In 2010, I wrote an article stating that tissue paper companies would fully enter the era of deep distribution. At that time, among the four major tissue companies, only Hengan Group was practicing deep distribution, which it had started relatively early, around 2003. To this day, companies such as Gold Hong Ye Paper, Vinda, C&S Paper, Shandong Dongshun, Shanghai Jieyun, and May Flower have successively entered the ranks of deep distribution.
Why exactly should companies engage in deep distribution? What are its benefits? Is it still worth continuing this model? Many senior executives have likely explored these questions, because deep distribution was once a panacea in Chinese marketing circles and made significant contributions to Chinese marketing. The most benefited and successful were FMCG companies, such as P&G's manufacturer-retailer integrated small store model, Coca-Cola's 101 project, Master Kong's sales office model, and Lanju's township distribution model. These models played a significant role in the rapid growth of these companies in their industries. However, today I want to say that deep distribution will become a thing of the past. Any model is subject to limitations of time and space. Of course, the main reasons are based on the following analysis.
First, times have changed, and consumer habits have changed. The key reason deep distribution worked so well in the past decade was that the market was still in a stage of explosive growth, or rather, companies were in an era of supply falling short of demand. At that time, terminals of all sizes sprang up like mushrooms after rain, from first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen to third- and fourth-tier cities, and even townships. Supermarkets "blossomed overnight like thousands of pear trees." However, today, on one hand, some industries face overcapacity, making it impossible for companies to continue mass production. On the other hand, overcapacity means consumers can freely compare products, and the choice is in their hands, but consumption cannot meet the production capacity of enterprises. Most critically, with the rapid development of online shopping, consumers no longer only shop in supermarkets; the internet offers more product choices, faster delivery, more convenient shopping, and better after-sales service. It is hard to see post-80s and post-90s generations still shopping in supermarkets; most shop online. Even when they shop in supermarkets, it is often impulsive buying because they forgot to shop online.
Second, companies adopting deep distribution now find it hard to remain competitive. When a model is used by every company, you will find that its use has lost its relative competitive advantage. The ultimate goal of competitive strategy is to establish a competitive advantage. The purpose of deep distribution is to achieve terminal interception through manufacturer-retailer integration, aiming to control stores of all sizes. But when terminals of all sizes have become the target of every manufacturer's efforts to compete, what remains is price cuts, promotions, and constant in-store activities, competing in manpower and expenses, pushing manufacturers into a difficult situation. Even if sales volume rises, profits still decline year by year. We once praised Master Kong's deep distribution model and encouraged other companies to learn from its channel and terminal control. But look at Master Kong's announcement: as of the end of December 2014, Master Kong had 582 sales offices and 77 warehouses, 36,837 distributors, and 118,359 direct retail stores. How many personnel are needed to support such a vast network, and what are the monthly expenses? According to its financial reports, from 2010 to 2014, sales performance increased, but profits remained flat or declined. What does this indicate? It shows that this sales model has reached its end. Even if performance increases, it is a thankless task and not a competitive model. Marketers often focus only on sales performance and rarely care about profit growth. So, what I want to say is that Master Kong must find a new path to break through.
Third, B and C class stores and traditional distributors are struggling. I dare not say that a wave of closures is coming for B and C class supermarkets, but we can see that small and medium supermarkets and distributors have entered a difficult stage. The reasons are: first, many industries face overcapacity, leading to price wars, expense wars, and manpower wars, competing for shelf space in supermarkets. Second, supermarkets of all sizes are also engaged in price comparisons and activity comparisons, with thin margins on shelf prices. Third, in recent years, labor costs, logistics costs, and warehousing costs have risen significantly. Ten years ago, a professional driver earned about 2,000 yuan per month; now, a professional driver must earn at least 4,000 yuan, doubling the cost. Fourth, supermarket fees are also increasing year by year; even second-tier supermarkets in county towns charge display fees, because these supermarkets are also helpless and can only rely on fees to cover daily expenses, as product price differences can no longer sustain their operations. Distributors say, "If we work with supermarkets, we die; if we don't, we also die; either way, we die!" They are very helpless. So, in recent years, we have seen distributors fleeing, switching industries, or even closing down. Channel transformation is imminent!
Fourth, the core idea of deep distribution is to establish manufacturer-retailer integrated terminal operations. But today, merchants are fleeing, switching, or closing. Even if manufacturers want integration, I estimate that distributors may not be willing to dance with the wolf, because the result of dancing is losing both the bait and the fish. I have also chatted with many distributors about this issue and have seen the progress of deep distribution currently carried out by several manufacturers. In reality, it is a one-sided wish of the manufacturer or very difficult to carry out. Unless it is a company like Master Kong that operates terminals itself, but such a model is even more difficult to sustain in terms of costs, especially for companies with narrow and shallow product lines, which are even more unable to bear it alone.
I firmly believe that deep distribution will become a thing of the past. If you don't believe it, just wait and see!
Liang Shengwei: Twelve years of marketing management, ten years of enterprise consulting services; formerly Marketing Director of Guangdong C&S Paper Group, Assistant General Manager of Guangdong Huihailong Group; currently Senior Consultant at Guangzhou Yingchuang Enterprise Management Co., Ltd. Email: lsw812@163.com
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