Click 'Read Original' for details.
The most painful thing about entrepreneurship is not failure, but seeing the future while being unable to cross the present. Today, urban distribution market entrepreneurs face exactly this situation.
Numerous proofs point to a bright future for urban distribution, yet the collective difficulty in profitability is disheartening. It seems easy to enter the market—just people and vehicles—but profitability and good financial returns, at least in the short term, seem out of reach.
Internet-based urban distribution, software service providers, and city distribution service providers—all players have entered with high hopes, but the current reality is mostly bleak and harsh. Our research found that many urban distribution providers, including those transformed from distributors, have invested nearly ten million yuan and devoted all their energy, yet after several years, they still suffer annual losses and have gained almost nothing.
The urban distribution market, half sea and half flame, has passed its capital-glory moment and reached a time for periodic review and reflection. Without correct summary and reflection, effective adjustment is impossible, and the dawn of hope will be hard to see.
Why is profitability so difficult for third-party urban distribution? Many distributors engaged in urban distribution do not understand why, after a lifetime of business, they cannot make money in this sector.
First, third-party urban distribution is essentially a negative cash flow business, and even scaling up does not change this. Internet technology itself cannot move goods from A to B, so urban distribution requires people, vehicles, warehouses, equipment, and systems.
All these investments are upfront. Even if capacity can be crowdsourced, other preliminary investments total about 3,000 yuan per square meter. If cold chain capability is added, the investment doubles. This is why some urban distribution companies invest tens of millions in a regional market over several years.
Why is it a negative cash flow business? Because despite the huge investment, most clients pay later. In the market, monthly settlement is considered good, but even then, settlement often takes at least two months. Some large clients have longer payment terms, and as long as your clients are big B, this is hard to change.
With heavy upfront investment and delayed client payments, the negative cash flow state of third-party urban distribution is hard to change for a long time.
Second, small scale guarantees losses, and large scale also struggles to make money. The business model of consolidated warehousing and distribution is too singular, with large upfront investments, long financial return periods, and low revenue. Therefore, profitability is hard before scaling.
Due to excessive upfront investment, many urban distribution projects initially abandon warehousing and start with delivery. But if only providing transportation services, the core model of co-distribution cannot be achieved, and service costs alone cannot compete with traditional small and scattered capacity. Most critically, without clients in the warehouse, there is no stickiness, and accounts receivable risk increases.
Moreover, under the subsidy pressure of professional capacity platforms like Huolala, urban distribution companies find it hard to win clients on cost and price.
Even if scale is achieved, does the hardship end? Not necessarily. As client numbers and scale expand, warehouse space, personnel, and fleets may all need to expand. All expenses are prepaid, but accounts receivable snowball until you cannot push forward.
Third, before large-scale order stacking and co-distribution are realized, urban distribution services can only reduce costs by wringing towels, but this also reduces service quality. Warehouse rent, labor, energy, and management costs have been rising rapidly. Due to intensified competition in FMCG, manufacturer profits are limited. Clients' profits decline, their ability to pay is limited, and it is almost impossible for third-party urban distribution to absorb these increased costs.
Without profit, evolution and upgrading are impossible. Currently, most third-party urban distribution providers rely on wringing towels to maintain operations, which compromises professional division of labor and service quality. Most urban distribution companies are in this objective reality.
Only when co-distribution reaches a high level will urban distribution companies see revenue multiply significantly while costs only increase slightly, leading to substantial business profits. But when this future will arrive, no one knows.
Based on reality, the survival and development path for urban distribution companies The future of urban distribution is not up for debate; it will move toward consolidated warehousing and co-distribution. The experience of developed countries and China's urban reform direction prove this.
But the path to this future is unclear. Ideals cannot feed you. If we do not clarify the vague path, we will not be the ones to survive into the future.
First, we must clearly judge that urban distribution development is a protracted war, not a quick battle, and the future will not arrive soon. The industry currently has no mature models or mature companies; all are in the early stages of entrepreneurship.
Clients of urban distribution services are also immature, including their understanding of third-party urban distribution, acceptance of order standardization and fee standardization, willingness to pay, and ability to pay—all still in early stages.
Urban distribution services are mainly B2b, with orders mostly from b-end. C-end orders are complex inside the warehouse but simple in delivery, with higher unit revenue. B-end orders are simpler in the warehouse but delivery is particularly complex, often involving settlement sheets, damage inspection, returns and exchanges, and even shelf display requirements.
The delivery recipients are also immature. Why is urban distribution difficult? First, client orders are always non-standard; second, delivery recipients always have their own requirements and standards, making it hard to coordinate win-win solutions. Complex requirements such as appointments, time limits, designated vehicles and personnel, and some with vehicle width and height restrictions, significantly increase service costs for third-party urban distribution, making co-distribution impossible even with co-distribution orders.
This immature state will persist for a long time. That is, even if enough co-distribution orders are integrated, achieving co-distribution faces many practical challenges.
Based on the 'protracted war' judgment, all urban distribution entrepreneurs must cherish valuable cash flow, optimize existing business, and make profit-loss predictions for incremental business. Otherwise, they cannot survive the long winter.
Second, integration capability is the most important among all abilities. Warehouse and distribution services require substantial physical investment, so before opening a warehouse, there must be sufficient existing business as a guarantee. Without this, warehouse utilization alone can be exhausting.
Many urban distribution operators have realized this and even use subsidies to 'invite clients in' to increase warehouse capacity. This may have some effect, but it puts great pressure on later operational profitability and may even lead to long-term losses.
Therefore, it is more advisable to start the market through integration. The advantage of integration is that you do not need to make large upfront investments; hardware and business are mostly ready-made, just needing unification for greater efficiency.
But everyone must see that integration is the most important and also the most difficult, due to human nature. Especially in regional markets, everyone wants to be the integrator, not the integrated. Many clients would rather suffer themselves than be integrated by peers.
A feasible way is to ally with outsiders. By deeply cultivating the local market with existing business and allying with outsiders, you can gain incremental business and also receive support in finance, technology, etc.
The future world is not for lone wolves. Integrating others is strength, but assessing the situation and accepting integration is wisdom.
Third, refined management skills must be mastered, and all operational service issues must find answers.
Urban distribution services, in the end, are embroidery work. With tens of thousands of square meters of warehouse, thousands of SKUs, and thousands of orders per day, if refined management is not mastered, even profitable businesses will lose money.
New Distribution has long provided extensive content and cases on urban distribution operations, from system selection, warehouse management, business structure, to delivery management. Learning from advanced players and progressing with peers is especially needed in this still barbaric market.
Every entrepreneur and operator in the urban distribution market must find correct answers to the following questions and form effective operational systems. These systems are the foundation for urban distribution operators.
Warehouse and distribution systems are not suitable; processes and systems cannot run smoothly.
How can sorting processes be both fast and economical?
For distributors doing urban distribution, how should they choose systems and design warehouse and distribution processes?
Initially, there are no clients; when clients come, they cannot make money.
How to design a scientific and reasonable fee system? How to standardize services?
For distributors doing urban distribution, how to make clients accept standardized services and prices?
In delivery, how to meet service needs for orders with time limits, traffic restrictions, width and height limits, and fragmented and complex orders?
Where is the perfect balance between delivery cost and service quality?
For distributors doing urban distribution, how to achieve profit through lean management?
From August 20-23, 2019, the China FMCG Conference will be held in Shanghai. Solutions and practices for these questions will be shared and discussed at the conference by excellent urban distribution project operators from across the country.
Tips will be paid 400-2000 yuan once adopted.
China FMCG + Internet Professional New Media Committed to FMCG manufacturer and distributor transformation and channel digitalization solutions