---
title: "Economic Downturn: How Should Distributors Conduct Business in 2016?"
description: "As 2015 draws to a close, distributors are summarizing their business performance and planning for the coming year. Many industries have shifted from high growth to a 'new normal' of low or no growth, with weakened consumer momentum adding to the difficulty. How should business be conducted in 2016, and how can current problems be solved? This article offers rational analysis of declining performance, profit erosion, and new product selection."
author: "张德昭"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2015-12-14"
language: "en"
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# Economic Downturn: How Should Distributors Conduct Business in 2016?

> As 2015 draws to a close, distributors are summarizing their business performance and planning for the coming year. Many industries have shifted from high growth to a 'new normal' of low or no growth, with weakened consumer momentum adding to the difficulty. How should business be conducted in 2016, and how can current problems be solved? This article offers rational analysis of declining performance, profit erosion, and new product selection.

As 2015 draws to a close, distributors are likely summarizing this year's business performance and planning next year's business layout. Many industries have shifted from high growth to a 'new normal' of low growth or even no growth, and the lack of consumer momentum has made business much more difficult. How should business be conducted in 2016? How can the problems companies are currently facing be solved and remedied?

1. How to Rationally Analyze the 2015 Performance Decline?

No company can guarantee that its business will always grow; even the biggest companies cannot. Business development always encounters a 'ceiling' at some point, whether in regional markets or category markets. In actual business operations, there are many reasons for a decline in performance (more precisely, shipment volume), such as:

**1. Category market recession, industry stagnation (e.g., carbonated beverage market);**
**2. High base period, performance 'inflated' (e.g., pre-mixed wine industry represented by RIO);**
**3. Severe impact from external cross-regional dumping;**
**4. Past performance achieved through cross-regional dumping, but now unable to dump;**
**5. Loss of important channel customers;**
**6. Impact of competitors' heavy investment (e.g., Evergrande Spring Water);**
**7. Force majeure (e.g., this year's private-label mineral water in the petrochemical system, which has significantly impacted the performance of many water companies in that channel);**
**8. .........**

And so on. The reasons are diverse, making it difficult to offer a one-size-fits-all solution; in many cases, the problem may be unsolvable.

In this situation, my view is: the general principle is to pursue the quality of business, not just the scale. Find ways to discover and solve problems that were masked during the era of high volume growth, transitioning from 'extensive' to 'refined' management.

Specifically, here are some reference directions for solutions:

**1. Is there still room in the market?**

When distributors encounter a performance decline, their first reaction is likely 'my channel coverage is not enough.' For distributors with gaps in certain regions and channels, there is indeed still an opportunity to enjoy 'channel dividends.' But for many distributors who have already implemented deep distribution thoroughly, a performance decline may be a signal and turning point: it means that the era of relying on channel stuffing to achieve performance (for a particular product) may be gone forever. At this point:

(1) Check whether the profit contribution of the corresponding product has been maximized. Is there still potential for further exploitation? Can investments with low marginal benefit to performance be reduced or changed in form (e.g., shifting funds originally invested in channels to consumers)? At this time, 'maintaining stability' may be the best strategy.

(2) Are there more opportunities at the consumer level? Consumer promotions can be discussed with the manufacturer to find effective methods, increase consumer pull, and strive to increase actual sales.

**2. Should you consider adding new product lines?**

Adding new products is a complex issue. I tend to be conservative and would not take this path unless absolutely necessary. Unless a distributor has only one product and is too constrained by the manufacturer, regardless of performance, adding products should be considered. However, for distributors in some industries, adding new products has a relatively obvious effect, while in others, new products become a burden.

**3. Is my cost structure reasonable?**

During high growth, some problems can be masked, especially in the 'spend money to buy performance' phase of expansion. But when spending money can no longer 'buy performance,' it's time to think about your cost structure. Especially when implementing deep distribution, there comes a stage where costs rise faster than performance, affecting company profits. At this point, you need to consider how to allocate or even cut redundant costs.

2. How to View Profit Decline?

Many distributors may not have a clear concept of profit, always thinking that business volume is king. This mindset needs to be corrected.

Profit is a variable; its basic formula is: Profit = Operating Revenue - Production Costs - Expenses.

Let's look at 'operating revenue' and 'expenses' separately to see what factors affect profit and how to adjust and improve. For distributors, the cost corresponds to 'product cost,' i.e., the purchase price from the manufacturer plus freight and loading/unloading fees from the manufacturer to the distributor's location.

'Operating revenue minus product cost' is the gross profit portion.

**1. Operating Revenue (can be viewed as gross profit)**

Operating revenue is related to sales volume, supply price, product mix, and other factors. Sales volume is self-explanatory; let's look at the other two factors.

(1) Supply price. In the context of weak sales growth, adjusting prices is one possible way to increase operating revenue. But the impact of price adjustments is also obvious: adjusting the selling price changes the profit distribution among other channel members; also, what is the price situation in surrounding regional markets? After adjusting prices, does it increase the risk of cross-regional dumping? So, specific issues should be weighed according to actual conditions.

(2) Product mix. This focuses more on the mix of products with different gross margins. Striving to increase the weight of high-gross-margin products in performance can significantly improve gross profit even when overall sales volume changes little.

The actual effect of adding new high-gross-margin products may be affected by two factors: first, the distributor's current business scale; second, the proportion of each product in the business. My view is: when the business scale is not too large and the weights of products are relatively even, choosing to introduce high-gross-margin new products will have a significant effect on improving overall gross margin; conversely, if the existing scale is already large and two or three or even one or two main products contribute the majority of business, then hoping that new products will drive overall gross margin improvement is, in my opinion, not easy at least in the short term. New products need two to three years of market cultivation to make a significant contribution. Simply put, 'a small boat turns easily.'

**2. Expenses**

We divide expenses into two parts: one is 'administrative expenses,' such as office rent, office supplies, utilities, etc., which are roughly the same every year; the other is 'marketing expenses,' which generally include warehousing, logistics, personnel wages, and market investment. Distributors usually have empirical values for various expenses; here are some references for expense management.

(1) Set a budget. Everyone knows sales targets, but many distributors may not be clear about or accustomed to budget targets. The 'budget + summary' model allows you to keep track of monthly expenses, solve problems promptly, and avoid having all issues pile up until the end of the year.

(2) Improve efficiency. For expenses like warehousing and logistics, improve efficiency. Additionally, the biggest cost in deep distribution is often labor. For distributors, how to effectively allocate labor costs or design a low-cost, high-incentive compensation system is a way to solve this problem.

(3) Reduce market expenses with low marginal contribution. The marginal benefit of market investment to performance is decreasing, which is particularly common in the deep distribution process, and we are not even considering issues like 'leakage' of market funds. Distributors need to carefully analyze: which expenses are necessary, and which are spent but have no practical effect. For things that can be saved, it's better to save them...

3. On Adding New Products

'Should I add a new product?' 'How should I choose a new product?' Although many articles tell you how to choose a product based on 'market trends' and how to operate a new product, I always believe that for distributors' practical operations, the risk of choosing new products exceeds what most people imagine. Perhaps it's because I am conservative by nature, or because I am more accustomed to thinking from the manufacturer's perspective, and I am not familiar with the considerations of distributors in product selection.

**1. First, the question of whether to choose a new product.**

Whether to take on a new product must be thought through clearly. Distributors run their own businesses without pressure from shareholders or capital markets, so they often don't need to be overly aggressive. Especially in a poor macro environment, is it worth allocating funds to operate a new product (not to mention whether it will succeed) and bear the corresponding risks? Moreover, are existing manufacturers setting higher performance targets for the coming year, posing greater challenges to the distributor's capital turnover?

(1) Category market development. To make a long story short: in some categories and regional markets, competition may be less intense, market concentration lower, fewer big brands, and higher acceptance of 'copycat products'—products from trade shows are more likely to survive in such markets. But in other categories and regional markets, it's a white-hot 'law of the jungle,' such as beverage markets in first-tier cities—even Master Kong and Coca-Cola cannot guarantee that a new product will survive; what about those 'small unknown brands'?

(2) Operational philosophy. With only 'deep distribution' as a market operation method, how can distributors win over consumers? I even tend to think: distributors with a bit of strength should not take on purely new products; just be a good 'porter' for big brands—even though big brands have many demands and thin margins...

(3) Interest orientation and manufacturer-distributor game. Distributors don't care about 'brand' when doing products, and they don't always consider 'long-term' planning; they are typically interest-driven. This leads many distributors to not plan a new product from a global and framework perspective, but to focus heavily on short-term gains and losses—because new products inherently carry risk—and making money is the top priority. Coupled with the complex and tangled relationship between distributors and manufacturers, the two often find themselves in a game where 'hearts cannot think together, and strength cannot be exerted together.' At this point, what should be done?

**2. More important than choosing a product is preliminary research and subsequent operation**

To some extent, I feel that data from consulting firms like AcNielsen can mislead distributors. For example, functional beverages are growing, so you choose a functional beverage to operate. But how will your product compete with Red Bull? Lehu and Qili have poor market performance and slow sales... I have personally experienced a decent functional beverage product that showed no improvement after a year of operation. Mineral water in the 2-3 yuan price band is growing, so you choose a mineral water product in that price range. But how will your product compete with Nongfu Spring and Ganten? Ready-to-drink coffee is growing, so you choose a ready-to-drink coffee product. But how will your product compete with Nestlé and Uni-President series? ... This is no longer just a 'product selection' issue; it involves how to operate a brand—but that is precisely the distributor's weakness...

**More important than choosing a product is preliminary research and subsequent operation:**

**(1) How accepting is the regional market and main category market you serve of 'non-big-brand' products?**

Products from trade shows are mostly small brands; the survival potential of these small brands varies greatly by region: in places like Beijing, Shanghai, Guangzhou, and Shenzhen, pressure may be greater; in other regional markets, local consumers may be more accepting of 'non-big-brand' products; even, big brands may not reach there, making it a paradise for small brands.

Additionally, in some categories, 'brand' influence is significant, such as beverages; while in others, brand requirements are relatively lower, such as snacks and condiments. Clearly understanding the industry characteristics of your main category is also a preliminary step to increase the success rate of new product selection.

**(2) Manufacturer's operational approach**

Even for small brands, you need to look at the manufacturer's approach, not just various supports. Be cautious of manufacturers who want to grow through distributors but lack a clear strategy.

**(3) Avoid the mindset of 'channel is king' or 'with channels, you have everything'**

After distributors have tasted the benefits of deep distribution in significantly boosting performance, they may think: as long as my channel is strong enough, no matter what product I take on, I can quickly distribute it; coupled with refined channel management, product 'sell-through' is easy... Strictly speaking, a strong channel is only a necessary condition for new product success, not a sufficient condition! Just because you give the channel generous profits doesn't mean consumers will buy; they are unrelated levels.

**(4) Rapidly increase penetration at low cost**

Even without the resources of large enterprises, you must do what needs to be done!

Distributors tend to use sales methods to solve problems—'waiting' for consumers to become interested, aware, and purchase your product.

Stop waiting!

When distribution reaches a certain level, find ways to rapidly increase new product penetration at the lowest cost. In other words, find ways to get already-distributed stores to turn over first. Especially, share early accumulated experience with the manufacturer promptly to provide reference for subsequent actions.

**(5) Systematic promotion activities**

Compared to the orderly consumer pull of large enterprises, the market pull of distributor companies appears random and ad hoc. In reality, without the brand endorsement of large enterprises, sporadic ground promotions are extremely limited in helping a new product.

**-END-**

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