ESG 2023 Highlights | How Should Companies Respond to the US Retail Crisis?

During the sub-forum of going global to the US on June 2, Mr. Zhou Shihao, founder and chief executive of Shanghai-headquartered YQNLink (运去哪), delivered a wonderful keynote speech "New Opportunities under the Crisis of the American Retail Industry". The following is a summary of the speech (with some omissions):

Good morning everyone, thank you for giving me this opportunity. I think the business connection is a common topic between the people of China and the US.

Back to the essence of business, let's look at consumption. The basis of consumption comes from retail, and the underlying logic of all retail in the world comes from the population. According to the retail sales data in April released by the US Department of Commerce, we found that retail sales are still on the rise, although the 0.4% month-on-month increase may appear relatively weak.

At the same time, if you have friends working in the United States, you will find that the inflation situation is relatively severe. This February, an employee of our company in the US called me. I thought he was going to express his joy at getting a 25% raise, but he told me, "After I receive my salary at the end of the month and pay all my bills, my disposable income is actually less than before."

Against the background of high inflation, social retail sales are still rising, which is rare, and what is even rare is that online consumption in the US can still maintain a year-on-year growth close to double digits (8%).

In terms of subdivision, furniture is still the largest retail category in the US market. For Americans, home is the most important space. In the field of physical consumption, a large amount of expenditure flows into how to decorate one's house and how to make one's life more comfortable. In the category of furniture, we see that Indonesia, Vietnam, and other Southeast Asian countries have undertaken more and more industrial transfers from China, and have gradually become important sources of imported furniture for the US.

Compared with furniture categories, the status of mechanical products in Sino-US trade has not changed so significantly, because the mechanical device industry has a higher technical content, and it takes longer to transfer from China to Southeast Asia. Our friends sometimes ask us, when will there be a qualitative change in China's exports? We believe that, for a certain industrial chain, when 50% of the production of all components is transferred out, we will see a "scale" change. Before that, we would think that this transfer is slow. Till today, the transfer of the mechanical device industry has not reached this threshold value, and we expect it to be realized within two to three years.

The proportion of US electrical appliances imported from China has declined in recent years. But what makes us more optimistic is that there is an electrical appliance category that is the strength of Chinese manufacturing-air conditioners. Generally, air conditioners in the US do not have a heating function, so in terms of the compressor efficiency of the whole air conditioner, China has a lot of rigidity in the supply chain of core components. In addition, the rising trend of product innovation of "charged with core" products in China has also enabled Chinese brands to still maintain a certain share of the global electrical appliance market.

In the past three years, more trading companies have turned to cross-border electronic commerce, which has driven the rapid development of cross-border electronic commerce. But today we see that cross-border e-commerce and traditional trade are deeply integrated, and cross-border trade is accelerating towards omnichannel. No company can only rely on a single sales channel to complete its global layout, especially in a very special market like the US.

Here we give an example - Walmart. From 1962 to 2023, Walmart has gone through six stages of development. In the first stage, Walmart is not a supermarket in some sense, but a global supply chain management company. Its core competitiveness is that it can make full use of global manufacturing, especially Chinese manufacturing, to reduce commodity procurement costs and provide the market with retail products that are more advantageous than competitors in quality and price, to meet the growing purchasing needs of consumers. Therefore, Walmart's self-definition of its core competency is supply chain management.

After years of development, Walmart has moved from offline to online in order to better reach the supply chain, so as to complete the reach of products and retail customers. Its success tells us not to reject new channels, but to actively develop new channels to achieve greater commercial value.

To give another example, the supply chain model of a domestic emerging platform is changing. The requirement for suppliers is that they must stock up in overseas warehouses in the US, otherwise they can only collect goods in China as suppliers. Amazon has a similar change. Firstly, Amazon decisively cut off its DI (self-collection sector), because Amazon believes that it will never be more clear than the manufacturers and brand owners in the supply chain to know where the cost is. Amazon is like Walmart. It's not "a company that sells things", so it should let brand owners and consumers match the supply and demand relationship between each other by themselves. That's why the platform has greatly reduced its self-operated business.

Secondly, make adjustments to DF (dropshipping) and PO (general cargo mode). In the past three years, dropshipping has been a relatively fast-growing field. But in the past six months, more and more companies have begun to ask a question: Can I make online and offline use the same inventory? In other words, if a company set up an overseas warehouse in the United States, can it satisfy cross-border e-commerce trade and offline distribution channels at the same time? And a single online channel may not be able to maintain a high growth rate of revenue.

More channels also mean more challenges. The original batch of "operational" sellers who do not have brand and manufacturing capabilities, and mainly rely on categories and flow are losing their advantages. To some extent, competition has become more intense. First of all, with the continuous improvement of online and offline channels, more factories with cost management capabilities will be more competitive. At the same time, more sellers are constantly colliding in the categories that they are originally good at, compressing the already close-to-extreme operating methods and operating costs to a very small scale. At this time, everyone is actually looking for a breakthrough point. And this breakthrough point is the re-segmentation of consumers, the new understanding of the market, and deeper exploration of cost and brand innovation.

Come back to the development trend of omnichannel - from FBA to FBM. Through these two definitions, let me give you an example of how we view changes in the US retail industry. For sellers, on the one hand, from "all in" Amazon to more use of channels such as Walmart, Wayfair, and independent stations. When talking about Chinese brands that have done their best in the direction of independent stations, SHEIN has to be mentioned. SHEIN's use of independent stations comes from its own capabilities and China's strong textile supply chain accumulated over the past few decades.

Through multi-dimensional changes in channels, leading brands like SHEIN use FBM warehouses to cover the whole US to prepare goods. The goods prepared are not only supplied online but also face offline. This is the only way to flexibly respond to different seasons and different regions to establish an efficient and low-cost supply chain. At the same time, it can maintain inventory management that is as flexible as online procurement when supplying to the leading offline stores. Therefore, more Chinese companies are giving more missions to overseas warehouses in the US.

But everyone knows that when a business in a certain industry is doing well, everyone's inertial thinking is to expand the scale. So in the past three years, the entire cross-border trade ecology, including YQNLink, has almost been making efforts to expand the scale. But what is interesting is that the world is not only spring or summer. Once the cold winter comes, more companies begin to think about how to tap their own value.

Because there is winter and summer, business is not just about growth. "There will always be people who pursue their dream on a starry night, and there will always be people who resign and return to their hometowns." Today, many overseas warehouses have entered the stage of refined operation and establishment of service barriers from scale expansion. What kind of business can do this? To begin with, we must make sure that we can survive, and then, we hope to maintain the level of front-line service providers, and we are willing to spend more time establishing standards and improving the team. Also, we must build stronger information and digital capabilities through self-construction or external collaboration. Everyone has already experienced the initial stage. Once the cruel stage of cost competition is reached, every manager must control his desire to expand when it is rising, and bring more encouragement and a sense of steadfastness to the team.

When it comes to improving digital capabilities, in fact, many companies in China have been promoting digitalization in the past three years. When the market is on the rise, digitalization may be more of a "face project", but in the current environment, many merchants are beginning to think about how to ensure the timeliness of the shelves, how to keep themselves in stock while maintaining a low inventory level, and improve the utilization rate of funds. Because to some extent, today, whether you go overseas to the US through distribution or e-commerce, you may encounter a challenge, that is, you never know how much tariffs will be added to your goods tomorrow.

Many of the best cross-border e-commerce sellers I know are now choosing products based on the idea that they will go to Southeast Asia and Mexico to find such products if the US "list" imposes a 25% tariff on China. As long as they find it, when the manufacturing cost is comparable to that of China, his products will have a considerable 25% higher gross profit level. So the seller has to recalculate how much of the 25% is worth spending on the supply chain.

But we also have to consider how long this flexibility can last, and what kind of company has this ability to select products. The ability to control this kind of supply chain is not single-point to single-point, but multi-point to single-point, or multi-point to multi-point. If it does not have the ability to digitize, can the team support the enterprise to complete such a large-span transformation? Therefore, enterprises must improve their digital capabilities.

That means the business flow must be connected with logistics. The good news is that after the volatility of the epidemic period, Chinese entrepreneurs are now paying more attention to the logistics sector. For example, in the past, when many companies held meetings, the first person to speak was sales, followed by marketing and operations. When it was the turn of the logistics department to say a few words, the meeting was adjourned. But at the moment, the company meeting needs the logistics department to tell everyone where the goods have arrived, when they will arrive, and whether they can catch up with this season.

With the increasing emphasis on the logistics sector, more companies have begun to consider how to connect with digital logistics providers online. At the same time, corporate management also pay attention to the supply chain part in the BI report, such as the distribution of warehouses, delivery timeliness, Is the overall cost of online and offline inventory the same, inventory age, how many unsalable goods, and so on. This demand for full-process visualization is driving e-commerce companies to operate categories in a more refined manner, rather than simply considering the purchase price of supply.

So in a sense, the market needs an omnichannel supply chain logistics service provider. What we YQNLink have always been proud of is that only by relying on China's strong supply chain foundation can we produce better logistics service providers. In the past, we have been committed to building digital service capabilities. Our growth flywheel is to improve our digital capabilities and refined operational capabilities, so as to provide customers with a more cost-effective combination of cost and performance capabilities, and help everyone manage their own supply chains. This is the layout of our warehouse in the US, which can flexibly provide you with online and offline sub-warehousing and flexible supply chain processing capabilities between general trade and cross-border e-commerce. Our headquarters is in Shanghai.

Finally, a teacher shared a passage with me, which smoothed some of my anxiety from the epidemic period to today. This is what the teacher said: Be optimistic about going to sea. If human beings had not left Africa, there would not be the current global population distribution, and there would be no new living space. From this dimension, we have to face going to sea naturally, we are pursuing better harvests, not self-exile.

In addition, going overseas does not only refer to the physical location from China to the US, but more to the transcendence of the ideological dimension. For example, from offline to online, or we may go to the Metaverse in the future. At the same time, going to sea is also a binary change in a sense, and it is necessary to prepare well and badly at the same time. At the same time, we must convince ourselves that this era requires the rise of Chinese companies, especially retail, and we will face greater challenges when we go out, and we must overcome anxiety with a peaceful mind.

The underlying logic of YQNLink as a logistics service provider is that we believe that China will be the most dynamic country in the world in the next 20 to 50 years. We come out of China and go to the world, and will accompany Chinese brands to truly grow into a world-class and open economic ecology, thank you!

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