---
title: "How Can Distributors Ensure Their Profits Are Not Carved Up?"
description: "Case: A 'bloodbath' caused by forced stockpiling. Lao Gao, a distributor for A-brand liquor, faces a common dilemma: sales are up but profits are down, and he's being 'held hostage' by the manufacturer's demands to stock up, leading to a vicious cycle of discounting and eroding margins."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2018-09-08"
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# How Can Distributors Ensure Their Profits Are Not Carved Up?

> Case: A 'bloodbath' caused by forced stockpiling. Lao Gao, a distributor for A-brand liquor, faces a common dilemma: sales are up but profits are down, and he's being 'held hostage' by the manufacturer's demands to stock up, leading to a vicious cycle of discounting and eroding margins.

**Case: A 'bloodbath' caused by forced stockpiling**
Lao Gao is a distributor for A-brand liquor. To outsiders, he seems to have it all: a prime location in the provincial capital with a self-owned compound of thousands of square meters, a four-story office building in front, large warehouses in the back, nearly a hundred vehicles, and a team of over 200 people. His business is big and impressive. But in reality, his profits from this brand have been declining year after year. Lao Gao is facing a common problem: sales have increased significantly, but he still suffers losses from time to time.
Recently, Lao Gao has been 'held hostage': because he has to advance promotional expenses himself, he is forced to stock up on inventory to cover these costs and overheads. That's when the trouble began:
1. Sales rhythm is disrupted. The first 20 days of each month are spent clearing last month's inventory, and at month-end, to secure the fees, he has to continue pushing volume, creating a vicious cycle.
2. Product freshness declines. To clear old stock, the manufacturer only focuses on high-end products, and the resulting return costs and handling costs for low-end products take a big bite out of Lao Gao's gross margin.
3. Consumers get the impression that old stock is frequently discounted, and it takes up shelf space and sales opportunities for fresher products.
4. New products are not yet accepted, yet more inventory is forced on him. The manufacturer assesses distributors on purchase activity and month-on-month growth, limiting the number of purchases per month and the minimum order quantity per purchase. If the plan is not met, mandatory allocation is imposed.
Under the combined effect of these factors, Lao Gao's targets increase year after year, and his input costs rise steadily. Under the unbearable pressure of profit erosion and inventory pressure, Lao Gao chose to exit after the first quarter.
So, how can distributors save their profits when faced with the high-pressure stocking tactics of big brands?
**1. Don't put all your eggs in one basket**
Distributors should have a brand portfolio concept. Which brands look good on the surface but are rotten inside, with thin profits, or even grow by excessively eroding their own and channel profits? Which brands offer good profits? Additionally, consider the product portfolio within each brand: which are volume-driving products, which are high-margin products, and which are defensive products?
Distributors need a sound business structure mindset. They should review their brand and product portfolios, clarify product positioning, product mix, and product hierarchy, and determine the right combination of brands and products to improve profitability and enhance resilience against risks.
**Key: Only through diversification can you effectively hedge against the potential risk of manufacturers eroding your profits.**
**2. Avoid 'greedy and all-encompassing' distribution**
Distribution rate is an effective tool for manufacturers to assess distributors. If you say your target is too high, they check the distribution rate. If the distribution rate is low, it means there's still market space! If it meets the standard, they ask if the per-store inventory is sufficient, whether it matches the industry leader, or even whether you can distribute to any channel with even a slight connection to the product!
But the problem is that some outlets are newly opened, have insufficient foot traffic, overstock to obtain sales fees, or are not suitable for the product. Ignoring these stores' absorption capacity and being 'greedy for more' with 'excessive distribution' only results in high distribution rates and displays, but ultimately most of the goods are returned, and you have to spend more to handle them. Unknowingly, distributors suffer hidden losses.
The terminal outlet ledger should not just be a file; it should not simply classify outlets by hardware like floor area. Instead, gradually establish a model that classifies terminal types based on sales volume, then clarify the basic distribution items for each terminal type, the approximate turnover days for each product category, the base quantity for each distribution, and the inventory quantity to be retained per store per unit time. Ultimately, focus on quality outlets and improve the quality of terminal outlets.
**Key: Distributors should work with manufacturers to define an 'effective distribution rate' that suits the regional economic environment. Don't just distribute to any outlet that can sell; be wary of excessive distribution to ineffective or low-efficiency outlets.**
**3. Manage your own warehouse**
Many big-brand salespeople, even managers, like to treat the distributor's warehouse as their own. Often, without the distributor's consent, they place orders on behalf of the distributor or force allocation. To complete their tasks, they turn the company's inventory into the distributor's inventory, and force regional non-moving products into the distributor's warehouse.
Distributors should manage their own warehouses, have a clear judgment on the trends, sell-through, and inventory of different products, and not hand over ordering rights to others. Pay attention to monthly inventory turnover rate and monthly product sell-through rate, and use value and quantity changes to reduce inventory risk. This way, when manufacturers make unreasonable allocations, you can counter with evidence.
**Key: Distributors should manage their own warehouses and pay attention to both value and quantity changes.**
**4. Avoid these management systems**
Distributors should streamline their management systems, break down each position into quantitative tasks, and introduce input-output analysis in management processes and channel construction to reduce hidden management costs.
In particular, be sure to avoid management systems that are not suitable for you.
Case: In the case of manufacturer A, which Lao Gao cooperated with, the delivery staff salary reform only set basic salary, item salary, market infrastructure salary, and sales commission salary, and limited personnel to full-time delivery staff. In Lao Gao's provincial capital, the basic salary is 3,000 yuan per person, with two people per vehicle. The brand's average gross margin is less than 15%, so 'a vehicle needs to increase sales revenue by nearly 30,000 yuan per month just to offset the basic salary cost.' Add to that the 'dedicated vehicle and dedicated delivery' where operating costs cannot be shared by other brands, plus other detailed assessments and product commissions, and the operating costs are enormous.
**Key: In an increasingly saturated channel environment, when manufacturers try to impose 'high-end' management systems, distributors must be vigilant, as these can significantly eat into your hard-earned profits.**
Source: Distributor WeChat Journal
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