Products in a distributor's hands can all be profitable, as most people know, but not entirely; it depends on many situations! So, mastering product portfolio is a key concern for every distributor. But with numerous brands, how to position? How to select? How to combine? How to execute?

Characteristics of Three Tiers of Brands

Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories, which we may call Tier 1, Tier 2, and Tier 3 brands.

Tier 1 brands include some world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, Dove, etc.; also include some well-known domestic brands such as Wahaha, Yili, Mengniu, etc.

Generally, Tier 1 brands have a low return on investment, commonly with a "6+1" or "7+1" profit model, i.e., 6%-7% distribution gross margin, 1% annual rebate, with the highest distribution gross margin generally below 11%, and usually a no-return policy. After deducting warehousing and distribution costs, personnel salaries, expenses, losses, and taxes, net profit is minimal.

However, Tier 1 brands have multiple advantages: strong brand support, products sell well, and the manufacturer provides a large terminal market maintenance team, so distributors find it relatively hassle-free to operate these brands;

Distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and essentially no operational risk; large sales volume, with annual regional sales ranging from several hundred thousand to hundreds of millions.

Tier 1 brands are typically "must-sell" in channels, allowing distributors to quickly build sales networks and obtain favorable trading terms with retail outlets.

Tier 2 brands typically refer to brands with high product quality, no large-scale brand operations, but with proactive and skilled channel promotion support.

Tier 2 brands have a relatively high return on investment, usually between 12% and 20%. Their characteristics include: generally lower brand awareness, some appearing as regional brands; no terminal market maintenance team or a small team, with terminal maintenance handled by the distributor, and the distribution margin includes terminal maintenance costs of about 1% to 1.5% of sales;

Distributing Tier 2 brands can also achieve high sales volume, with annual regional sales reaching several million or more; Tier 2 brand products have longer payment terms in modern channels, requiring significant capital and bearing corresponding bank interest; market management is less mature and standardized, placing higher demands on distributors.

Tier 3 brands have essentially no brand awareness. They typically target low-income groups or niche markets, or use prices far below Tier 1 and Tier 2 brands in the same category to impact the market.

Tier 3 brand characteristics include: low brand awareness, opaque pricing, with distribution margins reaching 30% to 40% or more; due to lower quality and lack of good market planning, sales volume is generally small, with annual regional sales below several hundred thousand; prone to slow-moving inventory, with higher returns and losses; distributors bear the risk of market investment costs; product life cycles are short.

Distributors operating Tier 3 brands face high risks, but with distribution margins as high as 30%-40% or more, it presents a picture of "infinite scenery at the perilous peak."

Some distributors leverage their keen market observation to find products among the vast number of Tier 3 brands that meet local market demand, implementing "short, flat, fast" operations, and can also reap substantial rewards. Operating Tier 3 brands requires continuous elimination of products and introduction of new ones to address the short product life cycle.

Optimal Product Portfolio Model for Distributors

Let's first analyze the returns from investing one million yuan of working capital separately in each of the three tiers of brands.

Investing in Tier 1 brands: Assume a distribution margin of 7%. Using a typical warehouse sales model as an example: distribution cost 2%, personnel salaries 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 Tier 2 brands: Assume a distribution margin of 15%. Distribution cost 2.5%, personnel salaries 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 Tier 3 brands: Assume a distribution margin of 30%. Distribution cost 3%, personnel salaries 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment costs 6%. Assume payment terms of 75 days (varies by region and outlet), ignoring in-transit funds, with one turnover every two and a half 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 Tier 1 brands yields the least profit; investing solely in Tier 2 brands, despite longer payment terms, yields higher monthly profits; investing solely in Tier 3 brands yields the highest monthly profits.

In fact, if a distribution company operates solely with Tier 3 brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, with negotiations with retail outlets always in a disadvantageous position. Frequent "sudden death" of products can cause significant harm to the company's stable operations.

Operating solely with Tier 2 brands, although profits and sales stability are relatively high, requires significant capital.

Operating solely with Tier 1 brands, although sales are assured and risks are low, profits are not high.

Therefore, if a distribution company selects several brands from each of the three tiers for combined operation, it can complement the advantages of the three tiers, reduce opportunity costs, and achieve optimal profitability and operational stability.

Roles of Each Brand in the Portfolio

Role of Tier 1 brands: Bear the basic operating costs of the company, ensuring normal survival; bundle with Tier 2 and Tier 3 brands in negotiations with retail outlets to improve trading terms for Tier 2 and Tier 3, such as shortening payment terms, reducing fixed monthly and annual deductions, etc. Assist Tier 2 and Tier 3 brands in quickly covering the sales network; dilute distribution costs, salaries, and management expenses for Tier 2 and Tier 3 brands. Also contribute some net profit.

Role of Tier 2 brands: After Tier 1 brands cover basic operating costs, Tier 2 brands become the main profit contributor; since Tier 1 brands have large sales volumes, distribution companies allocate significant personnel, warehouse, and vehicles to meet operational needs, which become a heavy burden if distribution rights are lost for some reason. At this point, Tier 2 brands can ensure the company's normal survival, enhancing the distribution company's ability to resist risks; provide terminal market maintenance teams for Tier 3 brands.

Role of Tier 3 brands: With Tier 1 and Tier 2 brands as backing, Tier 3 brands further increase profit margins, and with careful control of losses, can generate extremely high profits. Since Tier 3 brands have very small per-SKU sales, their sales weight should not be too large; otherwise, management issues from too many SKUs can reduce profitability.

Generally, for a well-developed distribution company, the optimal product portfolio model is to control the sales weight of Tier 1, Tier 2, and Tier 3 brands at 40%, 40%, and 20%, respectively.

At this point, the investment return per million yuan can reach about three times that of investing solely in Tier 1 brands. Specifically, the optimal number of brands is 1-2 Tier 1 brands, 4-6 Tier 2 brands, and 5-8 Tier 3 brands.

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