How can you optimize your product portfolio to easily earn more profits? When distributing several products, which product is the "profit" and which is the "weapon"? Let's calculate which combination model is best, as analyzed below:
Characteristics of Three Types of Brands
Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories: first-tier, second-tier, and third-tier brands.
First-tier brands include world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove; they also include well-known domestic brands such as Wahaha, Yili, and Mengniu.
Generally, first-tier brands have a low return on investment, commonly following a "6+1" or "7+1" profit model, i.e., 6%-7% distribution margin plus 1% annual rebate, with the highest distribution margin typically below 11%, and usually a no-return policy. After deducting warehousing and delivery costs, personnel wages, expenses, losses, and taxes, net profit is minimal. However, first-tier brands have many advantages: strong brand support, fast-moving products, and a large terminal market maintenance team provided by the manufacturer, making distribution relatively worry-free; distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and minimal operational risk; high turnover, with annual regional sales ranging from hundreds of thousands to hundreds of millions. First-tier brands are often "must-stock" in channels, allowing distributors to quickly build sales networks and obtain favorable trading terms with retailers.
Second-tier brands typically refer to brands with high product quality, no large-scale brand operations, but proactive and skilled channel promotion support.
Second-tier brands have a relatively high return on investment, usually between 12% and 20%. Their characteristics include: generally low brand awareness, some appearing as regional brands; no terminal market maintenance team or a small team, with terminal maintenance borne by the distributor, and the distribution margin includes terminal maintenance costs of about 1%-1.5% of turnover; distribution of second-tier brands can also achieve high turnover, with annual regional sales reaching millions or more; second-tier brand products have longer payment terms in modern channels, requiring significant capital and interest costs; lower and less standardized market management, requiring higher distributor capability.
Third-tier brands have little to no brand awareness. They typically target low-income groups or narrow markets, or use prices far below first- and second-tier brands to impact the market.
Characteristics of third-tier brands: low brand awareness, opaque pricing, distribution margins up to 30%-40% or more; due to lower quality and lack of good market planning, turnover is generally small, with annual regional sales below hundreds of thousands; prone to slow sales, with high returns and losses; distributors bear the risk of market investment costs; short product life cycles. Distributing third-tier brands carries high risk, but with margins as high as 30%-40%, it presents a "limitless scenery at the peak" scenario. Some distributors leverage their keen market observation to find products among the vast number of third-tier brands that meet local market demand, implementing "short, flat, fast" operations to reap significant rewards. Distributing third-tier brands requires continuous elimination and introduction of new products to address short life cycles.
Optimal Product Operation Model for Distributors
Let's first analyze the returns of investing 1 million yuan of working capital separately in each of the three brand categories.
Investing in First-Tier Brands: Assume a distribution margin of 7%. Using a typical warehouse sales model: delivery cost 2%, personnel wages 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment terms of 15 days, ignoring in-transit funds, with two turnovers per month. Monthly net profit: (7%-2%-1.2%-0.3%-0.2%-1.4%-0.5%) × 1,000,000 × 2 = 28,000 yuan.
Investing in Second-Tier Brands: Assume a distribution margin of 15%. Delivery cost 2.5%, personnel wages 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment terms of 60 days (varies by region and outlet), ignoring in-transit funds, with one turnover every two months. Monthly net profit: [(15%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 39,000 yuan.
Investing in Third-Tier Brands: Assume a distribution margin of 30%. Delivery cost 3%, personnel wages 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment 6%. Assume payment terms of 75 days (varies by region and outlet), ignoring in-transit funds, with one turnover every 2.5 months. Monthly net profit: [(30%-3%-1.5%-0.6%-1.5%-2.2%-6%)/2.5 months - interest 0.5%] × 1,000,000 = 55,800 yuan.
From the above analysis, we can see that investing solely in first-tier brands yields the least profit; investing solely in second-tier brands, despite longer payment terms, yields higher monthly profit; investing solely in third-tier brands yields the highest monthly profit.
In fact, if a distribution company operates solely on third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, leaving negotiations with retailers at a disadvantage. Frequent "sudden death" of products can severely harm the company's stable operations. Operating solely on second-tier brands offers higher profit and sales stability but requires significant capital. Operating solely on first-tier brands ensures sales and low risk but yields low profits.
Therefore, if a distribution company selects several brands from each of the three categories for combined operation, it can complement the advantages of each, reduce opportunity costs, and achieve optimal profit and operational stability.
Tasks in This Combined Operation
Tasks of First-Tier Brands: Cover basic operating costs to ensure the company's survival; bundle with second- and third-tier brands in negotiations with retailers to improve trading terms for the latter, such as shortening payment periods and reducing fixed monthly and annual deductions; assist second- and third-tier brands in quickly covering the sales network; dilute delivery costs, wages, and management expenses for second- and third-tier brands; and contribute a certain amount of net profit.
Tasks of Second-Tier Brands: After first-tier brands cover basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have high sales volumes, the distribution company must allocate significant personnel, warehouse space, vehicles, etc., which become a heavy burden if the distribution rights are lost for some reason. At this point, second-tier brands ensure the company's normal survival and enhance its ability to withstand risks; they also provide terminal market maintenance teams for third-tier brands.
Tasks of Third-Tier Brands: With first- and second-tier brands as backing, third-tier brands further increase profit margins, and as long as loss control is maintained, they can generate extremely high profits. Since third-tier brands have small per-SKU turnover, their sales weight should not be too large; otherwise, management issues from too many SKUs may reduce profitability.
Generally, for a well-developed distribution company, the optimal product operation model is to control the sales weight of first-, second-, and third-tier brands at 40%, 40%, and 20%, respectively. At this point, the return on investment per 1 million yuan can be about three times that of investing solely in first-tier brands. Specifically, the optimal number of brands is 1-2 first-tier, 4-6 second-tier, and 5-8 third-tier brands.
Source: Sugar, Tobacco, and Wine Weekly
Click the image above to register for free for the "Distributor + Internet Transformation Battle" exchange salon in Chengdu on March 22.
-END-
China's best learning platform for FMCG distributors Focused on providing professional, practical, and actionable tutorials for companies and distributors Committed to helping Chinese FMCG distributors grow rapidly
The most professional and practical knowledge base in the FMCG industry
Reply with the red number below to get corresponding content Reply with number 1 to view the complete knowledge base
| 001 Excellent Article Selection | 002 Distributor Market Operations | 003 Terminal Visit Management | 004 Sales Supervisor Skills | 005 Sales Improvement Techniques | 006 Channel Expansion | 007 Managing Distributors | 008 Distributor Development | 009 Distributor Internal Operations Management | 010 Team Management | 011 Efficient Distribution Techniques | 012 Sales Manager's Eighteen Skills | 013 KA Operation Methods and Strategies | 014 First Lesson for New Salespeople | 015 Internet, Brands |
[Long press QR code to follow]
To join QQ/WeChat groups, please click: Read Original