New Distribution has previously reported on many practical cases of distributor transformation, covering areas such as business management, organizational change, warehousing and logistics, and channel expansion. However, cases involving brand transformation are rare. Since the brands a distributor represents form the foundation of their business, this might seem like a topic with little to discuss. But after reading today's case, you will surely admire the boldness and courage of this distributor. As is well known, holding the agency for a well-known first-tier brand is like having a "treasure" for a distributor. Although it doesn't generate much profit, sales are stable, stores need it, and business is worry-free—it's the cornerstone of a distributor's business.

But the distributor we're discussing today once had his main business in first-tier brands, yet over the past decade, he resolutely gave up his "iron rice bowl" and focused on distributing second- and third-tier brands. Although the sales volume is not large, the profit is several times that of distributors in the same category. Before the Chinese New Year, I had a conversation with Mr. Zhang Li, General Manager of Xiangyang Kaitai Department Store in Hubei. Before 2010, Kaitai Department Store represented many well-known brands such as Diao Pai, Darlie, Heimei, Liangmianzhen, Unicharm, and Shanghai Jahwa. But now, Kaitai only represents a few well-known brands like Pechoin, Cold Sore, and Adolph, along with many second- and third-tier unknown products.

In 2010, the business volume was around 40 million yuan; in 2021, it was 60 million yuan. The volume barely changed, but profits have multiplied several times over, from just two or three percentage points.

How did Xiangyang Kaitai Department Store achieve this? How does Zhang Li think? This article will detail the brand transformation journey of Xiangyang Kaitai.

At the Beginning of Transformation: Cutting One Brand Each Year

Before 2010, as mentioned earlier, Xiangyang Kaitai Department Store was considered a "well-known" distributor locally, holding many first-tier brands. Although it looked glamorous on the surface, profits were pitifully low. "Large capital, low profits. The distributor merely played the role of a logistics provider and financier. Although we as distributors had our own ideas, they were hard to implement because the costs were controlled by the manufacturers. The price distribution rights were uniformly guided by the manufacturers, and business operations were basically in the hands of the brand owners." This was Zhang Li's reflection on the business situation in 2010. Zhang Li has a vivid memory: he was chatting with two friends, one a distributor and one a manufacturer's manager. The distributor complained to the manufacturer's manager, saying, "Doing these first-tier brands earns so little, it's meaningless!"

The manufacturer's manager joked back, "Why should the brand let you earn so much? The salespeople are mine, the brand is mine. You just provide a warehouse and capital. Why should you earn too much? It doesn't make sense." Although it was a casual conversation, it deeply touched Zhang Li: it turned out that in the eyes of manufacturers, distributors were so "insignificant." Doing business with first-tier brands—anyone can do it! As long as you have capital and a warehouse, why choose Kaitai Department Store? Where exactly is Kaitai's core competitiveness? In 2011, Zhang Li kept asking himself this question. At that time, although he was doing 40 million yuan in business, Kaitai Department Store had almost no sales staff of its own. The manufacturer set up a business department there, and Kaitai basically didn't have to manage anything; all promotional activities were decided by the manufacturer. If the manufacturer had funds, they would send people; if not, they wouldn't.

Although they were the local distributor, the operating and distribution rights were completely in the hands of the manufacturers. Realizing this, Zhang Li made up his mind to reform. In 2012, Kaitai began representing Pechoin, which was the first brand that Kaitai fully operated and built a team to serve.

Then it became unstoppable. By 2013, Zhang Li started cutting one first-tier brand each year. At the same time, he continuously introduced more second- and third-tier brands. On one hand, he ensured that sales volume didn't fluctuate too much and maintained regular operational configurations; on the other hand, he introduced second- and third-tier brands to increase profits. Zhang Li also emphasized, "Many distributors, for example, those handling P&G or Unilever, may reach a business volume of 300 to 500 million yuan, with relatively abundant capital. Although profits are only two or three percentage points, that's also a business model. There's no right or wrong in business; it's just that Kaitai chose a different model—smaller volume but relatively better profit margins."

Of course, this is also related to Kaitai's geographical location. If it were in a first-tier provincial capital city, the market capacity would allow for a much larger business scale. With scale, you get better brand policy resources and can also cover multiple regions.

But if you're in a third- or fourth-tier city, on one hand, the market is small with limited capacity; on the other hand, it's difficult to expand your business to other cities. This is determined by your origins.

To Successfully Transform, All Salespeople Were Replaced

The above is the original intention behind Kaitai Department Store's transformation. But when they actually embarked on the transformation path, they encountered many difficulties. Zhang Li said that initially, the company was oriented towards first-tier brands, with brand salespeople handling the market. Our own people just went to stores to restock shelves and handle miscellaneous tasks; they didn't need to work hard or do calculations. But after deciding to transform, the business logic completely changed—they had to take charge of the market themselves. To successfully transform, from 2011 to 2016, over five years, all original salespeople left and were replaced with a new group. Zhang Li calls this transformation "gene modification." The internal organizational structure was fully adjusted to adapt to the operational logic of second- and third-tier brands.

Of course, in terms of performance assessment, Kaitai Department Store also made corresponding changes: For salespeople, the assessment is directly based on net profit. The company's backend operating costs are given a standard rate, and all related costs for sales associates and market expenses are fully transparent and data-driven. Currently, Kaitai Department Store can clearly see the profitability of each store, each brand, each product, and each month, as well as the profit contribution of each salesperson and sales associate.

In addition, regarding the compensation for frontline sales associates, it used to be a base salary plus commission, but later it changed to a commission-only model. Similarly, the team of 200 sales associates was hard to convince at first. When making adjustments, Zhang Li adopted a pilot + dual salary system approach to gradually transition. First, pilot stores with good sales were selected; second, two salary standards were offered: a low base salary with low commission, and no base salary with high commission. Whichever method yielded higher income was used. Through guidance and income comparison, the adjustment was finally made. Zhang Li told New Distribution that the original intention behind designing this salary model was not only to increase the sales associates' work enthusiasm but, more importantly, to enable them to increase their actual income through their own efforts.

Undoubtedly, the difficulties of Kaitai Department Store's transformation were not only internal organizational obstacles but also external pressure and the challenge of selecting products. At that time, many distributors and manufacturer managers sneered as Kaitai Department Store threw out its "treasures" one by one, thinking the company had lost its nerve and might not survive...

In terms of product selection, because they had never dealt with second- and third-tier brands before, they had to proactively seek out brands, such as at the Beauty Expo. Although they now have stable cooperation with over 50 brands, during the transformation, they chose wrong brands more than a dozen times, paying a lot of tuition fees.

The transformation journey of Kaitai Department Store can be described as full of "tribulations." From 2011 to 2016, five years, the brand renewal was basically completed; from 2016 to 2021, another five years, they further evolved and explored in business data construction and management standardization, achieving an overall business transformation. The team of over 200 sales associates and frontline salespeople changed Kaitai Department Store from being led by brand owners to now being able to co-create and do well in the market with brand owners. With its wings now fully grown, Xiangyang Kaitai Department Store has transformed into a true distributor, and in the future, it will aim to become a local daily chemical category distributor.

In the future, cooperation with first-tier brands will no longer be just as a logistics provider or financier. With a large sales associate team, they can do more promotional activities in stores, not just simple special offers, special offers, special offers, and they are more capable of protecting prices and preventing price wars between brands.

Summary

Of course, this case is not intended to tell distributors to give up agency for unprofitable first-tier brands and switch to second- and third-tier brands with higher gross margins.

The core purpose is to tell distributors: for a distributor, your core competitiveness is not capital strength, brand resources, or store relationships. As a true distributor, the most critical capabilities should be marketing and promotion, store coverage, and display and sales promotion. Maybe marketing and promotion sounds a bit vague; a more practical way to put it is: When a distributor is separated from the brand owner's personnel support and financial support, can you sell a new product well, not a bestseller? The brand owner can provide guidance, strategies, and methods. But can you execute them solidly, rather than completely relying on the manufacturer and being a hands-off boss, just acting as a delivery and financing provider?

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