A distributor's ability to make money and easily earn more profit is directly related to their product portfolio. When selecting new products, besides considering whether the product has selling points, one must also think about how it fits with existing products. Among the products distributed, which ones are "profit" and which are "weapons"? Below, the editor of Dealer's Home calculates for you which combination model is best, analyzing as follows:

Different Characteristics of Three Types of Brands

Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories, which we may 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 some well-known domestic brands such as Wahaha, Yili, and Mengniu. Generally speaking, the return on investment for first-tier brands is not high; the common profit model is "6+1" or "7+1", meaning 6%–7% distribution gross margin plus 1% annual rebate, with the highest distribution gross margin generally below 11%, and typically a no-return policy. After deducting warehousing and distribution costs, personnel wages, 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 basically no operational risk; sales volume is large, with annual regional turnover ranging from millions to hundreds of millions. First-tier brands are usually "must-stock" in the channel, allowing distributors to quickly build a sales network and obtain favorable terms in retail negotiations.

Second-tier brands typically refer to brands with high product quality, no large-scale brand operation, but with proactive and skilled channel promotion support. The return on investment for second-tier brands is relatively high, usually between 12% and 20%. The characteristics of second-tier brands are as follows: brand awareness is generally low, some appear as regional brands; there is no terminal market maintenance team or the team is small, so terminal maintenance is borne by the distributor, and the distribution gross margin includes terminal maintenance costs of about 1%–1.5% of turnover; distributing second-tier brands can also achieve high turnover, with annual regional turnover reaching millions or more; second-tier brand products have longer payment cycles in modern channels, requiring significant capital, and distributors must bear corresponding bank interest; market management is less mature and less standardized, placing higher demands on distributors.

Third-tier brands basically have no brand awareness. They typically target low-income groups or narrow markets, or impact the market with prices far below those of first- and second-tier brands in the same category. The characteristics of third-tier brands are as follows: low brand awareness, opaque pricing, and distribution gross margins can reach 30%–40% or more; due to lower quality and lack of good market planning, turnover is generally small, with annual regional turnover below hundreds of thousands; they are prone to slow sales, with high returns and losses; distributors must bear the risk of market investment costs; product life cycles are short. Distributors operating third-tier brands face high risks, but because distribution gross margins are as high as 30–40%, it presents a picture of "infinite scenery at the perilous peak." Some distributors leverage their keen market observation to find products among the vast number of third-tier brands that meet local market demand, implementing "short, flat, fast" operations, and can also reap substantial rewards. Operating third-tier brands requires continuous elimination of products and introduction of new ones to address the short product life cycle.

The Best Product Operation Model for Distributors

Let us first analyze the returns from investing one million yuan of working capital separately in each of the three types of brands.

Investing in first-tier brands: Assume a distribution gross margin of 7%. Taking a typical warehouse sales model as an example: distribution cost 2%, personnel wages 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment terms of 15 days, ignoring in-transit funds, with two turnovers per month. Monthly net profit: (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 gross margin of 15%. Distribution cost 2.5%, personnel wages 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment terms of 60 days (varying by region and outlet), ignoring in-transit funds, with one turnover every two months. Monthly net profit: [(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 gross margin of 30%. Distribution cost 3%, personnel wages 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment costs 6%. Assume payment terms of 75 days (varying by region and outlet), ignoring in-transit funds, with one turnover every two and a half months. Monthly net profit: [(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 longer payment terms, yields higher monthly profit; investing solely in third-tier brands yields the highest monthly profit.

In fact, if a distribution company operates solely with third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, leaving the company in a disadvantageous position in negotiations with retail chains. Frequent "sudden death" of products can cause significant harm to the company's stable operations. Operating solely with second-tier brands, while profits and sales stability are relatively high, requires substantial capital. Operating solely with first-tier brands, although sales are not a concern and risks are 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 the three types, reduce opportunity costs, and achieve optimal returns and operational stability.

In this operating combination:

The role of first-tier brands: bear the basic operating costs of the company, ensuring normal survival; bundle with second- and third-tier brands in negotiations with retail chains to improve trading terms for the latter, such as shortening payment cycles and reducing fixed monthly and annual deductions; assist second- and third-tier brands in quickly covering the sales network; dilute distribution costs, wages, and management expenses for second- and third-tier brands; fifth, contribute a certain amount of net profit.

The role 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, the distribution company must allocate substantial personnel, warehouse space, vehicles, etc., which become a heavy burden if the distribution rights are lost for some reason. At this point, second-tier brands can ensure the company's normal survival, enhancing its ability to resist risks; provide terminal market maintenance teams for third-tier brands.

The role 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 turnover, their sales weight should not be too large; otherwise, excessive SKUs can lead to management issues, reducing 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 brands, 4–6 second-tier brands, and 5–8 third-tier brands.

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