China's economy has entered a phase of medium-speed growth, and the FMCG market has entered a new cycle. Significant changes have occurred in consumers, the retail environment, and market competition. For those in the FMCG industry, it is essential to re-understand industry changes and consider future enterprise transformation directions.
Distributors, constrained by their role in the supply chain, often lack deep strategic thinking about their own business development. This is a genetic issue for distributors: products are developed, produced, and marketed by brand owners, then sold to consumers by retailers, making the distributor's role seem merely that of a transporter from a supply and marketing perspective.
But if they were just transporters, there would be no need for extensive discussion about distributors.
To discuss distributors, we cannot only stand from the distributor's perspective; we need to view this matter within a larger framework.
In the near future, I will use a column format to re-explore the revolution in China's commercial circulation after 40 years of reform and opening up.
Today is the first article: "Distributors That Don't Transform Their Supply Chains Will Only Find the Road Getting Narrower."
Who Are Your Customers?
From the distributor's perspective, the first important proposition to consider is: Who are your customers today?
Many distributors might think their customers are retailers, while others say their bread and butter is the brand owners, because they only have the qualification to do business thanks to the exclusive agency rights granted by brand owners.
Both answers are partially correct and partially incorrect. Who your customers are depends on what type of trading business you are running.
"New Distribution" once conducted a study on the evolution of FMCG distributors in China, categorizing current distributors into 7 types. In fact, different types of distributors have different primary customers.
In a sense, for warehousing and distribution agents and brand agents, the customer is the brand owner; for category operators, customers are split between brands and retailers; for supply chain platform providers, the customer is the retailer.
Distributors are in the midst of the game, making it difficult to see this comprehensively. Especially for brand distributors, you serve the brand, not the retail customer.
Reasons for Low Efficiency in Brand Owners' Warehousing and Distribution
Recently, I exchanged views with Secretary-General Jian of the Distributor Branch of the China Warehousing and Distribution Association. He said that the logistics industry in the FMCG sector is extremely backward, with very low vehicle and labor efficiency, and warehouse management is very outdated.
I think he is wrong. Why are distributors' vehicle and labor efficiency insufficient?
If we consider the role of brand distributors, their customer is the brand owner. But a single brand has only dozens or hundreds of SKUs, so there is no need to implement complex warehouse management systems.
On the surface, it looks chaotic, but in reality, it's because the business is simple. There's no need to add high costs or use complex management; simple inventory management can solve warehouse issues.
Regarding vehicle efficiency, the issue is that the vehicle carries not just a driver but also a salesperson.
Because the market is oversupplied, distributors need salespeople to make door-to-door sales. This means that for long-distance visits, salespeople need a vehicle. Since they have a vehicle anyway, whether it's a van, box truck, or sedan, the fuel cost difference is minimal. When people and goods arrive, selling becomes easier. Therefore, the distributor's dedicated sales vehicles are essentially the sales representatives' means of transportation.
So, low vehicle efficiency is not a problem as long as costs are covered; the real problem is not getting orders.
In the past, consumer needs were simple, and brand owners pursued extreme production scale and efficiency. A single sales model was simple and effective. Additionally, China's market has a vast three-dimensional depth with ample room for downward penetration, which is why we still see millions of box vans and trucks helping brand owners promote their products in township markets.
The historical development path has created today's results. In the supply chain of production, supply, and sales, the distributor's business model is undoubtedly the simplest and most extensive.
Consumers and the Market Have Changed
Today, the market has undergone major shifts, and consumer needs have changed dramatically. From basic material satisfaction, they have upgraded to higher pursuits.
The shift has been from "I buy because I need it" to "I buy because I like it," and consumers now value emotional value over functional value.
Behind this is the great abundance of market supply, changes in generational differences, increased consumer choice, and upgraded consumption awareness. This is filled with huge variables and uncertainties.
Consumers have changed, but the problem is that over 90% of domestic hypermarkets still sell products designed over a decade ago, and their model still relies on charging channel fees.
Tmall, JD.com, and Pinduoduo have taken away most planned consumer categories. Essentially, the listing cost of limited shelves cannot compete with unlimited shelves. If hypermarkets do not adopt premiumization, curation, PB (Private Brand), and discounting, they will inevitably be eliminated by history.
Small shops are also facing huge competitive challenges. For cigarettes, alcohol, beverages, snacks, and general merchandise, except for cigarettes, everything else has been replaced by better, faster, and more convenient formats.
Alcohol has self-operated home delivery apps; snacks have food delivery; beverages have ubiquitous street-side milk tea shops; snacks have bulk snack stores. Small shop businesses have been greatly impacted. If they do not adjust their category structure according to changes in consumers and the business district, their business will be struggling and declining!
These are the problems hypermarkets and small shops face today, not to mention online community group buying, flash warehouses, and private domain traffic segmentation!
Same-City Retailers Are Seeking Change
The market challenges are enormous. Larger retailers are attempting transformation: some are trying PB, some are trying to bypass distributors to directly sign and purchase to compress costs, and others are trying premiumization and discounting. Typical examples include Hema's private brands, RT-Mart's M membership premiumization, and Biyoute, Dazhang, and Xinyulou's direct signing and purchasing models.
Not only hypermarkets, but convenience store chains in various regions are also expanding through franchising, continuously taking over or rebranding quality traditional mom-and-pop shops.
Some ambitious mom-and-pop shops are also continuously purchasing cheaper and better products through channels like group wholesale and Pinduoduo to supplement their store's product mix.
Same-city retail formats like community group buying and private domain e-commerce do not purchase goods from local trading companies at all.
Changes in retailers have led to a significant decrease in the number of retail customers and sales volume for many distributors downstream, and their bargaining power is weakening.
The Model of Traditional Brand Distributors
The Road Is Getting Narrower
Traditional brand owners share a common trait: a single-person, single-vehicle, single-category or single-brand supply model. In the face of changes in the retail industry, you will find that marginal sales are decreasing and profits are getting lower. The dedicated personnel, vehicle, and sales model for terminal maintenance has become a large-scale but extremely uneconomical business.
Small shop business is getting worse (due to diversion), maintenance costs are rising, and many manufacturers are currently forcing distributors to use dedicated personnel, vehicles, and sales for performance. High costs, low output, and poor efficiency are causing distributors to lose money the more they do.
Hypermarket business is getting worse, and the pressure on distributors is increasing. Single-brand distributors lose money if they do it, but they have to do it because the manufacturer requires it.
For a single brand, bargaining power with channels is decreasing, and terminals have more and more channels to stock goods. Although it is an exclusive agency, it is no longer a scarce business. This leads to being squeezed and exploited by channels, with longer payment terms, advance expenses, slower capital turnover, and lower profits.
In the long run, if a single brand cannot be finely operated and expand across regions to increase market scale, the business will only get narrower.
Distributors Need to Redefine
Who Your Customers Are
Undoubtedly, the business model of distributors who only handle a single brand has reached its end. By single brand, I mean not just one, but generally no more than three to five, without cross-category operations. The business model relies on the brand owner's exclusive agency resources and the manufacturer's sales support for distribution, with the distributor mainly responsible for delivery and some special channels.
This type of distributor, even with multiple brand agencies, cannot form a synergy. They can only provide some seasonal warehousing and capital complementarity. They have no control over the downstream, no marketing power over the market, no management power over the team, no turnover power over capital, and no negotiation power over brands.
As mentioned earlier, for this type of distributor, the customer is the brand owner, but the market discourse power has shifted from the brand owner to the retailer. If distributors still entrust their fate to brand owners, the future road will only get narrower, as the title suggests.
What I want to say is that for such brand distributors, the first step in facing transformation strategy is to redefine your customers.
Gradually switch customers from upstream brand owners to downstream retailers. This role change is determined by market supply. Whoever holds scarce resources is your true customer.
We must provide what customers need.
If the customer is a small shop, provide service solutions for small shops; if it's KA, provide service solutions for KA.
Supply Chain Service Providers
Shift from Selling for Brand Owners to Selling for Retailers
The logic of selling for brand owners and providing services to retailers is completely different.
Brands need you to have sufficient capital, sound warehousing and logistics, cooperation, agile thinking, certain social resources and channels, and market coverage and service capabilities.
Retailers, on the other hand, may need one-stop supply, complete categories, reasonable prices, timely delivery, thoughtful service, and possibly product mix optimization, store operation guidance, retail brand franchising, POS data information system support, and employee training guidance.
These capabilities are essentially based on the customer's business district, population, and consumer needs, providing one-stop solutions for goods and services.
The Essence of Distributor Transformation Is a Career Change
Becoming a supply chain platform provider does not mean not serving brand owners. The biggest mindset shift is from selling for brand owners to operating an integrated supply chain based on production, supply, and sales. This requires deep understanding of the entire industry chain, including factory production, brand marketing, product operations, warehousing and distribution management, and retail franchising.
There is profound logic behind this, which I will detail and interpret in future column articles.
The core competitiveness of supply chain service providers differs from that of distributors. It comes from the scale effect of integrated production, supply, and sales, from professional category operation, from extremely high turnover efficiency, and from deep understanding of retail.
Behind this is the transformation from a distributor to a supply chain service provider, requiring changes in concepts, capabilities, resources, organization, models, and management.
Essentially, this is a career change.
The Mission of Tameng Is
To Help Distributors Complete Transformation
The biggest problem for distributors is strong inertia. The organization has grown to this size, and all capabilities are centered on how to serve brand owners.
Developing new capabilities is not achieved overnight. Rome was not built in a day; it requires a cycle to realize.
Many distributors do not possess this transformation capability, but the current market environment forces them to change.
There are paths and methods for this transformation, and there are reference cases.
The mission of Tameng (Top500 China FMCG Distributors Alliance) is to help more distributors gain transformation support through Tameng's resource platform and learning platform. In the future, Tameng will organize more study tours, training, case sharing and observation, and resource sharing to help distributors complete their transformation.