Major distributors are abandoning major manufacturers—does this news surprise you? There are already many such cases. Yuan Lai, a lead writer for New Distribution who has long tracked the development of major distributors, has keenly observed the phenomenon of "major distributors switching away from major manufacturers," quoting one major distributor: "There's volume but no profit, so why do it?" Major manufacturers are industry leaders, and major distributors are regional leaders in distribution. It's common for major manufacturers to switch distributors. But it's rare for major distributors to switch away from major manufacturers. When rare events occur frequently, it signals the emergence of a new trend. This phenomenon between major manufacturers and major distributors has already occurred twice since China's reform and opening up. The current budding "major distributors switching away from major manufacturers" is the third round. The widespread contradiction between major manufacturers and major distributors is not due to capability issues on either side, but rather the accumulation of environmental changes. I call this a structural contradiction. Structural contradictions are inherent, endogenous, and unavoidable within the system. By analyzing the structural contradictions between major manufacturers and major distributors, we may find a remedy for the fundamental marketing problems. First Round of Structural Contradictions: No Profit in KA Stores Around 2000, KA stores developed rapidly in China, leading manufacturers to recognize that "those who win KA win the world." However, China's KA stores developed a profit model independent of global KA logic: the backend profit model. Its basic feature is that KA stores charge suppliers numerous "backend fees" without guaranteeing sales, including entry fees, barcode fees, display fees, end-cap fees, promotion fees, and dozens more. Moreover, KA stores implement unconditional "last-place elimination," causing some supply chain costs to exceed sales revenue, forcing suppliers to "subsidize" KA stores. Thus, the phenomenon emerged: "Not doing KA is waiting to die; doing KA is seeking death." The conflict erupted around 2010. Facing this, major distributors and major manufacturers adopted completely different strategies. Major distributors simply wouldn't do business if it wasn't profitable—a typical profit-first strategy. If it wasn't profitable, they'd hold on for a while, then give up if it didn't improve. Major manufacturers prioritized market share. Even if unprofitable, they had to suppress competitors. This was the first round of structural contradictions between major distributors and major manufacturers, and it was widespread. I call it structural because it wasn't determined by the manufacturers or distributors themselves, but by China's KA business model. How was the first round of structural problems solved? Many major manufacturers offered solutions: First, in central cities, distributors exited and manufacturers directly managed KA, shifting from "dealer operations" to "direct operations"; second, in non-central cities, manufacturers paid the core KA fees to ensure distributors could profit from KA. Second Round of Structural Contradictions: Major Distributors' Warehouses Overflow China's market had two turning points. First, after the 1997 Asian financial crisis, the market shifted from a "shortage state" to a "surplus state," triggering the later "market focus descent" (from "provincial distributors" to "city distributors," then to "county distributors") and subsequent deep distribution. Second, from 2013 to 2016, various FMCG sectors suddenly moved from high-speed growth to decline. For example, by 2022, the baijiu industry had fallen over 50% from its historical production peak, beer over 40%, and instant noodles over 50%. In 2013, when FMCG sales suddenly declined, most manufacturers and distributors expected a quick recovery. In 2014, as declines continued, many thought they could weather the storm. In 2015, with continued declines, they finally realized the Chinese FMCG industry had entered a downward trajectory. Due to consecutive years of declining sales volume (note: volume, not value), major manufacturers did not reduce sales targets for major distributors; instead, they intensified channel stuffing. Early on, channel stuffing could still be pushed through, albeit at higher costs. Later, it reached a point where stores weren't afraid of overstocking, as they had policies allowing returns of unsold goods. If returns weren't accepted, they threatened to stop ordering. As a result, near-expiry products surged, and major distributors' profits plummeted. Many major distributors experienced "warehouse overflow," severe overstocking, and working capital difficulties. While capital issues had multiple causes, distributors often blamed channel stuffing. Around 2016, warehouse overflow was severe, and many major distributors disappeared. This was the second round of structural contradictions. The era of incremental market growth had ended. The period of "volume first, then profit" was over. Facing this, major distributors still prioritized profit. They could tolerate short-term losses but never long-term losses. For major manufacturers, since the oligopoly structure was still unstable, they had to protect market share, prioritizing share. How was the second round solved? Major manufacturers' measures included: First, in central cities, manufacturers intervened in market operations, taking over functions like market promotion and ordering, while leaving marginalized channel functions like distribution and financing to distributors. Second, in county-level markets, although distributors remained dominant, their salespeople were "directly managed by major manufacturers," including manufacturers paying salaries (with bonuses from distributors) and implementing closed-loop management, allowing them to only handle the manufacturer's business. Third Round of Structural Contradictions: The Value of Big Brands in Driving Sales Disappears In the eyes of major distributors, the value of major manufacturers is constantly changing. In the early period, big brands could both increase volume and generate profit. Just handling big brands was profitable. In the middle period, big brands couldn't generate profit but could drive sales. Major distributors relied on "brand portfolios" to make money—using well-known brands to attract customers and ordinary products to generate profit. It should be said that the phenomenon of big brands having "volume but no profit" isn't determined by the brands themselves, but is a common phenomenon in China's popular channels. Of course, it's also a strange phenomenon. The fact that big brands aren't profitable has existed for a long time. Why has it suddenly erupted now? I believe there are three reasons: First, major distributors' channel control capabilities are strengthening. Especially county-level major distributors, who now generally have strong channel control, sometimes even stronger than central city distributors. Of course, this is also a result of the long-term marginalization of central city distributors. Particularly, some new types of distributors that have recently risen have strong operational capabilities and low dependence on big brands. Head brands in grassroots markets are concentrating among head distributors, giving them leverage to negotiate with major manufacturers, rather than always compromising. Second, the rise of white-label products means they no longer need big brands to drive sales. The rise of white-label products is a result of the marketing industry's transformation from deep distribution to "bC integration," and also a necessary outcome of China's improved legal system and general manufacturing progress. E-commerce, community group buying, KA stores, and distributors are all doing white-label products, which indeed pressures major manufacturers and gives major distributors the determination to break free from dependence on them. Third, big brands can no longer drive sales, eroding the last confidence in them. The extreme result of long-term over-reliance on big brands to drive sales is that big brands truly struggle to make money, and even driving sales becomes difficult. Of course, some smaller distributors still have expectations for big brands to drive sales, but major distributors no longer care. With volume but no profit, major distributors are unwilling to continue wasting time. Facing the third round of structural contradictions, what should major manufacturers do? The Crux: Balancing Share and Profit is Difficult As long as a company is a major manufacturer, it must prioritize market share. As long as there's market share, there are opportunities to make money. Winners of the first round of competition are certainly scale-leading enterprises. FMCG companies that become oligopolies have achieved scale advantages. It should be said that up to now, major manufacturers still prioritize market share. That's strategy. But for major distributors, their strategy is naturally profit-first. Because they aren't market leaders, if market share can't be converted into profit, they can tolerate it short-term but absolutely not long-term. The conflict between major manufacturers' share-first approach and major distributors' profit-first approach manifests as structural contradictions when market conditions change. Facing structural contradictions, it appears as major manufacturers "advancing" and major distributors "retreating." Major manufacturers' "direct KA operations" is advancing; "taking over promotion and ordering functions" is advancing; "paying distributor salespeople's salaries" is advancing. Their "advance" means "if you don't do it, I will." Major distributors "exiting KA" is retreating; "handing over salesperson management" is retreating. However, the manufacturers' "advance" actually reflects their "reluctant compromise" and concession. Rather than advancing, it's reluctantly "taking over." Major manufacturers are "filling holes with people" and "paying money to avoid disaster." When distributors won't do something, manufacturers have to do it themselves. "Paying money to avoid disaster" is the inevitable result of prioritizing share over profit. But facing the third round of contradictions, paying money to protect market share may no longer be possible; new thinking is needed. Major Manufacturers: From Share-First to Profit-First In the past, major manufacturers' sales growth came from two sources: industry growth and squeezing competitors' market share. Now, in FMCG industries that have become oligopolies, it's very difficult to squeeze the long tail through price, policies, etc., to increase industry concentration (like CR4, CR8). The current situation is that the decline in mass product sales in FMCG is unstoppable. If you try to protect market share, you may lose both share and profit, resulting in a lose-lose situation. Let's look back at the general laws of competition. The first round of industry competition is scale competition for mass products. Winners are those who achieve scale advantages. This is why many companies still prioritize market share. The second round is structural competition for high-end products. Winners are those who achieve structural advantages. This is the current direction of transformation. The third round is competition across the industry chain. Winners are those with industry chain advantages. This is future competition and what needs to be planned now. It's important to analyze the industry's stage and clarify the main competitive options. The first and second rounds of structural contradictions were actually resolved through major manufacturers' substantive "concessions" and "paying money to avoid disaster." When share-first can no longer solve problems, a different mindset might: use profit to protect market share. Where does profit come from? From high-end products. Currently, two major variables affect marketing: premiumization and digitalization. This article focuses on premiumization, not digitalization. After the pandemic, media and public opinion have heavily promoted "consumption downgrading," which is extremely harmful. Now should be the golden age of premiumization. The arrival of a golden age isn't dramatic. The climax of a golden age is dramatic. If you wait until it's dramatic to participate, it's too late. Don't hesitate. Without premiumization, the scale advantages gained in the first round of competition will be completely lost. Major manufacturers should quickly and decisively enter premiumization. Through premiumization, they should complete the transformation of channel models from deep distribution to bC integration. Premiumization solves both manufacturers' and distributors' profit problems. In the past two rounds of structural contradictions, manufacturers were caught in the "protect share" vs. "protect profit" dilemma, but premiumization doesn't have such contradictions. Once premiumization solves the profit problem, then go back to protecting profit. Use the profits from high-end products to support mass products in even more brutal marketing battles. The end result is a win-win for both market share and profit: use premiumization to protect manufacturer and distributor profits, and use profits to protect mass product market share. The past two rounds of structural contradictions were triggered by conflicts between market share and profit, where you couldn't have both. The rise of premiumization offers a chance to have both. Isn't competition in high-end products fierce? The most intense marketing battles appear to be in mass products based on cost-performance. In the face of cost-performance, consumers have no loyalty. High-end product marketing battles are cognitive battles, wars without smoke. To summarize: Facing the third round of structural contradictions between major manufacturers and major distributors, premiumization is the antidote. When the market share landscape is settled, structural competition is just beginning. Liu Chunxiong, advocate of new marketing and dean of the Marketing Digitalization Research Institute. Currently an associate professor at Zhengzhou University, author of the new marketing trilogy: "New Marketing," "New Marketing 2.0: From Deep Distribution to Three-Dimensional Links," and "New Marketing 3.0: bC Integrated Digital Transformation."