumers are willing to treat themselves a little better. I see it, and I want to satisfy my curiosity and my urge to own it. We've found that with shower products and with cleaning products alike, what consumers care about now is opening the cap and getting a scent, a fantasy, even though it does nothing for how the product works. So we market that atmosphere too," a brand manager at Unilever told QDaily. "This is the screen era. Visual stimulation beats every other kind. The human senses are all connected, so you can design a visual scene on an e-commerce screen to feel scented — with VR, say." That may be part of why the big companies are now so keen to experiment with every new technology.

The big companies have revised the "consumer truth model" as well: the consumer learns about a product online — goes into an online store to buy — receives the product — uses it and gives feedback. They also know that any step in that path can be broken.

Still, they cannot ignore the buying power the platforms have released. Unilever rarely publishes separate figures for its China business, but in its 2015 annual report the company singled out the growth of e-commerce in China, saying online sales accounted for 5% of Unilever China's total — 3 percentage points above the company's showing in the global e-commerce market.

On e-commerce platforms, "consumers aged 18 to 24 account for 64% of sales volume, and those aged 25 to 29 for 20%." That figure comes from Xu Youjie, P&G Greater China's vice president of communications and public affairs, in an interview with QDaily late last year.

"Every ad now, location-based or not — national or regional — has to drive traffic online. Very few still drive it to a physical store," the same Unilever brand manager told QDaily. "Unilever has been doing channel marketing for more than 20 years. The marketing department is the bridge between e-commerce and offline, and we don't favor one over the other."

She added a moment later: "Marketing also hands some authority to the e-commerce department. Offline, we used to control 100% of the image — we decided, you executed, exactly. With e-commerce we go back and forth with the people in that department, let them try things, and our rate of cooperation is far higher than offline."

Budgets have changed the marketing department too. "E-commerce isn't only a sales channel, it's a media channel. You used to place an ad on Sina and link it to Tmall and JD.com. Now you place the ad on JD.com and Tmall directly. E-commerce has become a traffic gateway, so a company needs to build a whole separate set of things for it," Li Leihan said.

Liu Yiman, director of Tmall's overseas direct-sales business, first felt how much the big companies cared about e-commerce in 2013. "The person dealing with Alibaba went from being the China CEO to the global CEO. P&G, Unilever, Nestlé and others all came to talk about strategic partnerships."

In fact, back in late 2008, when there was no Tmall and only Taobao Mall, P&G and others had already been in touch with Taobao. "But nobody really knew what the internet was then. A lot of people didn't see it as a priority, and getting the China team and the global team to agree was a hassle. Still, they thought it was the future."

For big companies with vast structures and very stable internal processes, the internet model meant innovation, and it also meant real risk and the cost of trial and error. Any industry giant turns especially cautious in the face of uncertainty, and more so when the numbers still look good. "The people who first came to us were either from digital marketing or from marketing or sales — in any case, whoever ran some tiny innovative side business, with very few resources and very little influence. They were there to execute, not to decide," Liu Yiman said.

P&G, Unilever and the rest are happy now to publicize what they have achieved in e-commerce, but the achievement looks more like a Tmall trophy: the internet upending one more traditional industry. The big companies had no choice but to cooperate.

For these companies, e-commerce is no longer merely a sales platform that supplements offline channels; it is also a platform for innovation and brand building. The second role has even taken priority when the big companies work with the platforms. "It isn't just old brands like Head & Shoulders and Rejoice, it's new products too. It used to take two or three years from R&D to the shelf before a product reached China. Now we work out the launch strategy, the marketing and the execution together with them, and we can put a new product in front of consumers in one or two weeks," Liu Yiman said.

That is a powerful temptation, and no surprise that P&G released 17 imported products at once on Juhuasuan this past April. More and more fast-moving consumer goods companies now give e-commerce the first run of a new product.

"But there are more products online than in a supermarket, and holding a consumer's attention for long is actually harder. You can buy a banner slot at launch, but what comes after that?" Li Leihan sometimes questions his own work this way. "The company is trying all sorts of things internally, but it always feels like scratching an itch through a boot. Joining up front-end product development with later marketing on the e-commerce side — that tug-of-war is very hard."

The big companies have also realized that e-commerce has not pushed hard into some tier-3 and tier-4 cities. "Consumers there may be used to buying clothes on Taobao, but they still buy daily necessities offline. It will take time for e-commerce to reach consumers in this category," Zhou Tian said.

None of these doubts is enough now to keep top management from putting e-commerce first. At P&G China the e-commerce department often promotes experienced, high-performing people out of sales. To one P&G employee, moving from the sales department, which handles the traditional channels, to the e-commerce department "is actually a promotion."

Many have chosen to leave. In late June this year, Lin Xiaohai, president of P&G Greater China's sales division, announced he was leaving to join Alibaba. It is the third change at the top of P&G China's sales department in four years. Last July, Xiong Qingyun, former president of P&G China's beauty division, left for JD.com. She was called the highest-ranking Chinese national in P&G's global organization, though there have been reports lately that she struggled to adapt at JD.com and was demoted.

"When our sales director left in 2014, we all felt the big hole had finally burst open," said Dong Rina, who joined Unilever in 2012. She did not say what exactly the big hole was. "We all knew why sales weren't working — the system, channel stuffing, professional managers stuck in their ways."

Dong Rina, who had set her mind on joining a fast-moving consumer goods company when she graduated from university, left Unilever in 2015. "It was a very good place to start a career, but there was too much negative stuff in the work environment." Li Leihan, anxious himself, has started thinking about quitting too.

The loss of core staff and the departure of the young people who were supposed to be the company's future both show how little confidence the big companies have in turning things around. This collective migration of talent toward internet companies is widely read as a signal of where the industry is going.

Ma Ruchao, president of Mondelez China, describes the 1990s path to success for a multinational in China like this: set up representative offices in Beijing, Shanghai and Guangzhou — expand to other cities — recruit the best graduates from China's best universities — find distributors — stock small shops — the professional manager posted to China learns Chinese — gets promoted — start over.

The internet has broken that cycle, and the trend looks irreversible. "Everyone went from rejecting e-commerce at first to slowly accepting it, and now they even want to use e-commerce or mobile internet technology to change how physical stores interact with consumers. I think that's a good thing. The goal in the end is still to find the consumer," said Wu Kun, general manager of Chando's business division. "E-commerce has built an image of being cheap, but apart from price, what else does online add? That's the question the whole industry is working on right now."

"Find new channels from a stable base — that has always been how fast-moving consumer goods companies work. Offline is the base, and doing e-commerce doesn't mean throwing the base away," said an employee in P&G's e-commerce department.

What they need most right now is a way to rebuild their confidence.

(At the interviewees' request, Zhou Tian, Li Leihan and Dong Rina are pseudonyms, and place names have been changed.)

Cover image from Visual China Group.