Nine out of ten distributors report that they didn't make money in 2016, and despite hopes for a better 2017, business hasn't improved as the year draws to a close. Products painstakingly distributed in the first half of the year suddenly stopped selling in the second half, leaving some distributors breaking even and others operating at a loss. With a poor macro environment and heavy pressure from manufacturers, many distributors are at their breaking point, willing to abandon manufacturers with no future prospects. Many distributors are open to taking on differentiated products. If this were an isolated case, it could be seen as an exception, but as this phenomenon becomes more widespread, it warrants deeper reflection. Big brands are losing their appeal, and distributors are quitting at will. Why?

1 Distributors say "no" to big brands, and manufacturers are losing their dominance over distributors.

As the opening of this article suggests, in recent years, more and more distributors have been saying "no" to some big brands. Two years ago, this was unimaginable; back then, agency rights for big brands were highly sought after. How quickly times change! There has always been a term that seems unique to China: "managing distributors." I have questioned this many times: Aren't customers the gods of manufacturers? Shouldn't we serve the gods wholeheartedly? How can there be "managing" the gods? In reality, this reflects the abnormal state of manufacturer-distributor relations in China, where manufacturers, especially big brand manufacturers, hold a dominant position.

2 Why have big brands lost their appeal?

In the past, big brands were very popular. Why? Because big brands brought significant benefits to distributors. The benefits brought by big brands might not be direct profits, but they certainly brought indirect profits. Big brands often became "traffic drivers," pairing with small brands to generate both sales volume and profits. What kind of era was that? I summarize it in two phrases: explosive low-end consumption and endless sales growth. In that era, all Chinese enterprises, whether manufacturers or merchants, were growth-dependent. As long as sales grew, profits grew. All problems of an enterprise would be masked by sales growth. But this era ended in 2013, when most industries in China reached their historical peak in sales. In 2014 and 2015, facing declining sales, the normal work for manufacturers was to "rescue sales." How to rescue sales? There are roughly three methods:

  • First, launch new products, but this was rarely done because new products "can't quench immediate thirst," and the marketing system lacked the energy to promote new products;
  • Second, intensify channel stuffing, such as increasing promotional efforts, which most companies did;
  • Third, some grassroots marketing personnel, in order to save sales, opened new accounts and implicitly encouraged cross-regional selling. These practices, in 2014 and 2015, distributors had to endure. First, manufacturers had been dominant for too long; second, everyone believed the decline might be temporary. In the past, manufacturers and merchants believed in one principle: sales are squeezed out. Channel stuffing and promotions could always squeeze out sales. After 2014, manufacturers and merchants still hoped to squeeze out sales, and their work revolved around that. But gradually, they found that sales could no longer be squeezed out. By 2016, distributors generally saw that the decline was not temporary but a turning point. Distributors could not see the future. When distributors can't see the future, some stop tolerating the arrogance of big brands and gain the courage to decisively tell manufacturers, "I quit!"

3 Why can't distributors see the future?

In addition to the overall decline in sales, rising labor costs are also unbearable for distributors. Since 2003, China has entered the track of deep distribution. Deep distribution actually has two major premises: First, channel fragmentation, which can only be solved by deep distribution, because the essence of deep distribution is to get as close to the terminal and consumers as possible; Second, deep distribution relies on a human-wave tactic. This is because labor costs were low. When sales are growing, cost increases can be temporarily ignored because sales growth can dilute costs. When sales stop growing, distributors find profits squeezed by both sales volume and costs. Sales haven't grown, but promotional expenses have increased, squeezing gross margins; cost increases further squeeze profits. In the past, the average profit for distributors in the FMCG industry was about 3%, with average delivery costs of 7%-8%, not including promotional and management expenses. With such low profits, any slight impact from sales volume or costs pushes them to the break-even point. For some price-transparent FMCG products, gross margins are already quite low. Distributors can tolerate one year without profit, but it's hard to tolerate two years. If they see no hope of profit after two years, distributors gain the courage to say "no."

4 Manufacturers are starting to compromise!

In the past, manufacturers rarely compromised with distributors. This time, when some distributors took the initiative to say "no," manufacturers actually compromised. Because if manufacturers don't compromise with distributors, distributors can easily quit. Initially, it was strong distributors who said "no," but now ordinary distributors dare to say "no" as well. If saying "no" becomes even more common, the manufacturer-distributor relationship will shift.

4 How do big brands dominate distributors?

In the past, big brands dominated distributors for two reasons: First, big brands could indeed lead merchants in marketing progress; Second, big brands could bring profits to merchants. But in recent years, in the internet era, they have lost direction and no longer have the ability to lead merchants in progress. Losing their leading role in marketing and failing to lead distributors in progress is a major aspect of big brands losing their dominance. Of course, the decline in sales and profits, and the manufacturers' inability to do anything about it, especially in high-value-added promotion, is also an important reason. As the industry hits its ceiling, both manufacturers and merchants now face a common problem: how to achieve profit growth when sales are declining? If this problem is not solved, big brands will further lose their dominance over distributors. Voices from frontline distributors:

  1. When it comes to big companies, a host of familiar brand names naturally come to mind. The advantage of big brands lies in their high-quality, fast-selling products; the disadvantage lies in their advanced internal management systems, and it is precisely these standardized systems that have severely damaged them. Big brands have moved from full market development to market maintenance, from emphasizing sales volume to emphasizing execution. But in an era where charts don't reflect reality, almost all data is false decoration. The false data eventually gets aggregated at the headquarters and used as the reference standard for the next year. Making correct judgments based on false data is almost impossible. The inverted value system leads to a loss of confidence from top to bottom, resulting in chaos and inevitable collapse like a mountain falling.
  2. The analysis is spot on and speaks to the hearts of distributors. Manufacturers keep squeezing expenses. Some products originally had a little profit, but when manufacturers see you can sell, they raise prices for distributors. Distributors, on the other hand, find it impossible to raise prices for their downstream customers given the tough business environment.
  3. Distributors pay manufacturers in advance, but to their downstream customers, they offer cash plus credit, returns, bad debts, prepaid expenses, and marketing costs. If they encounter an unscrupulous manufacturer, quitting without hesitation might be a wise decision.
  4. When distributors are maliciously overdrawn by manufacturers, and when distributors become tools for profit extraction, what they lose is not just customers but the trust of the people. Then that enterprise will have no future!
  5. It's all the fault of channel stuffing. Stuffing is a short-sighted, simple, and crude approach. Big brands should build distribution networks, open up channels, allocate profits reasonably, and distribute precisely. Source: Distributor Forum -END-