Distributors Really Can't Hold On Much Longer

I visited a county-level FMCG distributor chamber, and among its 20 or so members, two had recently given up and quit. When I checked other regions, it wasn't an isolated case. Those who join the chamber are usually doing well; those who don't join and can't hold on might be even more numerous.

The two distributors who gave up had quite good brands. The reason they quit was that they saw no hope. Moreover, the manufacturers' pressure to stock up pushed them to despair, and transformation seemed hopeless. It's only natural that they quit.

Before the 'Spring Sugar' event in Chengdu in March, I conducted a survey of distributors and drew three conclusions: the larger the scale, the less profit distributors make; the stronger the brand, the less profit distributors make; and corporate-style operations are less profitable than mom-and-pop shops.

I call this phenomenon the 'collective confusion' and 'collective helplessness' of distributors. Because expanding scale, building big brands, and corporate-style operations are both what we advocate and what distributors strive for. It's true that more and more distributors will find it unbearable and eventually give up.

I once asked, if distributors stop, what do they plan to do? And what can they do?

If it weren't for despair, most would continue to hold on.

Although e-commerce has had a significant impact on many industries in recent years, we can't blame e-commerce for distributors' inability to hold on. From my observation, e-commerce's share in the FMCG sector is almost negligible.

The overall predicament of distributors is roughly determined by three factors: sluggish or declining sales growth, lack of new strategic big products, and rising personnel costs. But these are not reasons for distributors to give up.

The most uncomfortable thing for distributors is not declining sales or losses, but the manufacturers' pressure to stock up. If in the past stocking up could create space, now it's knowingly doing the impossible. Stocking up leads to a large number of near-expiry products, and a lot of time is spent not on normal sales but on dealing with problems.

In 2014, manufacturers' sales declined, and many thought it was abnormal; in 2015, sales continued to decline, and people thought it was normal. 2013 might have been the peak of production capacity for most industries. However, in the 2016 sales targets, most manufacturers still aimed for growth.

Without completing the 'mainstream shift,' it's hard to rely on traditional products to push inventory. But who has a better solution?

If it's a small manufacturer, they wouldn't dare to push inventory, and they don't have the qualification to do so. It's those manufacturers with brand power who, relying on their strong brands, keep pushing inventory. This explains why distributors handling big brands feel the most pain.

It's not like before. In the past, distributors had expectations for the future; adding staff, vehicles, and investment could still bring sales growth. But now, distributors have no expectations, their operations tend to be conservative, they don't add staff or investment, and without changing their business model, pushing inventory can't solve the problem.

Distributors and manufacturers both face historic difficulties. The difference is that most distributors don't have grand ideals. When growth is weak, conservative operations are acceptable. However, big brands don't accept conservative operations. The worse the business situation, the easier it is for the manufacturer's pressure to be transmitted to distributors.

Although there are many reasons for distributors' difficulties, pushing inventory is undoubtedly the last straw that breaks the camel's back.

Manufacturers' Weak Transformation Affects Distributors

In the past growth of distributors, manufacturers played an important driving role, mainly in two aspects:

1. Product Push

A good product drives a batch of distributors to rise. However, the central government has been calling for 'structural adjustment' for years. Since 2014, we have proposed 'mainstream shift,' redoing strategic big products, and 'every industry needs to be redone,' but manufacturers have been slow to respond, always using the poor environment as an excuse.

We believe that the decline in volume in most industries is no longer normal, and only replacing products can solve the current problem. But perhaps those big bosses are busy with so-called strategies and don't treat products as the biggest strategy. For manufacturers that haven't solved the product problem, I suggest distributors gradually give up on them, because such manufacturers have no hope.

We remind manufacturers: instead of putting resources and energy into pushing inventory, it's better to focus on promoting new strategic big products. In the short term, pushing inventory is effective; in the long term, it's useless. This has long been a consensus. But the marketing system, under short-term performance pressure, would rather put resources into solving short-term performance issues than do long-term work. To solve this problem, only the top management can come forward, adjust from a strategic perspective, and increase the promotion of new strategic big products. Performance may decline in the short term, but it will recover quickly.

2. Management and Operations Push

In the past, manufacturers played the roles of enlightener, trainer, and guide in distributors' management and talent development. Some even sent people to act as 'shadow general managers' for distributors.

However, in the current predicament of distributors, we don't see the role manufacturers play. What's worse, in the current transformation, manufacturers are even more sluggish than merchants.

Because distributors are limited by their vision, their 'hope' is often instilled by manufacturers. Their current despair is often transmitted by manufacturers. In the value chain, if manufacturers can't drive distributors to progress but instead squeeze them dry through inventory pushing, then when distributors can't hold on, it's time for manufacturers to collapse.

I remind manufacturers here: in the past, pushing inventory might have squeezed out sales growth, but now distributors aren't growing, and pushing inventory can hardly bring sales growth, but it might crush distributors. If distributors can't hold on, can manufacturers stay aloof?

Seizing Transformation Dividends Is the Way Out

Whoever transforms first will gain the transformation dividend and thus escape difficulties. Some distributors I know have had effective transformations.

One distributor made an analogy: In the past, there was a shift from 'sitting merchants' to 'traveling merchants.' Most couldn't transform, but those who did developed rapidly. That's the transformation dividend. Now, almost all merchants are 'traveling merchants,' and 'vehicle sales' are the result of traveling sales. When everyone transforms, the dividend disappears.

Now, distributors' business models are similar, so there's basically no model dividend. With the current corporate management system of distributors, it's hard to improve personnel efficiency. How to improve personnel efficiency? It requires transformation, to gain the transformation dividend. Currently, there are two effective transformation methods:

The First Transformation Method

One is to use SaaS systems to shift from 'vehicle sales' to 'visit sales.' Vehicle sales are inefficient, and distributors know this well. Whether they can achieve visit sales is a major indicator of a distributor's capability, because visit sales greatly improve efficiency. In the case of sluggish sales growth, improving efficiency is crucial. However, the transition from vehicle sales to visit sales is painful, and a short-term decline in sales is normal, sometimes even halving.

From what I know, relatively excellent distributors have generally achieved visit sales. Ordinary distributors may find it hard to implement. This will become a test to judge a distributor's future.

The Second Transformation Method

Two is to use B-end platforms to improve efficiency and reduce costs. (Details are omitted here due to trade secrets in B-end operations.) From my field observations, merchants doing well in B-end have seen considerable improvements in store visit rates, sales, and cost savings. However, doing B-end is harder than visit sales. To use an analogy, visit sales only require passing one hurdle, while B-end platforms require passing four.

Because the hurdles are difficult, distributors who successfully transform gain the transformation dividend.

From Corporate Operation to Platform Operation

For distributors below the county level, corporate operation has reached its limit, and its role has even turned into the opposite. Because distributors generally have poor management capabilities, corporate-style distributors are not only inefficient but also have poor incentive effects. Many distributors have successfully tried changing from corporate operation to platform operation.

The so-called platform operation is to turn employees who receive salaries and commissions into 'second bosses' who take profits. The distributor is the 'big boss,' and employees are 'second bosses.'

The boss is the only person in the world who doesn't need incentives; the boss is self-motivated. The boss doesn't take a salary or commission; the boss takes profits. The boss doesn't need management.

How to turn employees into 'second bosses'? It's to contract out second- and third-tier brands, or second-line products (categories) of first-tier brands, to employees, and then share profits with them.

When employees become 'second bosses,' the company becomes a platform. The platform has two functions:

One is financing, where the boss provides financing to the 'second bosses,' such as providing money to purchase goods;

Two is providing platform support, such as holding first-tier brands, holding 'hard currency' and 'essential products,' because the operation of second-tier brands or products needs the coordination of first-tier 'essential' products.

Once employees are activated, the market is activated, and distributors are relieved.

Distributors who can't hold on are not just one or two, not isolated cases, but a batch. This means distributors will inevitably form new integrations. Integration isn't necessarily a bad thing. At every turning point of transformation, some rise and some fall behind. But the changes in the environment at the turning point are what we really need to understand clearly. This is not only a problem for distributors but also for manufacturers.

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