---
title: "Channel Digitalization: Strengthening or Bypassing Distributors?"
description: "Distributors stand on the front line of digitalization. Channel digitalization, far from weakening distributors, actually strengthens their value. The dual-private domain model emphasizes the role of retailers, but distributors are essential for connecting, activating, and co-operating with users. They must transform from distribution-focused to operation-focused roles, becoming the main players in B2C operations."
author: "刘春雄"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2022-02-24"
language: "en"
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# Channel Digitalization: Strengthening or Bypassing Distributors?

> Distributors stand on the front line of digitalization. Channel digitalization, far from weakening distributors, actually strengthens their value. The dual-private domain model emphasizes the role of retailers, but distributors are essential for connecting, activating, and co-operating with users. They must transform from distribution-focused to operation-focused roles, becoming the main players in B2C operations.

# **Distributors, Standing on the Front Line of Digitalization**
If channel digitalization is about disintermediation, then are distributors the primary target of disintermediation?
In the dual-private domain model, users are both the private domain of the terminal and the private domain of the brand owner. Are users also the private domain of distributors?
If brand owners are all connected to users, do distributors still have channel value?
Does channel digitalization weaken or strengthen distributors?
**My view is that channel digitalization actually strengthens the value of distributors, placing them on the front line of digitalization.**
The digital operation of the dual-private domain model emphasizes the value of retailers in digitalization. Moreover, channel digitalization involves "two major integrations": the integration of online and offline, and the integration of the three parties—manufacturer, store, and distributor. Therefore, in the channel digitalization system, distributors are actually on the front line.
So, how should we view the value of distributors in the F2B2b2C model of channel digitalization? **This is not a simple question; it touches on the fundamental issues of Chinese marketing.**
Although the framework of traditional Chinese marketing conforms to Kotler's 4P structure, the role of channels is particularly heavy. The magazine *Sales and Marketing* claims that "China has 80 million salespeople," while Kotler's *Marketing Management* says the United States has 10 million salespeople.
**The difference is: salespeople in China work with channel partners (B-end), while salespeople in the U.S. work with customers (C-end).**
Traditional Chinese marketing has two major drivers: brand-driven and channel-driven. **The renowned educator Chen Chunhua wrote in *Sales and Marketing* in 2004 that in China, channel-driven is superior to brand-driven. Channel digitalization does not mean the disappearance of traditional offline channels, but rather the integration of online and offline. Therefore, the role of distributors remains essential.**
**The Evolution of Chinese Channels: The Mysterious Constant of 6 Levels**
To understand Chinese channels, one must understand the three major environmental factors that shaped them:
**1. China's vast territory.** China has 34 provincial-level administrative regions, 333 prefecture-level divisions, 2,847 county-level administrative divisions, and 38,773 township-level administrative divisions (source: Baidu Baike). The vast territory, coupled with the low urbanization rate during China's urbanization process, means that rural consumer populations are dispersed.
**2. China's large population and fragmented channels.** With 1.4 billion people, there are over 6 million retail terminals and over 4 million catering terminals. The dispersed agricultural population leads to scattered terminals.
**3. Low starting point for channel partners.** Chinese channel partners often start as individual traders. In the transition from trader to manager to entrepreneur, most distributors remain between trader and manager, failing to complete the transformation to an entrepreneurial form. This is the fundamental reason why China has formed a pattern of "county as the basic business unit."
The ultimate goal of channels is to reach users (C-end), and if not possible, to get as close to users as possible, with retail terminals being the closest. **Therefore, China's channel evolution has gone through two rounds: first, "market focus sinking," i.e., channel flattening; second, deep distribution, i.e., reaching terminals.**
People know the benefits of channel flattening and deep distribution, but few analyze their costs. Because flattening has costs, only a limited number of manufacturers can truly reach terminals. **The cost of channel flattening is the internal hierarchy of the manufacturer's sales force.**
For every level reduced in flattening, the internal hierarchy increases by one level. Let's look at the results of three rounds of channel flattening in China.
**Before 1998**
Channel structure: Sales Director → Regional Manager → Sales Representative → Provincial First-tier Distributor → Municipal Second-tier Distributor → County Third-tier Distributor → Retail Store. Channel structure: 3 levels within the manufacturer, 3 levels in the distributor channel. Total: 6 levels.
**1998–2000**
Channel structure: Sales Director → Regional Manager → Provincial Manager → Sales Representative → Municipal First-tier Distributor → County Second-tier Distributor → Retail Store. Channel structure: 4 levels within the manufacturer, 2 levels in the distributor channel. Total: 6 levels.
**After 2000**
Northern regional channel structure: Sales Director → Regional Manager → Provincial Manager → City Manager → Sales Representative → County First-tier Distributor → Retail Store. Channel structure: 5 levels within the manufacturer, 1 level in the distributor channel. Total: 6 levels.
After 2000, Southern regional channel structure 1: Sales Director → Regional Manager → Sales Representative → Provincial First-tier Distributor → Provincial Distributor's Municipal Company → Provincial Distributor's County Company → Retail Store. Channel structure: 3 levels within the manufacturer, 3 levels within the distributor. Total: 6 levels.
After 2000, Southern regional channel structure 2: Sales Director → Regional Manager → Provincial Manager → Sales Representative → Municipal First-tier Distributor → Municipal Distributor's County Company → Retail Store.
Channel flattening in China should mean that manufacturers are closer to terminals and users. However, this is not entirely true. We see that the process of channel flattening is also the process of internal sales system hierarchy.
If external channels are called transaction levels, then internal management channels are also management levels. The distance from top management to terminals is determined not only by transaction levels but also by management levels.
**Management levels + transaction levels always maintain a constant of 6. This is a fascinating data point.**
**I believe this is determined by the vastness of the Chinese market, the relative dispersion of the population, and the fragmentation of channels. Otherwise, leading FMCG companies would not be able to achieve products that are "ubiquitous and readily available."**
The truth of channel flattening is: **transaction levels can be reduced, but to achieve high-density channel coverage, for every level of transaction reduced, one level of internal management is added.**
This is determined by the span of control theory, which has long been proven by classic management theory. Unless there are major changes in China's population structure and terminal distribution in the future, this will remain the case in the short term.
When the internal sales organization reaches 4 levels, it poses a great challenge to team management.
**There are two types of salespeople in China:** First, the "lone wolf" state of small and medium-sized enterprises, where individual combat is the main mode. In this case, the average management penetration rate is only 1.5 levels. Second, the "local organization" of large enterprises—where a city forms a large team.
Because "local organizations" have on-site management characteristics, salespeople are no longer in the "lone wolf" state, and management penetration is relatively high. This is also why leading FMCG companies have particularly strong channel-driven power.
Will channel digitalization change the current channel structure? We propose the F2B2b2C framework, which means the channel structure will not change; it will only be strengthened through digitalization.
**The two major integrations of channel digitalization do not mean the disappearance of traditional enterprises, nor a dual channel of traditional and digital, but rather the interaction of online and offline at three levels: cognition, transaction, and relationship.** Holding a phone to make a call: holding the phone is offline, making the call is online.
# **Major Changes for Distributors**
From distributors transforming into operators, shifting from a distribution-focused function to an operation-focused one. This is the major change distributors need to make.
**First, distributors are the connectors, activators, and co-operators of retailers' private domains.**
From the retail perspective, the dual-private domain model determines that the role of terminals is more important. Retail terminals not only have the role of reaching, connecting, and activating users, but also operate users (b2C operation). Moreover, retail terminals not only carry offline roles but also community and network roles.
The strengthening of the digital role of retail terminals requires distributors to participate in connection, activation, management, and operation. Without distributor participation, the dual-private domain is difficult to achieve.
To ensure distributors fulfill these roles, they must shift their focus from 2B to 2C. From deep distribution to user connection and activation. Therefore, distributors need to reallocate personnel, with a higher proportion of staff dedicated to 2C. Of course, 2C work also aids in deep distribution.
**Second, distributors must become the main players in routine B2C operations. In channel digitalization, F2C is non-routine, while B2C is routine. Therefore, distributors must be the absolute main players in B2C.**
For distributors to become the main players, they must closely cooperate with the manufacturer's regional sales department and regional marketing department. The manufacturer's regional marketing department should transform into a "front-end middle office" to jointly operate B2C. In addition to B2C operations, distributors must also participate in B2b2C and b2C operations.
Large stores will have independent systems, and distributors must participate in the b2C operations of large stores. For small stores, distributors must also participate in B2b2C.
Overall, distributors undertake four major channel functions: **promotion, ordering, logistics, and financing.** After channel digitalization, these four functions face transformation. **Promotion remains an important function; after digitalization, online and offline promotion is still crucial.**
**Ordering functions, after digitalization, will shift more online because user operations provide channel pull capability.** Even if there are offline orders, digitalization provides data support, making channel inventory transparent and simplifying ordering work.
**The logistics role, however, changes significantly.** This is not related to individual enterprise digitalization but to the development of digital logistics distribution platforms.
In recent years, many logistics distribution platforms have developed, evolving from hierarchical distribution to "direct-to-user"—reaching terminals and users directly, even bypassing distributors. **In the future, the logistics distribution function will be stripped from distributors, and this will not take long.**
**Channel financing will become more convenient after digitalization.** In the past, channel partners had few fixed assets and faced financing difficulties, especially for seasonal products with uneven capital needs. Channel digitalization will generate "digital credit," making financing relatively easier. In channel digitalization, manufacturers, distributors, and retail stores are all indispensable.
**Distributors Change Due to Digitalization**
Today's distributors are different from wholesalers of 20 years ago. The difference is not in name but in the channel functions they carry.
**Wholesalers provide supply, while distributors provide distribution functions.** In the digital environment, distribution functions will be provided by more efficient third-party platforms, and distributors will become brand owners' localized user operators.
Stores can connect with users, but they need localized distributors to provide coordination.
Brand owners can operate users online, but the integration of online and offline cannot be achieved without distributors. Localized user operation cannot be achieved without distributors.
**In the channel digitalization environment, distributors are indispensable.**
Source: Teacher Liu's Digital New Marketing (ID: liuchunxiong1964)
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