---
title: "Autumn Sugar Selection | \"First-tier brands have thin margins, second-tier brands have weak terminals, and third-tier brands die fast!\" How to choose products to make money easily?"
description: "With the Autumn Sugar Fair approaching, distributors are preparing to find several best-selling new products. Each distributor will select products based on their local market conditions, which brings up the issue of combining old and new products. To make money, besides considering the product's selling points, one must also think about the product portfolio. How can you optimize your product mix to easily earn more profits? Among the products you distribute, which ones are \"profits\" and which are \"weapons\"? The following analysis from the Distributor's Home editor calculates which combination model is best."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2015-10-15"
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# Autumn Sugar Selection | "First-tier brands have thin margins, second-tier brands have weak terminals, and third-tier brands die fast!" How to choose products to make money easily?

> With the Autumn Sugar Fair approaching, distributors are preparing to find several best-selling new products. Each distributor will select products based on their local market conditions, which brings up the issue of combining old and new products. To make money, besides considering the product's selling points, one must also think about the product portfolio. How can you optimize your product mix to easily earn more profits? Among the products you distribute, which ones are "profits" and which are "weapons"? The following analysis from the Distributor's Home editor calculates which combination model is best.

**Introduction:**
With the Autumn Sugar Fair approaching, distributors are likely preparing to find several best-selling new products at the fair. Each distributor will select products based on their local market conditions, which brings up the issue of combining old and new products. To make money, besides considering the product's selling points, one must also think about the product portfolio.
How can you optimize your product mix to easily earn more profits? Among the products you distribute, which ones are "profits" and which are "weapons"? The following analysis from the Distributor's Home editor calculates which combination model is best, as follows:

**Different characteristics of three types of brands**
Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories: first-tier, second-tier, and third-tier brands.

First-tier brands include world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove; also include well-known domestic brands such as Wahaha, Yili, and Mengniu.

Generally, first-tier brands have a low return on investment, commonly following the "6+1" or "7+1" profit model, i.e., 6%-7% distribution gross margin plus 1% annual rebate, with the highest distribution gross margin generally below 11%, and usually a no-return policy. After deducting warehousing and distribution costs, personnel wages, expenses, losses, and taxes, net profit is minimal. However, first-tier brands have multiple advantages: strong brand support, fast-moving products, and the manufacturer provides a large terminal market maintenance team, making it easier for distributors to operate; distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and basically no operational risk; large turnover, with annual regional turnover ranging from millions to hundreds of millions. First-tier brands are often "must-stock" in channels, allowing distributors to quickly build sales networks and obtain favorable trading conditions with retail outlets.

Second-tier brands typically refer to brands with high product quality, no large-scale brand operations, but providing proactive and skilled channel promotion support.

Second-tier brands have a relatively high return on investment, usually between 12% and 20%. Their characteristics include: relatively low brand awareness, some appearing as regional brands; no terminal market maintenance team or a small team, with terminal maintenance borne by the distributor, and the distribution gross margin includes terminal maintenance costs of about 1%-1.5% of turnover; distributing second-tier brands can also achieve high turnover, with annual regional turnover reaching millions or more; second-tier brand products have longer payment terms in modern channels, requiring significant capital and bearing corresponding bank interest; lower and less standardized market management, with higher demands on distributors.

Third-tier brands have little to no brand awareness. They typically target low-income groups or niche markets, or impact the market with prices far below first- and second-tier brands of similar products.

Third-tier brands have the following characteristics: low brand awareness, opaque pricing, distribution gross margins up to 30%-40% or more; due to lower quality and lack of good market planning, turnover is generally small, with annual regional turnover below hundreds of thousands; prone to slow sales, with higher returns and losses; distributors bear the risk of market investment costs; short product life cycles. Distributors operating third-tier brands face high risks, but due to high distribution gross margins of 30-40% or more, it presents a "limitless scenery at the perilous peak" scenario. Some distributors leverage their keen market observation to find third-tier brands that meet local market demand, implementing "short, flat, fast" operations, and can achieve substantial gains. Operating third-tier brands requires continuous elimination of products and introduction of new ones to address the short product life cycle.

**Best product operation model for distributors**
Let's first analyze the returns from investing one million yuan of working capital separately in each of the three brand categories.

**Investing in first-tier brands:** Assume a distribution gross margin of 7%. Taking a typical warehouse sales model as an example: distribution cost 2%, personnel wages 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment terms of 15 days, ignoring in-transit factors, with two turnovers per month. Monthly net profit is:
(7%-2%-1.2%-0.3%-0.2%-1.4%-0.5%) × 1,000,000 × 2 = 28,000 yuan.

**Investing in second-tier brands:** Assume a distribution gross margin of 15%. Distribution cost 2.5%, personnel wages 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment terms of 60 days (varies by region and outlet), ignoring in-transit factors, with one turnover every two months. Monthly net profit is:
[(15%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 39,000 yuan.

**Investing in third-tier brands:** Assume a distribution gross margin of 30%. Distribution cost 3%, personnel wages 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment cost 6%. Assume payment terms of 75 days (varies by region and outlet), ignoring in-transit factors, with one turnover every 2.5 months. Monthly net profit is:
[(30%-3%-1.5%-0.6%-1.5%-2.2%-6%)/2.5 months - interest 0.5%] × 1,000,000 = 55,800 yuan.

From the above analysis, we can see that investing solely in first-tier brands yields the least profit; investing solely in second-tier brands, despite longer payment terms, yields higher monthly profit; investing solely in third-tier brands yields the highest monthly profit.

In reality, if a distribution company operates solely with third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, leaving negotiations with retail outlets at a disadvantage. Frequent "sudden death" of products can severely harm the company's stable operations. Operating solely with second-tier brands, while profits and sales stability are relatively high, requires significant capital. Operating solely with first-tier brands, although sales are not a concern and risks are low, profits are not high.

Therefore, if a distribution company selects several brands from each of the three categories for combined operation, it can complement the advantages of the three types, reduce opportunity costs, and achieve optimal returns and operational stability.

**Tasks within this operational combination**
**Tasks of first-tier brands:** Bear the basic operating costs of the company to ensure normal survival; bundle with second- and third-tier brands when negotiating with retail outlets to improve trading conditions for the latter, such as shortening payment terms and reducing fixed monthly and annual deductions; assist second- and third-tier brands in quickly covering the sales network; dilute distribution costs, wages, and management expenses for second- and third-tier brands; fifth, contribute a certain amount of net profit.

**Tasks of second-tier brands:** After first-tier brands cover basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, distribution companies allocate significant personnel, warehouses, vehicles, etc., which become a heavy burden if distribution rights are lost for some reason. At this point, second-tier brands can ensure the company's normal survival, enhancing its ability to resist risks; provide terminal market maintenance teams for third-tier brands.

**Tasks of third-tier brands:** With first- and second-tier brands as backing, third-tier brands further increase profit margins, and only need to control losses to generate extremely high profits. Since third-tier brands have very small per-SKU turnover, their sales weight should not be too large; otherwise, excessive SKUs can lead to management issues, reducing profitability.

Generally, for a well-developed distribution company, the optimal product operation model is to control the sales weight of first-, second-, and third-tier brands at 40%, 40%, and 20%, respectively. At this point, the investment return per million yuan can be about three times that of investing solely in first-tier brands. Specifically, the optimal number of brands is 1-2 first-tier brands, 4-6 second-tier brands, and 5-8 third-tier brands.

**-END-**

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