---
title: "Don't Look Down on Small Brands: In a Distributor's Product Portfolio, Third-Tier Products Are the Most Profitable!"
description: "This article analyzes the characteristics of first-, second-, and third-tier FMCG brands and calculates the returns on investing in each tier. It concludes that while third-tier brands offer the highest profit margins, a balanced portfolio with a sales weight of 40% first-tier, 40% second-tier, and 20% third-tier yields the best overall profitability and stability."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-04-23"
language: "en"
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# Don't Look Down on Small Brands: In a Distributor's Product Portfolio, Third-Tier Products Are the Most Profitable!

> This article analyzes the characteristics of first-, second-, and third-tier FMCG brands and calculates the returns on investing in each tier. It concludes that while third-tier brands offer the highest profit margins, a balanced portfolio with a sales weight of 40% first-tier, 40% second-tier, and 20% third-tier yields the best overall profitability and stability.

Let's first talk about the characteristics of the three types of brands!
**1F****Different Characteristics of the Three Types of Brands**
Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories, which we might call first-tier, second-tier, and third-tier brands.
First-tier brands include some world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove; they also include well-known domestic brands such as Wahaha, Yili, and Mengniu.
Generally speaking, first-tier brands have a low return on investment, commonly following a "6+1" or "7+1" profit model, meaning a 6%–7% distribution margin plus a 1% annual rebate, with the highest distribution margin typically below 11%, and they usually implement a no-return policy.
After deducting warehousing and delivery costs, staff salaries, expenses, losses, and taxes, the net profit is minimal.
However, first-tier brands have many advantages: they have strong brand support, products sell well, and the manufacturer provides a large terminal market maintenance team, so distributors can operate these brands with less hassle;
Distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and essentially no operational risk; sales volume is large, with annual regional sales ranging from millions to hundreds of millions.
First-tier brands are typically "must-carry" in the channel, allowing distributors to quickly build a sales network and secure favorable terms with retail outlets.
Second-tier brands usually refer to brands with high product quality that do not have large-scale brand operations but provide proactive and skilled channel promotional support.
The return on investment for second-tier brands is relatively high, typically between 12% and 20%. The characteristics of second-tier brands include: generally lower brand awareness, some appearing as regional brands; no terminal market maintenance team or a small team, with terminal maintenance work borne by the distributor, and the distribution margin includes terminal maintenance costs of about 1%–1.5% of sales.
Distributing second-tier brands can also achieve high sales, with annual regional sales reaching millions or more; second-tier brand products have longer payment cycles in modern channels, requiring significant capital and forcing distributors to bear corresponding bank interest; market management levels are lower and less standardized, placing higher demands on distributors.
Third-tier brands have essentially no brand awareness. They typically target low-income groups or narrow markets, or they impact the market with prices far below those of first- and second-tier brands in the same category.
The characteristics of third-tier brands include: low brand awareness, opaque pricing, and distribution margins reaching 30%–40% or more; due to lower quality and lack of good marketing planning, sales are generally small, with annual regional sales below several hundred thousand; they are prone to slow sales, with high returns and losses; distributors must bear the risk of market investment costs; and product life cycles are short.
Distributors face high risks when dealing in third-tier brands, but with distribution margins as high as 30%–40%, it presents a picture of "infinite scenery at the perilous peak."
Some distributors leverage their keen market insight to find third-tier brands that meet local market demand from the vast array, implementing "short, flat, fast" operations and reaping substantial profits. Dealing in third-tier brands requires continuously eliminating products and introducing new ones to address the short product life cycle.
**2F****The Best Product Operation Model for Distributors**
Let's first analyze the returns on investing one million yuan of working capital separately in each of the three types of brands.
**Investing in first-tier brands:** Assume a distribution margin of 7%. Using a typical warehouse sales model, delivery costs are 2%, staff salaries 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, and monthly interest 0.5%. Assume a payment period of 15 days, with no consideration for funds in transit, allowing two turnovers per month. Monthly net profit is:
(7%-2%-1.2%-0.3%-0.2%-1.4%-0.5%) × 1,000,000 × 2 = 28,000 yuan.
**Investing in second-tier brands:** Assume a distribution margin of 15%. Delivery costs are 2.5%, staff salaries 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, and monthly interest 0.5%. Assume a payment period of 60 days (varies by region and outlet), with no consideration for funds in transit, allowing one turnover every two months. Monthly net profit is:
[(15%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 39,000 yuan.
**Investing in third-tier brands:** Assume a distribution margin of 30%. Delivery costs are 3%, staff salaries 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, and market investment costs 6%. Assume a payment period of 75 days (varies by region and outlet), with no consideration for funds in transit, allowing one turnover every two and a half months. Monthly net profit is:
[(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 first-tier brands yields the least profit; investing solely in second-tier brands, despite the longer payment period, yields higher monthly profit; and investing solely in third-tier brands yields the highest monthly profit.
In fact, if a distribution company operates solely on third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, leaving negotiations with retail outlets always at a disadvantage. Frequent "sudden death" of products can cause significant harm to the company's stable operations.
Operating solely on second-tier brands, while offering higher profit and sales stability, requires substantial capital.
Operating solely on first-tier brands, while sales are assured and risk is low, yields low profits.
Therefore, if a distribution company selects several brands from each of the three categories for combined operation, it can complement the advantages of each type, reduce opportunity costs, and achieve optimal profitability and operational stability.
**3F****Tasks in This Operational Combination**
The task of first-tier brands: to cover the company's basic operating costs and ensure normal survival; to negotiate with retail outlets bundled with second- and third-tier brands, improving trading conditions for the latter, such as shortening payment periods and reducing fixed monthly and annual deductions; to assist second- and third-tier brands in rapidly covering the sales network; to dilute the delivery costs, wages, and management expenses of second- and third-tier brands; and to contribute some net profit.
The task of second-tier brands: after first-tier brands cover basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, distribution companies allocate significant personnel, warehouse space, and vehicles to meet their needs, which become a heavy burden if distribution rights are lost for some reason.
At this point, second-tier brands can ensure the company's normal survival and enhance its ability to resist risks; they also provide terminal market maintenance teams for third-tier brands.
The task of third-tier brands: with first- and second-tier brands as backing, third-tier brands further increase profit margins, and as long as loss control is maintained, they can generate extremely high profits. Since third-tier brands have very small per-SKU sales, their sales weight should not be too large; otherwise, too many SKUs can lead to management issues and reduce profitability.
Generally speaking, for a well-developed distribution company, the optimal product operation model is to control the sales weight of first-, second-, and third-tier 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 first-tier brands. Specifically, the optimal number of brands is 1–2 first-tier, 4–6 second-tier, and 5–8 third-tier brands.
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