Author/phatos: Chen Zhitong
Compared with last year, this year has seen the Puerh tea market move toward relative stability. Widespread price adjustments have not immediately diminished the momentum of speculation and market positioning. This is not because profits have remained unchanged. Rather, it is the result of a change in profit expectations. Rising purchasing costs and falling profits represent increased risk.These factors are reflected in the market as a wide-scale increase in the rate of short-term turnover. To put it simply, the market has seen an increase in empty speculation.
The bicycle brokers of Fangcun rush about through colorful alleys of the market like wild bees picking honey- The spectacle is particular captivating when walking along the central street at sunset. Red flags hung everywhere proclaim that "Fine tea comes from Dayi." Television advertisements constantly repeat this slogan. Likewise, it blows through the Fangcun market: like a cool afternoon breeze. In other words, the number of Dayi agents and franchise shops has increased significantly. The number of other shops that are not Dayi franchise stores but specialize in Dayi teas has also greatly increased.
In 2004 there were only a few large Dayi agents who controlled the market. They formed a profit structure with lower-line sellers and engaged in speculation, product release and hoarding, and price manipulation. That period has passed. The relationship between first-line agents and franchise shops plays only a minor role in the market. Dayi itself exerts primary control over sales channels. This is a classic type of sales evolution. Only by reforming distribution can profit be reformed, Previously distributors controlled access to products, which gave rise to scarcity and drove prices higher, Dayi did not benefit from this situation, however, and suffered the consequences when prices collapsed.
This reminds me of a story told to me by a friend. My friend is a noted executive in a large food company. During the 1990's when the popularity of instant noodles was at its height, distribution channels were more limited than they are today. Production could not keep up with demand. Suppliers began hoarding the company's instant noodles, which caused shortages and drove up prices. Finally the market collapsed, and agents fered, Likewise, distribution channels were damaged and eventually the problem reached the manufacturer. Market demand never went away, but the manufacturer had no way to find its consumers. In the end, the company enacted a series of distribution reforms leading to today's massive market scale and profits.
I do not believe that instant noodles and Puerh tea are entirely comparable; however, distribution channel reform as the market grows is inevitable. Today Dayi has over 100 first-level agents and 1600 franchise stores. Many people believe that Dayi's channel reforms have been completed, but I believe die true reforms are just about to begin.
The power of the original Fangcun first-level agents has been greatly diminished. They are left with no alternative but to continuously develop new franchise shops. The barrier to entry for first-level agents and franchise shops in other provinces is much lower than in Guangdong, but starting prices are similar. This creates a situation of mismatched competition. Many Chinese provinces are blank slates for Pucrh, and requirements to enter the market are relatively low, This situation seems reasonable. When most of the products sent to these provinces find their way to Guangdong, however, the frustration of Guangdong's first-level agents is entirely understandable.
Consider the price of this year's Dayi 7542 101. The list price was just over 1000 RMB, which provides approximately 200 RMB of profit to first-level agents. A single franchise store could order at most five cases，however, and the actual selling price at Fangcun could rise to more than 3500 RMB. The traditional market then drove the price up to 5000 RMB per case. How can such a large price discrepancy exist? This is because franchise sellers and first-level agents possess more than just 7542. They also have in-demand products, weak-selling products, and high-priced products. It is not the case that every type of tea provides such high profits. In Fangcun, however, 7542 serves as the primary basis for speculation. If all products were accepted, prices would be negotiable. If only 7542 is accepted, there is no room for negotiation.
Among Puerh teas, 7542 can be considered the product with the widest circulation and the highest demand. All market prices are based on fluctuations in the price of 7542. These factors give rise to the situation in which shipments are broken up and flow back to Guangdong, Although the returning 7542 allows franchise shop owners to benefit from price differences of 1000 RMB, the profit is small compared with that of other low-volume and high-priced teas. Franchise shops are not wholesalers, and their costs are significantly higher than those of wholesalers. The impact of these distribution changes is two-fold. First, they limit abrupt and unnatural price fluctuation. Second, they serve to increase the profit of the tea factory itself.
The price of 7542 currently fluctuates between 20 and 30%. This is not at all comparable with the earlier situation in which prices could rapidly increase by a factor of two or three. Turnover rates are continuously increasing, however, which brings a destabilizing factor to future market development. These channel developments are also serving to lay the foundation for the future Puerh tea market, however. Dayi is engaging in large-scale Puerh tea cake production, and from its perspective these developments are positive.
But what is its objective in promoting the growth of so many franchise shops? Is it to attract more short-term speculators? No, Dayi's goal is to promote end-consumer sales. The new sellers certainly do not possess the resources of traditional first-level agents, but they are absolutely under the control of Dayi. This ensures the creation of a unified model of production and sales.
If Dayi truly wishes to promote its products in the market on a large scale, however, it must prevent the products from returning to the Guangdong market. I believe that if this is not done today, it will not be done in the future. Each package of tea is marked with the number of the selling agent, so it should not be difficult to trace the tea. In general, current challenge is to ensure the profits of franchise sellers. Its first-level agents are not its most important consideration.
The focus of future reforms is likely to revolve around consideration of the classification of specialty sellers. Many specialty stores in unfavorable locations or with poor profits are likely to be reclassified or to die out. Most significantly, sales regions are likely to be distributed in a more appropriate fashion. Many locations have an excessive concentration of Dayi franchise shops. These are not, after all, convenience stores and cannot be simply be allocated by region. Their distribution must be based on the actual development stage of the market in each area. It is not necessarily true that a large population implies a large number of Puerh tea drinkers. In addition, having to travel a few extra blocks is not necessarily a major inconvenience. Dayi must consider basic market capacity to ensure the profits of franchise sellers and to enact true distribution reforms.
If 30% of the franchise stores with the lowest sales were eliminated, Dayi would still have over one thousand franchise stores. I am confident that development trends of Dayi franchise sellers will determine the orientation of the future Puerh market. Changes to the operation of franchise stores may cause the future consumer market to take shape. As Puerh enters a true consumer era, the influence of Fangcun will be reduced. At that point, the lonely feeling in Fangcun will include not only the earlier first-ever agents. The market itself will take on a sense of loneliness. Why? Because Fangcun will no longer possess the power to allocate shipments or to allocate prices.
Why were the first-level agents able to create such turmoil in the past? Simply put, they controlled access to products and likewise controlled prices. Today, product access and prices are controlled by Dayi through its distribution channels. Agents no longer possess both of these capabilities and no longer guide the dialogue of the market. That is, Fangcun needs Dayi but Dayi is no longer absolutely dependent on Fangcun. All major brands must undergo this stage in their development, and this is the reality of the market.
If Dayi is successful in its distribution reforms, it is likely to inspire imitation by many second-line factories. These manufacturers see the opportunity to obtain a slice of the market by setting up shops in locations targeted by Dayi for franchise expansion. In consumer markets outside Guangdong, consumers wish to buy Puerh tea - not 7542 101. Dayi enjoys advantages but not absolute market dominance. Second-line factories must take advantage of the fact that brand habits have not yet completely taken shape. By seizing this opportunity, they too can hold a place in the Pucrh market.
Current development trends at Fangcun are extremely unfavorable to second-line factories. Most capital is concentrated on speculation of Dayi teas, and even older teas of many second-line factories do not command significant prices. I believe these factories may also imitate Dayi and move to limit the number of franchise shops they allow. They must also move past focusing on speculation at Fangcun. If Dayi's efforts to sell to end-consumers are highly successful, its brand name will be further solidified and the situation of second-line factories will grow even more difficult. These factories need to implement changes in their cooperation with existing sales channel agents to keep pace with Dayi's efforts to establish consumer sales. This may allow them to eke out their own position in the consumer market. If this market takes shape in other Chinese provinces and the end-consumer market becomes the mainstream, lonely Fangcun may grow even lonelier.
In the last issue, I discussed the divergence of large tree tea and factory tea. Today this situation has already begun to occur. Many large tree tea products are sold in Northern China and in other countries. Factory teas, on the other hand, flow south or return to Guangdong, This is a sign of things to come, Puerh tea cannot focus on Guangdong alone and must spread far and wide. As we drink Puerh by purple clay tea set, we should observe Dayi's distribution reforms, because they are likely to signal changes to the distribution of all Puerh.