Preface: To vividly illustrate the problems in the current FMCG industry's channel model, this article creates two characters—distributor Lao Zhang and marketing director Lao Cao—to reveal the drawbacks of current channels through their pains and worries, and on this basis, outlines the direction of future channel transformation.
-01- Distributor Lao Zhang's Worries Lao Zhang is a distributor for leading brand X in Jingzhou, Hubei. He is shrewd, has a good market sense, and is good at calculating. Ten years ago, he won the title of Excellent Distributor for Brand X. Lao Zhang mainly uses supermarkets as his main channel, with an annual turnover of around 50 million yuan. Due to manufacturer policies, he only operates Brand X's product lines.
Lao Zhang became a distributor for the brand in the early 2000s. At that time, money was easy to make, with an annual net profit margin of over 8%. Although his turnover was not as high as now, he could earn 1.5 to 2 million yuan each year, living a good life.
However, the past two years have been different. Sales growth has slowed significantly, and last year even saw negative growth. More frighteningly, profits have declined sharply, with the sales profit margin only within 1%, almost at the edge of not making money.
Why has he fallen into such a passive situation? Lao Zhang calculates when he is free. The problems lie in several aspects:
1. Environmental Changes In the past two years, under the impact of internet e-commerce, the development of traditional supermarkets has been unbalanced, with some regional stores experiencing business decline or even closure. Although some new stores have opened, Lao Zhang did not follow up in time and failed to enter them promptly, leading to a decline in product terminal coverage. In addition, B2B e-commerce platforms represented by Lintong have also diverted a considerable portion of product sales.
2. Intensified Competition In recent years, Brand Y has risen strongly with high gross margins, investing heavily in local supermarket channels, with displays, stacking, and promotion personnel all in place, seizing a large share of Brand X's market. Lao Zhang has reported this to the manufacturer multiple times, but the manufacturer's marketing executives have been slow to respond, and targeted countermeasures have not been issued in time. Lao Zhang is helpless.
3. Product Aging Brand X is a leading brand in the industry, naturally launching a large number of new products each year. However, many new products are not suitable for Lao Zhang's market. Yet, new product sales are a KPI for the manufacturer's sales, and the city manager responsible for the region pressures Lao Zhang to stock up. Lao Zhang does not dare to offend him, so he reluctantly agrees.
Knowing that many entry fees are wasted, he can only follow the manufacturer's instructions to first lay out the products, ready for withdrawal after poor sales.
In addition, upgraded products that truly suit the local market are delayed in launching, causing Brand X's old products in the local area to be in the late stage of their life cycle, making the decline in sales inevitable.
According to Lao Zhang, "The young people in Brand X's market product department are building cars behind closed doors, giving blind commands, and making a fuss!"
4. Team Issues In the past two years, recruiting has been difficult, and labor costs have been rising. Against the backdrop of declining gross margins, to make money, Lao Zhang has had to compress labor costs, and sales staff salaries have not increased for several years.
Good sales staff have all left, leaving those with poor ability who dawdle and curse him behind his back for being stingy. The team is lax, and terminal performance naturally declines. He is getting older and lacks energy. He wanted his son to take over, but his son finds the business too hard and refuses.
It seems Lao Zhang has fallen into a "vicious cycle": product sales and distribution profits decline, forcing him to reduce market and team investment, resulting in poor market performance and accelerating sales decline.
Marketing executive Lao Cao from the manufacturer visited last time and stated that if the market situation does not change, they would replace the distributor or even have the manufacturer's team take over directly. Lao Zhang, now 58, vaguely feels that this business cannot continue and has begun to consider retiring.
-02- Marketing Director Lao Cao's Pain Lao Cao, in his 40s, just took over as the marketing director of Brand X last year. He started from frontline sales, is strong in execution, diligent, and good at thinking. The regional markets he was responsible for all achieved healthy growth, earning him the appreciation of the general manager and the love of his subordinates, leading to his exceptional promotion.
But the situation after taking office is severe: Brand X's sales growth rate has dropped to single digits, and Brand Y has rapidly grown. Although there is still a gap in sales volume, the footsteps behind can already be heard. Lao Cao, who fought on the sales frontline, knows that the problems in the distributor channel, which accounts for 70% of total sales, are the key.
According to Lao Cao's summary, Brand X faces the following main problems in sales channels:
1. Aging Distributors Brand X is an old brand with over 30 years of history. The once vigorous distributor bosses are now mostly over 50 years old.
Distributors who performed well in the past are now retreating under the new competitive situation, with Lao Zhang being a typical example. The reason is that in the past, life was too easy, and this group of distributors lacks the ability for marketing and refined operations, making it difficult to adapt to the current fiercely competitive environment.
Some distributors have diversified their businesses, making distribution a secondary business managed by professional managers, with a lack of resource investment and management. These distributors account for 70% of Brand X. Replacing them all is unrealistic, but doing nothing while watching them decline is also not an option. The situation is severe and truly worrying.
2. Distributors Not Making Money Aging distributors lead to declining operations and no profits. As a result, the distributor group that was once highly loyal to Brand X has begun to have negative emotions, complaining that business is hard and hoping the company will increase gross margins. Brand X's product pricing is not high, and gross margin space is limited. It is difficult to give more gross margin to distributors. A channel that does not make money is unhealthy, and Lao Cao knows that trouble will come sooner or later.
3. Multi-Product Line Synergy To increase gross margins, new products are constantly launched. To adapt to the trend of consumption upgrade, Brand X continuously launches high-quality, high-margin products, with more and more SKUs.
The company has also begun diversified operations strategically, expanding across industries. This brings many difficulties to marketing work. The Chinese market is highly differentiated, and products are difficult to suit every market. The sales team is overwhelmed, and the success rate of product launches is not high.
4. Insufficient Execution of Sales Team Lao Cao came up from the sales frontline and is very clear about the chronic problems in the sales team. Since sales personnel are still assessed mainly by sales volume, the main energy of Brand X's frontline sales is still focused on stocking and collecting payments.
Stocking actions that ignore actual market conditions conflict with distributor interests, causing distributors to become wary, report false information, comply in appearance but oppose in heart, and embezzle promotional expenses, which have become common phenomena.
Real sales are completed by the distributor team. If Brand X's sales personnel do not visit the market, they are completely unaware of frontline market information, and when reporting upward, they have to fabricate false intelligence. This leads to the company's slow and clumsy response to the frontline market, and the company's market strategy cannot be truly implemented.
5. Channel Downward Expansion Dilemma Channel downward expansion is undoubtedly the general trend, and fourth- and fifth-tier markets are key markets for FMCG. Brand X has also begun channel downward expansion in recent years. However, under the traditional sales model, channel downward expansion is inevitably accompanied by the downward expansion of sales branches, and the sales team needs to expand significantly.
Lao Cao estimated that to further expand from county-level markets to village and town markets, the sales team would need to add 5,000 people. This cost is undoubtedly astronomical and clearly unaffordable for Brand X.
How to achieve further channel downward expansion without increasing or with minimal increase in personnel? This problem has always troubled Lao Cao. He clearly feels that the problems he encounters cannot be solved by minor repairs.
What is the root cause of the distributor's worries and the manufacturer's pain?
-03- The Traditional Channel Model Is Outdated The core issue lies in the business model. Traditional marketing organizations and channel management are mainly based on top-down centralized control, and such a management organization model cannot adapt to the rapidly changing market environment of the VUCA era. This is mainly reflected in the following aspects.
Top-Down Rigid Decision-Making The decision-making method of traditional marketing organizations is top-down. Usually, the marketing headquarters and related functional departments make decisions on brand promotion, new product planning, product pricing, sales policies, etc., which are then decomposed layer by layer by regional sales organizations, ultimately implemented at the distributor level, and executed by the distributor's team.
The biggest drawback of this decision-making model is that the ability and energy of high-level functional departments are limited, while the differentiation and complexity of the Chinese market are infinite.
Imagine that there are more than 2,000 county-level cities in China, each with different consumer demands, competitive situations, and channel characteristics. Which marketing department can create a plan suitable for every market?
Thus, under such a decision-making system, the plans issued by the company are not precise enough and often deviate from market reality. Taking new product launches as an example, this sufficiently explains the situation of distributor Lao Zhang's market where new products are not suitable for local needs, and also explains Lao Cao's distress over poor multi-product line synergy.
Can't Hear the Gunfire Ahead Under the traditional marketing channel model, information transmission is one-way. Top-down instructions are relatively smooth, but bottom-up market information transmission is not smooth, causing headquarters decision-makers to be unable to hear the gunfire ahead.
In fact, distributor Lao Zhang and his team know the local market best. As the saying goes, "The duck knows the warmth of the spring water first." Having operated for many years, they have a thorough understanding of the local market and are most aware of changes in competitors and demand.
However, under the traditional marketing organization system, constrained by various complex factors such as company politics and interest relationships, even if Lao Zhang reports the market reality and opinions to Brand X, it is difficult to get timely feedback and rapid decision-making. This is the key reason why when Brand Y rapidly rose in Lao Zhang's market, Brand X failed to snipe at the critical moment.
Difficulties in the Execution Process When market problems arise, manufacturers often complain about the insufficient execution of their sales teams, but the actual reasons are not so simple.
Under the traditional marketing channel model, frontline sales teams and distributors are not fully authorized; they are only executors.
On one hand, executors may not fully understand the reasons and assumptions of decisions, leading to deviations in execution; on the other hand, no one is willing to execute others' orders, especially when they find the plan does not match reality and they have no right to adjust it. Frontline sales and distributors can only curse in frustration.
When the market declines, manufacturer Lao Cao believes the problem lies in the insufficient execution of frontline sales and distributors, while distributor Lao Zhang believes it is the manufacturer's decision-making error. They blame each other, deepening the rift and losing trust.
Poor Collaboration Between Manufacturer and Distributor Manufacturers and distributors are on the same value creation chain. Only when they are of one mind and collaborate can they achieve market success.
If collaboration is truly achieved, a large amount of manpower and funds will be saved, greatly improving marketing efficiency. The problem that manufacturer Lao Cao cares about—how to achieve channel downward expansion with limited personnel investment—would have a solution.
However, under the traditional marketing channel model, the organization between manufacturers and distributors is disconnected, and organic collaboration is not truly formed. The problem lies in the conflict between the interests of the marketing team and the interests of distributors.
In the traditional model, under the pressure of KPI indicators, the marketing team often pursues short-term market goals, ignoring market reality and distributor interests, and presses distributors to stock up. Distributor Lao Zhang has a poor relationship with the city manager responsible for him, so he naturally does not tell the truth and will not truly execute the manufacturer's instructions.
Manufacturers and distributors are in the same bed but have different dreams, so naturally there will be no good market performance. This is a chronic problem of the traditional channel model.
The pain and worries of distributor Lao Zhang and marketing director Lao Cao are universal. The fundamental problem is that the traditional channel model is outdated. Facing common problems, how should they be solved?
-04- The Future Direction of Channel Models Building a Marketing Front Office In the VUCA era, organizations are undergoing profound changes. Overall, the trend is from control to empowerment, from pyramid to networked flattening, and shaping agile and efficient small teams is the general trend.
Whether it is Huawei's customer iron triangle, Haier's small micro-enterprises, Handu Yishe's group system, or Yihai Kerry's joint business entity, more and more companies have begun to explore organizational change, building a front, middle, and back office model.
As described in the book "Empower," in the organizational change of the US military, under the leadership of General Stanley, US troops in Afghanistan became a large team composed of small teams. Frontline US troops formed many combat groups, granted on-site decision-making power, able to call in air and missile support, and grasp overall battlefield information and decisions. This change increased the US military's combat efficiency by 17 times!
The so-called marketing front office is similar to the US military combat group. Facing a complex and dynamic market, it can make autonomous decisions, respond agilely and efficiently to competition, and meet consumer needs.
Unlike traditional executive sales teams, the marketing front office is granted decision-making power over local market sales plan formulation, marketing planning, and resource matching plans, moving decision-making forward and downward. The regional marketing organization transforms into a middle office, equipped with multi-functional roles such as market, product, and promotion, providing fire support to the front office operations.
Deep Cross-Organizational Boundary Collaboration Between Manufacturers and Distributors There are many opinions on the digital transformation of distributors and manufacturers. I believe that manufacturers and distributors are on the same value chain, and channel transformation must be a joint transformation. It is difficult for either party to break through alone.
Only through deep collaboration between distributors and manufacturers and the construction of a new organizational collaboration form can the value creation capability of the entire supply chain be improved, creating higher efficiency than ToB e-commerce.
Deep collaboration across organizational boundaries first requires aligned interests. It should be based on the long-term interests of distributors and manufacturers, with goals and implementation plans determined from the bottom up.
The creation of the marketing front office crosses organizational boundaries, forming a virtual team composed of distributor and manufacturer sales, ensuring that the manufacturer's marketing strategy is tested in practice and can be implemented, while greatly improving the efficiency of labor cost utilization.
End-to-End Two-Way Information Transmission and Integration As analyzed earlier, the problem with the traditional channel model is the information break between channel links, forming information islands, leading to distorted and one-way information transmission, causing marketing decision errors.
The core feature of the future channel model should be end-to-end two-way transmission of information and data.
One end does not refer to the sales terminal but should extend further to consumers. The channel should not only collect terminal sales, competition, display data, but also establish direct relationships with consumers through consumer communities and community e-commerce operations, collecting consumer usage data and feedback.
The other end refers to the manufacturer's back office, including core departments such as R&D, brand, and strategy. First-hand information on consumer demand, competition, and environmental changes can directly reach the back office, directly stimulating the manufacturer's brain decision-making center.
Eliminate information asymmetry between upper and lower levels, allowing manufacturers to conduct product development, business model innovation, and brand strategy adjustments more agilely and precisely, meeting consumer needs faster, better, and more accurately.
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