Young people are scrambling to buy substitutes, but are factories really making money?

Young people are now more looking for substitutes, so are substitute factories making money? Let's take a look at the author's analysis~

“Taobao, JD.com and Pinduoduo are all targeting factories.”

"That's great." Cody exclaimed as he looked at the finely crafted Chanel-style jacket in the window.

He was not exclaiming at how beautiful the garment that was neatly displayed on the plastic model was. After all, he was one of the producers of this coat. Cody and the craftsmen in his factory had touched many of the clothes in this store, inside and out, and had also taken them back and forth between the factory and the brand to make samples countless times.

Compared to how they looked under the cold light of the factory when they first left the factory, their value has jumped hundreds or even thousands of times in this window emitting warm light, in the salon aroma of this high-end shopping mall, and in front of the brightly dressed urban female customers.

Cody looked at the price list and didn't say anything for a long time. Although he knew in his heart that the work done by his small factory was just to "tighten the screws" for these clothing brands, and although he had considered creating his own clothing brand, after all, the raw materials, designs, and technologies were all ready-made...

He suddenly came to his senses: "Where were we talking about just now? Oh, did 1688 invite us to join? There was an invitation around 2020, but there was nothing on 1688 at that time, only a display page, which I didn't think was interesting... Now, we don't have the energy to do this, and our main focus is on brand orders... This year's business is just average..."

Lack of energy is only one aspect, but the more important one is actually lack of funds. The factory's business model has always been to pursue small profits but quick turnover, and every penny must be spent on the cutting edge. The arrival of the epidemic has undoubtedly made the situation more severe. The price of raw materials has continued to rise, and the demand side has repeatedly lowered prices, and the profit margin has continued to shrink.

But Cody knows that the past few years have been extraordinary for many factories - they have become the "sweet buns" that major e-commerce platforms are vying for. Especially this year, the threshold for large factories may have been trampled.

Since last year, JD.com has announced a "low-price revolution" and has also launched its Jingdong Manufacturing business in cooperation with factories. In November this year, Alibaba announced that it would upgrade 1688 to a first-level business and set up an entrance to "Taobao Factory" on the Taobao homepage. Major live streaming studios have stepped up their efforts to sell directly to factories. Pinduoduo has repeatedly lowered prices with a steady stream of billions of subsidies...

China has the best supply chain in the world. Factories are at the end of the upstream link and have always maintained a long distance from consumers. Now, this distance has been shortened again and again due to the epidemic and the help of platforms. Factories that have always been behind the scenes are coming to the front, either actively or passively, to meet consumers face to face.

1. Let consumers see the factory

The capacity of factories is almost always in excess, and excess inventory is the number one problem that many factories need to solve. The backlog of goods needs to find more ways to sell them, and the retailization of factories seems to be the general trend, and the platform has naturally become a driving force.

At present, the simplest and most direct sales channel is live streaming e-commerce. Since the rise of live streaming e-commerce, it has been keen on live streaming of the origin, source and factory to help factories sell goods quickly. Starting this year, this matter will become more detailed. For example, "Make Friends" opened a special "factory sales" live streaming room on December 17.

The relevant person in charge of Jiao Ge Pengyou told New Retail Business Review that the live broadcast room mainly focuses on the industrial belts of origin or product source factories of characteristic high-quality products. On the one hand, it brings affordable and high-quality products to consumers, and on the other hand, it helps factories to transform into e-commerce and digitalization, so as to better control product quality.

New Retail Business Review found that the "factory sales" live broadcast room will help factories tell good product stories and let consumers better understand the benefits of white-label products. This is something that factories are usually not good at.

The person in charge also said that the live broadcast room will conduct live broadcasts of tracing the source of seasonal, iconic, and node-specific special source products. For example, in spring, we will go to the tea mountains to conduct special sessions on high-quality tea, and in winter, we will go to down jacket factories to find good source products.

Live streaming e-commerce responded quickly, and traditional e-commerce platforms followed suit.

The biggest change in Taobao this year was the launch of the 99 Special Sale Channel for testing in the first half of the year, and then the Tao Factory Channel in the second half of the year.

Taobao has selected a group of high-quality factories to join Taobao Factory, and selected low-priced, high-frequency products for a retail trial with a price of 9.9 yuan and free shipping. Although this attempt has not yet produced gratifying results, the role played by Taobao Factory behind it is becoming more and more important.

It is reported that Taobao Factory emphasizes low prices and targets price-sensitive consumers. Alibaba hopes to use Taobao Factory to allow Taobao to regain consumers' "low-price mentality".

When facing another group of consumers, those who are less sensitive to prices but more concerned about quality, Alibaba has launched 1688, an old e-commerce platform that has existed since the birth of Alibaba.

1688 has completely transformed itself into a consumer-oriented brand this year. In the past, products could only be purchased in batches of dozens of pieces and sold to small and medium-sized businesses. Now, C-end consumers can also purchase them one or two pieces or in mixed batches of different products.

It is worth noting that the "1688 Strict Selection" module on the homepage of the 1688 App is the focus of 1688's construction. A group of factories with complete qualifications and excellent quality have been selected, and the products focus on standard products and quasi-standard products. Standard products are mainly office and playthings, department stores, home lighting, home textiles, sports and outdoor products, while quasi-standard products are mainly shoes, bags, and interior accessories. 1688 Strict Selection emphasizes the presentation of quality and personalized products, and price power is placed in a secondary position relative to Taobao factories.

In fact, 1688 Yanxuan was born out of the previous 1688 "Factory Goods Pass", which is a fully managed service provided by 1688. However, today's 1688 Yanxuan has weakened the functions of channel bidding and agency operation, allowing factories to face consumers more directly.

It is reported that there is no difference between Taobao Factory and 1688 in back-end operations, and the difference mainly lies in the product screening at the front end.

On the other hand, JD.com establishes cooperation with factories by developing its own brands.

This year, the name "JD Jingzao" has been mentioned repeatedly. According to media reports, since the launch of JD Jingzao in 2018, JD's own brand has cooperated with more than 70% of domestic industrial belts. In 2022, Jingzao's sales increased by 60% year-on-year, the average annual sales of more than 100 categories increased by more than 300%, and the success rate of new product development exceeded 90%.

Different from simply finding OEM to make OEM products, JD.com emphasizes "empowering" factories: using JD.com's insight into the C-end and its logistics capabilities to help factories reduce costs and increase efficiency, determine production based on sales, and reduce inventory.

JD.com is eyeing the blank area of ​​the Chinese market. According to Nielsen IQ data, the proportion of private brands in the global retail market is about 16.3%, but this proportion in the Chinese market is only 0.5%. Among the products of Costco, the world's second largest retailer, 25% are private brands. The high proportion of private products means that the platform has higher bargaining power with suppliers and big brands.

However, it is obviously not an easy task to build your own brand. Like building your own logistics system, this is a relatively heavy model. If you cannot control every link from R&D to production to implementation, problems may arise. NetEase Yanxuan, which has a similar model, has contributed many precedents of failure.

However, since its transformation from an e-commerce platform to brand operation in 2021, although NetEase Yanxuan's voice has not been as loud as before in recent years, it has been doing well in the segmented tracks of various channels.

According to media reports, in the first quarter of this year, NetEase Yanxuan's sales in Douyin, Kuaishou, Taobao, JD.com and other channels increased by 94%, 41%, 29% and 73% year-on-year respectively. Among them, NetEase Yanxuan's pet category sales increased by 96.4% year-on-year.

With such a good example, the problem that JD.com currently needs to solve is to build a sufficiently extreme and efficient supply chain system that can control its costs within the limit.

In this matter, it currently faces too many competitors - offline there are Costco, Sam's Club, Hema and even Aldi, and online there are NetEase Yanxuan and Xiaomi Youpin.

Hema revealed at a previous supplier conference that it would build a supply chain system similar to that of a car factory, such as opening a bakery next to a pasture, so that fresh products can be produced through the shortest link. This may be an idea, but it is not yet clear whether it is applicable to every industry.

It can be seen that different e-commerce platforms are using their own business genes to carry out different forms of cooperation with factories.

However, when it comes to the e-commerce platform with the closest relationship with factories, the name of Pinduoduo cannot be avoided. The reason why Taobao and JD.com took completely different paths of factory cooperation is that they really cannot copy Pinduoduo's model and cannot keep up with its rapid actions.

2. Criticize Pinduoduo, Learn from Pinduoduo, and Become Pinduoduo

Alibaba was once very close to Pinduoduo's C2M model.

The media "Dolphin Investment Research" believes that Pinduoduo's C2M strategy essentially seized the market of 1688, allowing customers of offline retailers to skip retailers and switch directly to online. Around 2017, the only difference between 1688 and Pinduoduo was "free shipping for one piece". But it was this free shipping that made Alibaba and JD sweat.

When analyzing Pinduoduo, Zheng Litao, host of the podcast "Sisters Who Make Waves", and Yao Kaifei, a senior expert in the e-commerce field, mentioned that behind Pinduoduo's "free shipping for one item" and repeated price cuts, there are actually extremely high operational and organizational structure thresholds.

For example, by acquiring customers through low-cost and exponential means through social software, Pinduoduo can quickly accumulate a large user base. It can also use the saved marketing and customer acquisition costs to subsidize merchants, or carry out profit-sharing activities such as free shipping and hundreds of billions of subsidies to directly lower the threshold for consumers to shop.

JD.com's self-built logistics system and emphasis on self-operated stores are obviously too costly to provide free shipping for the sinking market and attract small merchants to join. Pinduoduo's in-site advertising settlement method is completely different from Taobao, and its simpler and more brutal approach during big promotions (i.e. direct price cuts) has greatly lowered the threshold for merchants to use in-site services, making small merchants and factories that are not so familiar with e-commerce business more willing to join Pinduoduo.

Once the platform forms a flywheel effect, even if Pinduoduo clearly favors consumers in after-sales service, merchants still cannot do without this channel.

On December 28 and 29, Taobao and JD.com followed up with the "refund only" function, which has been controversial among Pinduoduo merchants. Taobao stated that this function is only for consumers with good reputations, and merchants can also file complaints, but controlling the degree of this function may become a new management problem. If Taobao cannot attract or retain more consumers in this way, and cannot balance the mentality of merchants, in the current state of channels everywhere, will small and medium-sized sellers leave Taobao without hesitation?

It is precisely because of such differentiation and simple and direct organizational management capabilities that Pinduoduo has won the favor of small and medium-sized merchants and consumers, and has also left its competitors with only being able to learn from its form but not its spirit.

Many factories entered the C-end market from Pinduoduo earlier, and are now looking for more opportunities on platforms such as 1688, Xiaohongshu, and live streaming e-commerce.

3. Stand outside the carnival dance floor

The change in the platform's attitude is due to the change in consumer consumption trends: more rational and calm consumers are beginning to pursue value for money, hoping to squeeze out the middle agents, channels, and brand marketing, get high-quality and low-priced products, and no longer care about the brand.

Before Pinduoduo emerged, it was difficult for the production side to establish a connection with consumers. As Cody said, they were only "tightening the screws" for the brand and had no bargaining power, let alone the possibility of a premium.

Nowadays, e-commerce platforms have eliminated as many layers of exploitative middlemen as possible, with the original intention of benefiting both the demand side and the production side. But of course, things are not that simple.

For the platform, the essence and process of selling goods have not changed, but the storyteller has changed from the brand to the factory. Compared with brands with rich market experience and accustomed to the ups and downs in the business war, the factory is obviously easier to control.

"My dealer friends have always told me not to listen to the nonsense of those platforms and live broadcasters, such as providing a full set of solutions, bringing in large quantities to clear inventory, and telling stories for factories... They just want to get rid of other middlemen and become the largest middleman themselves."

Cody finally turned his eyes away from those expensive coats that seemed not to be produced by himself, and looked into the illusory distance. "Distributors are also under a lot of pressure... But the fundamental problem is that if I want to start doing small B or C (business), I have to change the original operating model and carry out digital transformation... This is a difficult decision."

Obviously, Cody didn't have the capital to gamble. This was the subtext he couldn't say.

Unlike large factories that can devote some of their energy and money to trial and error, and then smoothly catch the fast train of changing times, many small factories like Cody's are facing a difficult environment and difficult choices, and they have many more concerns:

Can doing business with the C-end really bring greater profits to factories instead of further squeezing their living space? After the low-price carnival with platform subsidies, will low prices become the norm? Do they have the strength to keep low prices for a long time? …

We'll have to wait and see.

However, when they hesitated, the opportunity was lost.

For the big factories that have already joined the game, is the stage really big enough? Will the value of the factories be over-exploited? After the platform becomes the largest middleman, will it monopolize and control everything? After the huge initial investment, will all this become the last straw that breaks the camel's back? ...

It seems that these issues are too urgent for the large factories to think about them.

Author: Qian Luoying WeChat Official Account: New Retail Business Review