Whether you like it or not, the internet is taking over China's economy. With the advent of B2B distribution e-commerce, retailers remain irreplaceable, but the fate of distributors is now in question.

In 2015, Alibaba established 1688.com, marking the beginning of internet giants' foray into distribution e-commerce. 1688 leveraged cross-border e-commerce and the zero-tariff benefits of free trade to significantly reduce the cost of imported goods, and then utilized its Cainiao network for low-cost delivery. Among 1688's users, online and offline each account for half, meaning not only Tmall and Taobao users purchase from it, but many offline physical stores also stock up through 1688. In the imported goods market, which is still immature and lacks a well-established network, as a high-profile latecomer, it is easy to tear open a gap in this market, thereby using cross-border e-commerce as a fulcrum to further enter domestic distribution e-commerce.

For distributors, if Alibaba's 1688 is a distant concern, then JD.com's New Channel is an immediate worry. New Channel has disclosed limited information so far, but from what is known, it targets small and medium-sized retail stores in third-tier and below cities and rural areas, and plans to build a large-scale ground promotion team. The intention is clear: to completely replace distributors and second-level wholesalers, making itself the only intermediary between manufacturers and retail stores. At New Channel's launch event, JD.com repeatedly mentioned manufacturers and retailers, but conspicuously omitted distributors, revealing its purpose. If 1688 reflects Ma Yun's pragmatism and wisdom, then New Channel embodies Liu Qiangdong's ambition and gambling nature. Compared to 1688's gradual approach of encroachment, New Channel aims to fully realize the concept of "de-intermediation" from the start, a veritable whale swallow.

If New Channel successfully transforms China's business model, it will be both an opportunity and a challenge for manufacturers. The opportunity lies in the integrated new sales network, allowing their products to compete in non-core markets; the challenge is that their previously well-cultivated core markets will face competition from intruders. For retailers, New Channel will not have a significant impact, as their market capacity is fixed; a wider variety of products will not substantially increase sales, and the profit margins from eliminating intermediaries will quickly be eroded by competition among themselves. But for distributors, if New Channel's "de-intermediation" model is realized, it will undoubtedly be a catastrophe.

Alibaba's 1688 can be considered a product with strong innate advantages and good post-launch adjustments, but the success of JD.com's New Channel is a question worth exploring.

Advantages of New Channel

Advantage 1: Combination of Scale and System As a giant in the domestic e-commerce industry, JD.com has enormous scale and brand recognition, ensuring that it can achieve awareness for New Channel at relatively low promotional costs. In first- and second-tier cities, JD.com can rely on its existing logistics system, which is more efficient and offers better customer experience than Alibaba's, to deliver to retail stores without significantly increasing costs.

Advantage 2: Bargaining Power with Manufacturers As a large e-commerce platform cooperating with many manufacturers, JD.com shares many common interests with them. In negotiations with manufacturers, JD.com has sufficient resources to exchange, thereby increasing its appeal. Additionally, as a leader in internet commerce, JD.com has an advantage in customer education when dealing with manufacturers who have limited internet knowledge. More importantly, in China's FMCG sector, brand manufacturers have multiple offline sales channel levels. When they want to launch new products or policies, the intermediate levels restrict rapid promotion to end retail customers. This uncontrollable channel gives manufacturers less bargaining power in negotiations with distributors. New Channel's approach of reducing levels and information asymmetry is attractive to manufacturers.

Advantage 3: Easy to Ally with Retailers For retailers, cooperating with JD.com requires little cost. With strong financial backing, New Channel can offer retailers favorable policy support and quickly complete territory expansion.

Disadvantages of New Channel

Disadvantage 1: Missing Links in the Project Require Time and Money to Resolve Compared to traditional distributors, the biggest issue for New Channel is that the relationship between distributors and retailers is a strong-tie, strong-connection model. New Channel needs to upgrade from no relationship/no connection to weak relationship/weak connection, then to weak relationship/strong connection. As for strong relationship/strong connection, it may never be achievable. For New Channel, user development and customer relationship maintenance have not been fully carried out, which is a missing link. Even with JD.com's existing scale to reduce development costs, due to its huge appetite, the overall development cost remains astronomical, including both time and money. Even ignoring financial issues, building a store team will take considerable time. In the fast-changing internet era, investing large amounts of capital into a relatively unfamiliar field carries significant risk. As for integrating distributors, given New Channel's "de-intermediation" guiding philosophy, it is like asking a tiger for its skin—very difficult to achieve.

Disadvantage 2: China's FMCG Market Relies Heavily on Ground Promotion Chinese retailers' acceptance of products often depends on the manufacturer's promotional efforts. Brands like Coca-Cola may not rely on ground promotion, but even popular well-known brands like Master Kong and Uni-President require frequent promotions and in-store demonstrations. For smaller manufacturers, their brand influence is limited, and they need meticulous market cultivation, which traditional distributors are familiar with. However, for newcomers like New Channel, they lack sufficient resources. Even if they acquire such resources later, the huge management costs will affect the final store price of products. In other words, serving manufacturers is not the strength of centralized e-commerce like New Channel. This also makes manufacturers hesitant to cooperate, fearing the risk of offending distributors.

Disadvantage 3: Supporting Systems Depend on Capital Investment JD.com's self-owned logistics is an advantage for New Channel, but in third-tier and below cities and rural areas, this advantage is not obvious. New Channel will face the same problems as rural e-commerce did initially—though much easier to solve. Of course, with sufficient financial support, these are not problems, but then sufficient funds themselves become a problem. Does JD.com have enough funds to build such a supporting system? Does it have enough funds to cope with the surge in management costs? The cautious attitude of the larger Alibaba Group may serve as a reference.

In the final analysis, the lack of service functions and not being grounded are the fatal weaknesses of centralized distribution e-commerce represented by New Channel.

Chen Yafeng - Msmy Management Consulting Supply chain integration expert: innovative business model, framework designer and implementation commander integrating enterprise management, culture building, brand planning, channel marketing, customer guidance, and logistics.

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