2022 was the most severe year of the pandemic, with travel and offline activities greatly restricted. Despite this, I still visited dozens of distributors of various sizes and had in-depth exchanges with them. Among them were digital giants with annual sales in the hundreds of millions, traditional small distributors with annual sales of a few million, and more commonly, distributors with annual sales ranging from 15 to 30 million, struggling to maintain their scale. During my exchanges, I realized that commercial distribution, an industry as ancient as it gets, is undergoing accelerated change. But as the saying goes, 'the fish doesn't know it's in water,' most distributors are unaware of this change. While pioneers have already stepped into the new world, they remain stuck in the old framework. Today, I plan to share my observations with you in this article. Read patiently, and I believe it will inspire you.
Channel
Should we continue to be agents for first-tier brands? How? This is a question many distributors are pondering. Over the past 30 years, a large number of distributors in China have grown under the leadership of brands. Depending on the category, if a prefecture-level city distributor achieves tens of millions in sales, 40%-70% of that may be contributed by their leading brand. Without brands, these distributors could not have developed. It's not just about sales; crucially, brands taught distributors how to maintain terminals, set up organizational structures, formulate processes, and divide labor. But when distributors reach a certain scale, they must re-examine their relationship with brands. Why? A distributor told us, 'First-tier brands give me a 10-point gross margin, but our operating costs are 8 points, plus various expenses. When you calculate it carefully, we're not making money at all, and we might even be losing money.' The distributor thinks, 'I work hard, day and night, and have made great contributions to the brand's regional development. Why do I earn so little? Even lose money?' But the manufacturer thinks, 'I gave you the agency, invested in expenses, helped you build your team. Without our brand, your business wouldn't have started. Now that you earn less, you don't want to continue?' Both sides have their reasons. But business is not about reasoning. For brands, distributors are just a channel. What is the essence of a channel? Scaled reach. Distributors are born because of brands, but brands bring up distributors not out of goodwill, but because brands need you to reach hundreds or thousands of terminals at scale in a regional market.
When distributors have grown, considering whether to continue cooperation is not 'ungrateful,' but because they need profits, survival, and development. This is rational business analysis, but behind it lies deeper economic laws that determine the changing manufacturer-distributor relationship. That is scarcity.
Scarcity
Scarcity is the cornerstone of economics and the lens through which we see through the essence of business. The essence of commercial value is the monetization of scarce resources. What does that mean? For example, in recent years, many new consumer brands have emerged, but few have truly survived. The reason is simple: online traffic can help you scale quickly, but traffic costs money. Sales may look high, but there's no profit at all, and you might even rely on financing to survive. This is unsustainable. Not just new consumer brands; mature brands face the same. Online prices are much lower than offline, and you need to invest heavily in promotion and buying traffic. Many brands earn extremely low profits, or even lose money for the sake of publicity. Who takes the money? The platforms. Think about it: you are the brand, the platform is just a channel. Why does the channel take most of the profit while you become a 'worker' for the platform?
Because the platform holds a scarce resource—consumers. The money it earns is essentially the monetization of its scarce resource.
Whoever owns scarce resources has the choice and can earn more profit.
In the manufacturer-distributor relationship, why can distributors only earn hard-earned money? Because brands are scarce, while channel resources are not. Brands earn more profit essentially by monetizing their brand as a scarce resource.
Over the past decades, many distributors have grown their businesses by following brands, but they relied on manufacturers to do the market, and they didn't build their own capabilities in terminal promotion and brand operation. So costs rise, profits shrink, and they can only struggle to maintain.
However, scarce resources are shifting because the industry is accelerating change.
First, the channel transaction structure is changing. In recent years, the trend of large distributors has been obvious. Many small local distributors are either eliminated or reduced to sub-distributors or second-tier wholesalers. The commercial distribution industry is evolving towards standardization, intensification, and scale.
Second, consumption is a zero-sum game, and consumer demands are becoming more diverse. We have long moved from the era of brand sovereignty to the era of consumer sovereignty, which makes brand market concentration increasingly lower.
What does this lead to?
In the past, distributors were not scarce; brands were scarce, and good products were scarce.
Now, good products are not scarce; distributors who control terminal resources and have promotion capabilities are scarce.
The shift in scarce resources will inevitably lead to changes in manufacturer-distributor relationships. Distributors' market roles have changed, but many distributors are not aware of it. Their thinking remains in the old framework, viewing problems from the original perspective. They think about how to ask brands for more rebates and support, and if this brand doesn't work, how to find the next leading brand to maintain sales.
Their thinking is still stuck in the old world. But there are always pioneers who are already exploring the new world. Let me share two cases.
Serve customers well
In November last year, I visited a prefecture-level city distributor, Mr. Zhang. Over the past 10 years, Mr. Zhang has been doing one thing: selecting brands and product portfolios based on terminal customer needs. He has cut most of the first-tier brands he once represented, except for a few. As a result, he earns 2-3 times the profit of his peers. How did he achieve this? He built a team of over 200 in-store promoters covering more than 200 local supermarkets. He thinks about how to serve terminals well and studies local consumer needs. He said: 'Why do we deserve to make money? By meeting customer needs, ultimately consumer needs.' Well said. Initially, you are the brand's external team, earning a 'salary' paid by the brand. When you grow to a certain scale, with a team of over a hundred people and control of key local outlets, you become an independent enterprise, and you must earn 'profits.' Where do corporate profits come from? From the market, from customers. This is a fundamental shift in thinking. As we said, good products are not scarce; distributors who control terminal resources and have promotion capabilities are scarce. Mr. Zhang's profit is the monetization of the scarce resources he controls. Meeting consumer needs and serving customers well is the way to monetize. If your business has reached the top in your region and terminal coverage is not a problem, you must develop your own operation and promotion capabilities. Only then can you truly strengthen your scarcity.
Integrate the supply chain
Another case is Mr. Fan, whom I visited in September last year. In his early days, Mr. Fan represented very few brands and had to source from local distributors or second-tier wholesalers. Gradually, many brands were willing to supply directly, and even brands that previously refused to cooperate actively sought cooperation. In just 5 years, he now covers over 17,000 small shops and distributes over 6,000 SKUs. How did he do it? It relies on the efficiency advantages brought by the B2b platform. In traditional commercial trade, you represent a few brands, but with a self-built B2b, you can directly connect to thousands of terminals. Through scaled coverage and centralized demand, you can establish business relationships with more upstream manufacturers, helping hundreds of brands complete scaled distribution of thousands of SKUs. Compared with traditional trade, B2b digital distribution brings overwhelming advantages. There are many such companies. Some, like Mr. Fan, had no prior trade experience and directly disrupted the industry with high investment; others transformed from traditional trade, enduring 3 years of losses to resolutely complete digital transformation. Why do they do this? B2b essentially uses digital tools to integrate the local supply chain, achieving scaled coverage and distribution, thereby building efficiency advantages. Directly connecting thousands or even tens of thousands of terminals, a prefecture-level city can accommodate at most two B2b platforms. This is a truly scarce resource. Distributors with the conditions must participate in local supply chain integration. Because if you don't do it, someone else will.
Final thoughts
First-tier brands are not profitable; what should distributors do next? The above two cases clearly signal that the role of distributors is changing. Traditional distributors serve brands and do distribution coverage well; future distributors will revolve around channel customers and provide supply chain services! Strong distributors have already transformed from 'salary-earning' brand external teams to enterprises that serve customers well and monetize scarce resources into 'profits.' This is not determined by the will of individual distributors; it is the inevitable result of the trend brought by the combination of two factors: business evolving from low efficiency to high efficiency, and the transition from brand sovereignty to consumer sovereignty. Will small agents necessarily disappear in the future? If you rely on an absolutely leading brand and do the market well, will you definitely not survive? Of course not. We say supply chain integration is a trend, digital distribution is a trend, but so-called trends, in a larger time and space, will have different stages and structures depending on the region and category. In the foreseeable future, traditional distributors will not disappear; they will still exist, but they will remain in the old world.
The division between the old and new worlds is thinking, perspective, and the ability to discern industry changes, take action, seize opportunities, and win the future.
From April 6-8, 2023, the 8th China FMCG Innovation Conference will be held at the Tiwolei Hotel, Chengdu Intangible Cultural Heritage Expo Park (601, Section 2, Guanghua Avenue, Qingyang District) with the theme 'New World, New FMCG.' 'New Distribution' will join forces with the top 50 regional digital distributors in China to launch the 'China FMCG Digital Distribution Alliance,' building a platform for exchange, learning, and cooperation, and will hold a launch ceremony at the conference. Distributors who aspire to seize future opportunities are welcome!