Distributors, Where Is the Way Out?

Recently, I chatted with a distributor boss who said that the distributor community is now very anxious. The main reason is that the industry is changing too much, with various new models and new retail emerging one after another. They are still stuck in traditional trading businesses, squeezed by upstream and downstream, with shrinking profit margins, and unsure of what to do next. Especially those bosses whose business scale is neither large nor small—they can't just give up and lie flat; they still want to change, but how exactly? In which direction? They have no idea!

After listening to him, I suddenly thought of a metaphor made by business observer Wu Bofan: Suppose you are lost in a forest, what should you do? Do you first find a map or a guide before starting to move? If you do that, you will surely starve to death. In fact, everyone can do one thing: use your ears to carefully discern the direction of the sound of water, even if it's a tiny stream. Why? Because a small stream will definitely flow into a larger stream, a larger stream will become a creek, and a creek will lead to a big river. As long as you follow the water, you will definitely take detours, but you will never go back. If you keep going, you will surely find a way out. What does this mean? It is actually the logic of action when facing real difficulties. When you feel trapped and don't know where to go, you should take some action, but how exactly? How do you judge whether what you're doing is right? There is no clear map, and no one can tell you what will definitely work. What is the truly effective logic of action? First, you must perceive the direction of the small stream. Second, take concrete actions in line with that direction. When the environment is chaotic and information is unclear, perceiving the direction of the stream is crucial. Let me share my observations on these two points.

Recently, I visited several cities, exchanged ideas with some distributors, and also visited some local terminal stores. Let me first talk about a few phenomena I noticed.

First, KA hypermarkets are moving away from distributors. In the past, the division of labor between manufacturers and distributors was that brands directly supplied national chain hypermarkets (NKA), while distributors maintained local hypermarkets (LKA). However, we have noticed that in some places, local KA hypermarkets are beginning to try to bypass distributors and demand direct supply from brands, and they are doing so very forcefully.

Second, the trend of small store chains is obvious. In the past, chain convenience stores were mainly concentrated in first- and second-tier cities, but in recent years, chain convenience stores are expanding in lower-tier cities. During recent business trips to several third- and fourth-tier cities, I saw standardized chain supermarkets and small convenience stores everywhere.

Third, large distributors are showing a siphon effect. During the three years of the pandemic, business was difficult, and many distributors complained. However, the distributors I visited in different regions generally reported that the number of brands they represent is increasing, and their business is growing continuously. Some brands even proactively sought cooperation because their existing distribution channels were underperforming.

These phenomena vary in degree due to regional differences, but I believe those in the industry can perceive them. Why mention these things? Because these phenomena, on the surface, seem like different matters, but behind them lies the same thing—the transaction structure of the channel is changing! And this is the small stream we need to find.

The transaction structure of the channel is changing. What does that mean? Manufacturers produce products, and ultimately they need to sell to consumers. Why don't consumers buy directly from manufacturers? Because transaction costs are too high. Searching, comparing, communicating, transporting, paying, after-sales—these are all transaction costs. So, the commercial circulation seems to add layers of markup, but the entire chain operates as the lowest-cost way for the business system. Of course, this "lowest" is dynamic, and there are two forces that have always been driving transaction costs to evolve in a lower direction. One is technological progress. For example, the internet and online payments allow us to buy more goods at lower prices online; the application of various digital tools greatly reduces transaction costs caused by information asymmetry and opaque credit among parties. Another force superimposed on this is market competition. Local KA demanding direct supply from manufacturers is because channel profits are insufficient, and the costs of intermediate links are being compressed; behind the chainization of small stores is a more efficient supply chain system replacing wholesalers; and large distributors replacing small distributors is actually using scale cost and efficiency advantages to offset increasingly high delivery and fulfillment costs. Your feeling is that business is getting harder, but what is the essence behind it? The natural increment in the market has disappeared, forcing the market to adjust the transaction structure. Structural changes always move towards lower costs. Commercial circulation will move towards scale, standardization, and intensification. Inefficient transaction models must change, and extensive management is no longer viable. In the future, all competition will be about cost and efficiency.

In the future, distributors that do not have advantages in cost and efficiency will find it hard to survive. I have three suggestions.

1. Qualified distributors should participate in local supply chain integration. When KA hypermarkets are struggling and even closing down, small stores that are close to consumers in communities are doing very steadily. In a previous article, New Distribution calculated: Suppose a prefecture-level city has 4,000 small stores, with an average daily turnover of 3,000 yuan per store, and snacks account for about 25% of the category. Roughly estimated, the FMCG portion of the overall small store business in that city is: 4000300025%*365 = 1.095 billion yuan. Who will do this market? In recent years, many large distributors in various places have started to serve small stores that were previously supplied by secondary wholesalers by building their own B2b platforms, achieving multiplied growth. The growth brought by B2b is essentially an efficiency advantage built through digital tools, scale coverage, and distribution. As we said, changes in transaction structure always move towards lower costs. B2b is essentially integrating local supply chains, efficiently replacing inefficiency. Therefore, qualified distributors must participate in local supply chain integration. If you don't do it, someone else will.

2. Strive to expand scale; without scale, there is no cost advantage. Of course, doing B2b requires high conditions for distributors, and not every distributor is suitable. If the brand you represent has already reached the top three in a regional market, you must find ways to expand scale. In the past, New Distribution has always emphasized that distributors should become large distributors. Why? Let's look at a formula: Cost = (Fixed Cost / Sales Scale) + Variable Cost Sales scale can spread costs; without scale, there is no cost advantage. A distributor I recently visited told me something impressive: because their sales volume kept growing and they covered over 10,000 outlets, brands that were previously unwilling to cooperate proactively sought cooperation. However, some brands still maintained cooperation with original distributors due to long-term relationships. After listening to him, I think these brands will eventually come to him for agency. Why? It's simple: ultimately, rational business decisions will override emotional factors. So how to expand scale? Copy and transfer your ability to operate brands to other brands and categories, broaden your horizons, focus on the commercial circulation business, and become a category distributor or channel distributor. Focus on the commercial circulation business of a city, not just a category or a manufacturer.

3. Practice basic management skills and seek efficiency from management. You might say, "I can't do B2b, and it's hard to expand scale in the short term. Am I just waiting to die?" No! In fact, there is one thing that all distributors can and must do: practice basic management skills. I know several distributors in third- and fourth-tier cities who have reached a scale of 70-80 million yuan, with profits far higher than peers. There is no secret; it's just solid management. Distributor bosses often ask: What are the new trends in the market? Are there any good models to learn from? Can this new product be done? What if customers stop ordering? They habitually focus on the outside but neglect the basic skills that must be done daily. What is my next plan? Does the organizational structure need to be adjusted? What kind of talent is needed? Where to find them? How to train them? Are the current operations reasonable? Can 8 steps be merged into 6? What digital tools can help me reduce costs and improve efficiency? How to streamline processes? How to share the team's experience and capabilities so that individuals and business units deliver results? These are all management tasks, and they are boring, but when the business reaches a certain scale, you must shift from relying on people to relying on processes and systems to reduce costs, and use digital tools to improve efficiency and build competitiveness. This way, at least you have the opportunity to embed yourself in a more efficient collaboration network in the future.

I know that not every distributor will understand or agree with the three suggestions above. Most distributors will remain as they are. This is not surprising. The direction of business evolution is that efficiency replaces inefficiency, and the result of evolution is survival of the fittest. The underlying small stream of "cost and efficiency" will eventually lead to a big river of scale, standardization, and intensification. Following this direction, you may take detours, but you will never go back. In the past, the natural increment in the market made us mistakenly believe that 50% efficiency earns 50 yuan, 80% efficiency earns 80 yuan, and 90% efficiency earns 90 yuan. But the real situation in the future will be: 50% efficiency earns nothing; 80% efficiency also earns nothing; 90% efficiency earns 90 yuan; 100% efficiency earns 1,000 yuan; 120% efficiency earns 20,000 yuan. This seems cruel, but for truly capable distributors, it's a good thing. I wish you become the one who finally makes it out!

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