Currently, survival has become the most urgent need for many distributors. According to incomplete statistics, there are nearly one million FMCG distributors of all sizes in China.
In recent years, dramatic changes in the consumer environment have reshaped the retail landscape, and their impact has also spread to the upstream industry chain, making the situation particularly difficult for distributors. It is understood that traditional distributors have generally experienced a double decline in sales and profits, with some even exiting or going bankrupt.
"In July this year, our sales fell by 30% year-on-year. But compared with peers, this data is relatively optimistic. As far as I know, some companies have seen a decline of up to two-thirds," a frozen food distributor told Third Eye Retail.
In the view of industry insiders, this problem is the result of multiple factors. On the one hand, distributors face declining consumption power and channel differentiation leading to sales declines; on the other hand, brand manufacturers and retailers, aiming to transfer risks and ensure performance, either increase pressure to stock up or raise channel fees.
This has led to rising costs for distributors, making operations unsustainable; combined with the trend of channel flattening, the living space for distributors is still being compressed. It can be said that related companies are experiencing a "life-or-death moment."
But considering China's vast territory and complex market environment, brand manufacturers find it difficult to cover the national market on their own, so distributors still have their necessity. Therefore, distributors are facing a "knockout competition," and how to survive is the most important proposition at present.
In fact, many distributors have begun to adjust their businesses. For example, some have given up cooperation with large chain supermarkets and turned to find new channels. They adjust product structures and expand business categories to gain greater growth space. Or they move closer to becoming professional logistics or service providers.
Liu Chunxiong, a professor at Zhengzhou University, believes that distributors are on the eve of transformation. What needs attention is that as an intermediate link, changes in distributors will inevitably affect upstream and downstream enterprises, which in turn adds uncertainty to the development of the retail industry.
Trapped in a Dilemma
Since the beginning of this year, distributors' businesses have seen a significant decline.
Some distributors said that a previously operated imported butter cheese sold 150,000-200,000 yuan per month in a chain supermarket in Xi'an, but this year it dropped to 50,000-80,000 yuan per month, a decline of more than half. A leisure snack supplier in Xinxiang, Henan, mentioned that the company's sales have fallen by more than 20%, and profits have dropped by 40%.
"If a company doesn't grow, all kinds of problems arise." In Liu Chunxiong's view, after 2013, domestic FMCG sales reached a peak, and since then there has been no total growth, which determines that distributors have little room for growth.
"As movers, distributors' profits come from moving more goods. Without goods, growth is hard to talk about," he continued.
Channel differentiation has exacerbated this situation. In recent years, the rise of community group buying, live-streaming e-commerce, discount stores, and other channels has divided the market of traditional supermarkets, directly affecting distributors' businesses.
"Companies that do well in live-streaming are directly connecting with factories. Anchors like Xinba can fully carry the production capacity of a factory for several days, and the two sides no longer need the intermediate link of distributors. Discount stores, which are at the forefront, also gain competitiveness from compressing intermediate links. Although community group buying needs distributors to provide services, their distributors are emerging enterprises, not traditional ones," said Huang Xiang, sales director of Tianshui Great Wall Juice Group Co., Ltd.
Under the special circumstances of the epidemic, the growth of supermarket performance drove the development of distributors. After the market recovered, consumers had more shopping channels, and supermarket sales declined. Correspondingly, the problems faced by distributors also broke out.
In Huang Xiang's view, the epidemic also changed people's shopping habits. For example, healthy beverages have seen significant growth. If distributors do not pay attention to changes in consumer demand and adjust their product structure in time, their performance will also be greatly affected.
Although also facing the impact of changes in consumer demand and channel differentiation, distributors currently bear far greater pressure than traditional supermarkets.
On the one hand, brand manufacturers have not considered the decline in traditional supermarket sales and continue to raise sales tasks for distributors.
"The distributors of Mengniu and Yili in our county chose to quit because they couldn't complete the manufacturers' tasks," said an industry insider.
On the other hand, supermarkets are also transferring their own pressure to distributors.
It is understood that various entry fees currently account for 10% of distributors' sales, and some supermarkets also raise contract fees every year. Facing the situation where products in channels like snack discount stores are priced much lower than in traditional supermarkets, retailers require distributors to make concessions to gain competitive advantage.
In addition, the various operating costs of distributors are also increasing. "Our annual personnel wages need to increase by 5%, warehouse rent by 10%, and even parking fees are increasing," the frozen food distributor gave an example.
In actual situations, some distributors may avoid a significant decline in sales by adding channels, but corporate profits have generally declined. "Now many distributors' profits are less than 10%. In this case, once the volume is insufficient, they will definitely lose money. This is also the reason why many distributors choose to exit," said Jia Zhenbin, head of Huasong Paper Products.
Living Space
Mr. Tao, a senior FMCG industry insider, believes that for a long time, distributors have existed as "movers" and "banks." Their services such as delivery and after-sales help brand manufacturers complete their layout in the national market. At the same time, fund advances also share the operational risks of brand manufacturers and retailers. But with social development, the role of distributors is gradually being reduced.
First, the developed logistics system and information transparency have broken down geographical and information barriers, making it easier for brand manufacturers to reach terminals. An example is that many supermarket buyers are now contacting new products through channels like Xiaohongshu and Douyin.
Second, removing intermediate links to improve operational efficiency has become the choice of most enterprises. To enhance differentiated competitiveness and ensure price advantages, developing private labels and direct sourcing from origins has become the choice of many retail enterprises. Not only large chain supermarkets like Walmart, Yonghui, and Hema have laid out in this area, but regional retail enterprises are also promoting this through joint procurement and the establishment of business alliances.
"Distributors' profits are about 40%, of which 15% ultimately goes to retailers. As long as you skip this link, you can generate a 20% profit margin," a distributor explained.
Channels such as community group buying and live-streaming e-commerce also provide brand manufacturers with opportunities to directly reach consumers. "Although corporate profits are very thin on channels like Douyin e-commerce, since direct supply can make money as soon as it sells, it is also an option for brand manufacturers," Huang Xiang said.
On this basis, the consensus among practitioners is that a large number of distributors will be eliminated, but this group still has its necessity.
At present, there are more than 2,800 county-level administrative divisions in China. A brand needs 2,000-3,000 distributors to complete its national market layout. This means that brand manufacturers find it difficult to achieve full coverage of the domestic market on their own. At the same time, distributors are familiar with local markets and can help brand manufacturers develop non-mainstream channels.
"In most cases, due to high costs, it is difficult for a brand to deliver on time. But the advantage of distributors is that they can deliver multiple products at the same time, thereby reducing logistics costs," Liu Chunxiong said.
Mr. Tao believes that direct sourcing from origins is not entirely an ideal choice for retailers. Retailers choosing direct sourcing need to consider multiple factors, such as whether changes in capital costs, the ability to respond to sudden demand in a timely manner, changes in gross margins, promotion execution, and logistics efficiency match their long-term development strategies.
For retail enterprises, it is difficult to achieve direct sourcing when the quantity of goods purchased and the company's cash flow are insufficient. At the same time, many distributors, because they are responsible for one category, have a high degree of professionalism in product selection and sales. Traditional supermarkets want to take care of tens of thousands of products, which is correspondingly more difficult. A situation that may occur is that after skipping distributors, the profit margin of supermarkets increases, but sales may decline significantly.
In addition, since traditional supermarkets have played the role of "landlord" for many years, handing over operations to suppliers, whether the increase in sales and profits after cutting off distributors can cover the increased labor costs in the middle is also a factor retailers need to consider.
"I understand that some local supermarkets that directly connect with manufacturers are also troubled by product sales and after-sales issues," a supplier in Henan said.
Where Is the Way Out?
"At present, distributors generally have no core competitiveness, and what they do can be done by someone else. Therefore, when the market space becomes smaller, they will be eliminated if they don't adjust," Mr. Tao said.
In fact, many distributors have begun to adjust their businesses and find a way out.
In terms of cooperation methods, distributors have adjusted from credit period to cash purchase. Jia Zhenbin told Third Eye Retail that in the selection of new customers, Huasong Paper Products now only cooperates with enterprises that can make cash purchases. The reason is that in recent years, too many supermarket enterprises have gone bankrupt, and the credit period system has greater risks. "We never thought before that now we have a dedicated legal advisor to help solve debt problems."
In terms of cooperation targets, distributors choose to withdraw from top supermarkets and cooperate with smaller regional chain enterprises. Multiple distributors said they have reduced cooperation with enterprises such as Yonghui, China Resources, and Hualian, and even stopped renewing contracts.
On the one hand, such supermarkets have sufficient scale to support direct sourcing of goods. For example, China Resources has established its own trading company, and its demand for distributors is declining. On the other hand, they are more powerful in the supplier-retailer relationship and find it difficult to meet distributors' needs for reducing entry fees and cash direct procurement. Moreover, due to more internal levels, communication costs are higher. More importantly, compared with traditional supermarkets, some emerging enterprises have more obvious sales growth.
"When manufacturers choose distributors, they will refer to cooperation with large supermarkets, so I previously thought that if I earn more here, I won't earn there. But now that overall profits are declining, it's hard to balance the accounts. We would rather give up the brand agency than cooperate with these large systems," a distributor said.
In terms of product structure, increasing categories has become the choice of some suppliers. Jia Zhenbin said that the company has already acted as an agent for all first-tier paper brands, and has begun to cross-category operate alcoholic beverages, and pay attention to internet-famous and cost-effective products. From a cost perspective, in the future, distributors in county towns need to cover all categories such as alcoholic beverages, grain and oil, and daily chemicals to survive.
In his view, professional supply chain companies will replace traditional distributors. Such enterprises involve more categories, have more professional management, and higher operational efficiency. This is also the future direction of Huasong Paper Products.
Liu Chunxiong holds the same view. He believes that in the past more than 20 years, domestic distributors have generally been small in scale and bound to brands, so the ceiling is generally low and competitiveness is insufficient, which is an important reason for the current predicament. But this situation will gradually be broken, and in the future, regional oligarch enterprises will appear in the distributor track.
"These enterprises do not first serve brands, but move towards platformization. They do whatever products the market needs, whether as first-tier or second-tier distributors."
For existing enterprises transforming to online channels and manufacturers, practitioners believe that the business logic is different, requiring professional teams as support, making it difficult to achieve. In contrast, becoming logistics or service providers will be the way out for traditional distributors.
"In addition to changes in the consumer market, distributors are now at the node of generational transition. The entry of the younger generation will also bring new vitality to the industry," Liu Chunxiong said.