Author | Dong Erqian

Editor | Yang Xuran

In 1966, Buffett wrote in a letter to his partners that they had bought a department store in the first half of the year, which was the first time in history that the partnership fund had bought all the shares of a company, namely Cohen Brothers Department Store.

To meet customer demand, Cohen Brothers Department Store made almost all efforts, including delivery services, installing elevators, giving customers discounts, but after four years, it still didn't make money and ultimately had to sell it. In Buffett's view, operating retail is like shooting at a "moving target" rather than a fixed target, so the difficulty coefficient for the shooter is very high.

Buffett summarized in his review that retail is a tiring marathon, and every mile may have a new aggressive competitor leapfrogging over you.

Charlie Munger also summarized this later, "Buffett is afraid of retail, and he is right. Everything that was once powerful in retail has gradually disappeared. Partners have left, there are too many competitors in retail, and retail is too difficult to do. He is very worried."

And this is precisely the current situation in the e-commerce industry. Alibaba, JD.com, Pinduoduo, Douyin, all major platforms and small players, have repeatedly emphasized "low prices" this year, basically making low prices their only goal.

Just like not long ago on 618, Liu Qiangdong urgently issued modification instructions remotely from Dubai, the Middle East, requiring that the positioning of the big promotion be changed from "good and cheap" to "cheap and good".

Behind the competition among e-commerce platforms to chase low prices, it seems that more and more e-commerce sellers are falling into the dilemma of "low profits" or even "no profits." However, this is not a special era, but rather the true nature of e-commerce or the retail industry.

But when the era of low profits arrives, e-commerce sellers who have experienced more than a decade of passionate and opportunity-driven growth, accustomed to leveraging traffic to create wealth, seem to have been unable to adapt to normal days.

01

The Collapse of E-commerce Sellers

"Low profits are inevitable in competition."

The simple four words "everyday low prices" explain the fundamental reason why Walmart was able to eliminate many competitors. To achieve this, Walmart began developing its own global satellite network as early as 1983. Before the Internet became widespread, Walmart headquarters could inventory and check the sales of every product in more than 5,300 stores within an hour.

Walmart's satellite network is not only a supplement to global logistics distribution centers and store visits, but also a platform to exchange merchandise and operational information, preview new products, and propose innovative suggestions. Compared with Walmart, other competitors could not achieve economies of scale because they could not establish their own satellite communication systems, naturally losing a significant advantage in competitiveness.

In the era of e-commerce, Amazon founder Jeff Bezos proposed the famous "flywheel of growth" theory: attracting more users at lower prices, more users bringing more sales, more sales attracting more sellers, and more sellers paying more commissions, which Amazon then invests in infrastructure construction such as self-built logistics and servers, making the entire system larger in scale and more efficient.

Amazon's heavily invested logistics system

It is not difficult to see that the essence of retail is a game of cost competition.

M. McGoldrick, a retail expert from Harvard Business School, once proposed the retail wheel theory: traditional retail forces will be replaced by emerging forces with lower costs, and as these emerging forces expand, they will inevitably cause others to follow suit. Fierce competition forces them to adopt competitive strategies other than price, such as increasing services, and their price competitiveness will gradually decline, eventually being replaced by retail companies or models with higher cost-effectiveness and novelty.

From eBay to Taobao to Pinduoduo today, all confirm the correctness of this theory. If e-commerce platforms can still rely on scale advantages to reduce costs and increase efficiency, this reality is undoubtedly even more残酷 for individual sellers, as there are more small sellers on the platform, and the degree of differentiation between their products is lower, which means more intense competition.

Retail has always had the rule that low prices determine success or failure

Even a strong company like Gree, when facing fierce competition in the home appliance industry, Dong Mingzhu can only lament, "Low profits are an inevitable trend of social development. Only in the era of monopoly and information blockade can暴利appear. In the era of competition and the information age,暴利is no longer possible, and low profits are inevitable in competition."

Data shows that the profit margin of Chinese industrial enterprises in the first quarter of 2024 was 4.86%. Over a longer period, from 2012 to the present, the historical average profit margin of industrial enterprises during the same period is only 5.49%. In contrast, e-commerce sellers, as distribution channels, theoretically should not have a higher profit margin than this figure.

But the actual situation is that the number of e-commerce sellers is still growing rapidly - the average growth rate in the peak two years before 2021 even reached 32.1%, and this industry expansion speed far exceeds the growth rate of the retail industry and also far exceeds the growth rate of manufacturing profits.

This further means that e-commerce sellers can only obtain lower profit margins than industrial enterprises, or even losses. A large number of small sellers on the platform should learn to accept reality and give up the illusion of making暴利in e-commerce.

02

Changes in Supply and Demand

Less consumption.

If low profits are the endgame of e-commerce development, then the shift in economic growth has undoubtedly greatly accelerated this process.

As the economy shifts from high-speed to medium-low-speed growth, the average social return rate has undergone a transition from "暴利" to "low profits." The wealth, income, and return rates of the vast majority of people are being averaged out by a very small number of individuals and enterprises.

Although there is a large number of middle-class individuals and their wealth can still support daily consumption, emotions determine excess savings. The middle-income class, which originally had the largest number of people, is facing some social pressures, but overall, they can still afford daily consumption and some optional consumption - the popularity of products such as trendy toys and new energy vehicles is a manifestation.

The popularity of Pop Mart shows that people are not without money to spend

But the pressure and influence of public opinion on this group have determined that excess savings are needed at this stage.

Japanese scholar Kenichi Ohmae described Japanese society two decades ago: "Just working hard will lead to salary increases and promotions, which was a major premise for structuring Japanese society after the war, but this major premise has completely collapsed. Office workers must now realize that the peak of a person's salary is on average around their 40s. After this peak, there are rarely opportunities for promotion or salary increases. Therefore, what we must do now is to formulate a life plan that conforms to the actual situation."

Perhaps many Chinese people are now facing a similar situation - everyone is "making life plans" by saving money. Central bank data shows that the proportion of household deposits (resident deposits) has been increasing continuously, from 39.7% in 2016 to 48.2% in 2023, and in the latest April 2024 data, the proportion of household deposits has exceeded 49%, accounting for nearly half.

In an environment of less consumption, retail consumption is extremely competitive. Retail sellers and small manufacturing enterprises, which already compete in homogenized products, must work harder to compete, ceding profits to consumers in areas such as product development, production and processing, sales and distribution, and after-sales service.

With product homogenization and mass supply, price competition becomes the only core key. Xu Chi, the owner of a clothing manufacturing factory in Haizhu District, Guangzhou, told the media in an interview: "Factories compete for orders and customers. If you sell for 30 yuan, others dare to sell for 27 yuan. Sometimes the profit is so low that a piece of clothing can only earn one or two yuan. A few years ago, the factory still had a gross profit margin of around 10%, but this year it has basically been reduced to only 3 to 5%."

Another extreme case is that recently, there was a hot search revelation that someone said doing e-commerce in Yiwu is like playing "Infernal Affairs." When a deliveryman comes to pick up a package and discovers a popular item, he turns around and tells his wife who does e-commerce. The truck driver downstairs who distributes goods may be related to the deliveryman, and they can immediately find your source and replicate it quickly.

03

Creating New Value

A solution to break the deadlock in the era of low prices.

The low prices and cheapness of retail demand determine that e-commerce sellers must rely on volume to make money, which has given rise to a series of traffic plays, operational tactics, and new models such as live streaming sales. But the ultimate result is still to collect orders through high volume and trade quantity for price. Nowadays, this model of "demand concentration - capacity concentration - small profits but quick turnover" has reached its extreme.

Looking at it from another perspective, in such an era of product saturation and market turmoil, how can e-commerce sellers break through the limitations of the traditional product-centric growth model and create new growth?

The answer is also simple: innovate demand, especially from the perspective of consumers, to find those subtle changes in demand formed for various reasons, and the resulting market gaps.

In 2016, when the e-commerce industry had already formed a two-way split between Alibaba and JD.com, Huang Zheng realized the pain points of consumers buying fruit online and quickly established Pinduoduo with fresh produce as the entry point.

In his post-mortem review, Huang Zheng advocated avoiding direct conflict with giants and seizing their loopholes to create differentiated competitiveness. "I think more often, it still comes down to digging into consumer demands. The deeper you dig into consumer demands, the more likely you are to win the support of users and naturally achieve a great company."

For example, the best-selling air-conditioner quilt in the summer of 2023 was based on the user's usage scenario, capturing the change in consumers' demand for coolness, redefining the form of the quilt product, and achieving success.

The demand for air-conditioner quilts comes from the heavy use of air conditioners

Similar situations also include trendy toys and various ornaments, which have gradually gained popularity as the post-95s and post-00s gain spending power, because these small toys usually do not have emotional value in the eyes of the post-80s generation. If merchants' attention does not keep up with changes in consumer generations, they will not be able to capture changes in demand for toys.

The most crucial thing is that this innovative demand is dynamic, caused by one change leading to another, which requires small producers and small sellers to have sufficient market sensitivity, as well as the courage to try and invest in small steps.

In the current traffic distribution system of e-commerce platforms, under the platform's price comparison model, the flow of basic products will increasingly concentrate on products with high production efficiency, and these sellers can only follow the supply chain logic of trading price for quantity.

The incubation of new products will gradually shift traffic towards sellers who understand consumers and have product innovation capabilities, allowing innovative brands with user demand observation and thinking abilities to emerge constantly. Algorithms have their efficient side and their fair side.

04

Written at the End

"When structural changes occur in the times, historical expectations become a burden."

People cannot obtain the dividends of others in a field that has already matured, under the old logic.

Compared to unlimited competition in efficiency and low prices, understanding consumers, fine-grained operations, and doing demand innovation are the correct solutions for suppliers in the era of low profits. If they truly cannot achieve this and do not have sufficient financial strength to compete on low prices, then exiting the brutal competition among e-commerce sellers today is not a bad option.

Low profits are a sign of industrial maturity, but diversification is an important feature of the era of low profits. Diversified demand will inevitably give rise to diversified supply, as long as people truly realize the existence of diversified demand and are willing to build their own core competitiveness that fits this demand.

This may be the hope left for small sellers and small producers in this era.