Tip: Click the blue text above to follow "FMCG Distributor Professional Consulting" for more marketing and distributor internal management content.
Lao Zhang, a distributor of food, beverages, and alcohol in a city in Zhejiang, had been in the business for many years, and his company had been developing smoothly. However, in recent years, he has faced repeated setbacks. When he met the author, he sighed and complained: "I've been hunting eagles all my life, but now I've been blinded by a hawk. Last year, I took on new products from three companies in a row, and all of them were traps set by the enterprises, ending in failure. The losses were heavy." The author was surprised, as Lao Zhang was considered a veteran in the food industry, known for his caution and sharp insight. But now he had made mistakes repeatedly, which suggested deeper reasons. The author asked about the process, and Lao Zhang recounted in detail: "The first product I took on this year was from a health wine company in Shandong. I met them at the spring糖酒会 (sugar and wine fair). The parent company is a Hong Kong-listed company. They spent heavily at the fair, with a large booth, advertising, and coordination with local TV ads, which gave me a strong impression. The general manager promised me: 'Whatever the market sales, we will invest that amount.' The company claimed to pursue benefits over the next ten years. I thought the company had financial strength, was willing to invest heavily, and had a decent product, so it should gain a position in the health wine market. So I signed a distribution contract and paid 500,000 yuan in one lump sum." The author was curious: "Why did you pay so much for the first order when you just started distributing their products?"
Lao Zhang replied: "The company had a rule: to obtain exclusive distribution rights in our city, the first order must be at least 500,000 yuan."
The author asked: "According to the general manager's promise, you paid 500,000 yuan, so they should invest 500,000 yuan in your market. Did they fulfill that?"
Lao Zhang said angrily: "Fulfill? Not at all. They only sent me 50,000 yuan worth of goods a month later, and the promised market promotion expenses required me to advance the funds, and they would be reimbursed on a 1:1 basis with the next shipment based on sales volume. This meant I had to sell all 500,000 yuan worth of goods first, then when I reordered, they would reimburse the expenses on a 1:1 basis. I would have to pay another 500,000 yuan for the next order. I was completely trapped by that company."
The author asked: "So what did you do?"
Lao Zhang said helplessly: "First, I asked to return the excess payment, but the company ignored me. I had no choice but to have the remaining 450,000 yuan worth of goods shipped back, and try to cash out at cost price. After a year, I still have over 300,000 yuan worth of goods in the warehouse. Not only did I lose a lot of manpower and resources, but it also made my company's cash flow difficult."
Why did Lao Zhang, with years of experience in food and beverage distribution, make such a low-level mistake? The author believes the main reasons are the following three:
Empiricism is deadly. Lao Zhang has been in business for years, thinking he is experienced and has sharp insight. In his mind, as long as the manufacturer is willing to invest, the product has market prospects, and with his sales network, he can open the market and make profits. But any enterprise's investment has a limit, within its capacity. High investment must be based on high gross margins; otherwise, the enterprise cannot sustain normal operations. No matter how strong the company, it will not tolerate market investment exceeding the product's gross margin. The health wine general manager's statement that "whatever the market sales, the company will invest that amount" was actually playing a numbers game. Lao Zhang thought that whatever he paid in the first order, the company would invest that amount. But the health wine company's explanation was that they would invest based on what you sell, not what you pay. This meant there was no investment for the first shipment because it was just inventory transfer, not actual sales. And for the second shipment, they would reimburse the advanced expenses on a 1:1 basis with goods. In reality, the company's maximum market investment would not exceed 50% of sales. The high gross margin of health wine determined that the company would not lose money under any circumstances, and they transferred all operational risks to the distributor. Lao Zhang didn't see through this and fell into the manufacturer's trap.
Blind confidence and underestimating the risk coefficient when choosing products. Every decision by a business owner carries risk. Business owners must have the ability to avoid risks. Why did the health wine company set a threshold of 500,000 yuan for the first order? It was not as the manufacturer claimed, to "define the distributor's strength." In essence, it was to trap the distributor's funds to maintain their own normal operations. Lao Zhang thought that with his connections and established sales network, he could complete 500,000 yuan in sales in a short time. But things didn't go as planned. A high-priced new product entering a new market cannot succeed with just the distributor's efforts alone. The company had no specific plans for product promotion, market development, or personnel support, and delegated all of that to the distributor. Lao Zhang thought he had gained a lot of autonomy, but he lacked the capability. Moreover, a new product entering a new market needs a long process to be accepted by consumers. The main competitor, Jing Jiu, already had a high market share and strong brand advantage. Surviving and developing in the cracks is not an overnight task.
Superficial understanding of the partner company. Why did the health wine company spend heavily at the sugar and wine fair? It was just to show distributors a facade of strength. Large booth area, luxurious decoration, and massive advertising were all to express the company's confidence in the product to distributors. But all this was only for the attending distributors to see. The purpose was one: to "raise funds." Lao Zhang only saw the surface, but did not fully understand the company's management model, business philosophy, marketing personnel quality, or service system, and easily signed the contract and paid. Naturally, he suffered a "Waterloo" defeat.
So how can distributors choose products with "money" potential? The author believes they should consider the following ten aspects:
Product profit margin. When selecting a product, distributors first consider the wholesale-retail price system and the profit space left for them. Generally, for new products entering the market, the gross margin for secondary wholesalers should not be less than 12%, and for KA systems, not less than 30%. Distributors should not only consider storage and transportation costs, labor costs, public relations costs, and taxes, but also pay attention to the product's loss rate and capital occupation cost. Generally, new products have higher loss rates than mature products, and the return rate from retail terminals is correspondingly higher. During the promotion stage, the sell-through speed is slow, and the capital turnover rate is low. Therefore, without reasonable profit space, the product has no "money" potential.
Initial investment in manpower and resources. The main force for new product promotion is the manufacturer. Without the manufacturer's investment in manpower and resources to start the market, it is difficult for the product to open up. Some distributors prefer to operate "naked price" products, which have a low ex-factory price but no market promotion expenses. Sales depend entirely on the distributor. This model is straightforward, but such products are always short-term behavior of small enterprises, and product quality and delivery cycles are hard to guarantee. The manufacturer determines the product's future. Excellent enterprises will have a systematic market operation system and will invest sufficiently in manpower and resources in the initial stage. This investment should be long-term and stable, within a reasonable range. If the enterprise invests without regard to cost, exceeding its capacity, distributors should think about how long such investment can last and how long the enterprise can survive.
Market maturity of the product. New product types are emerging endlessly. Any innovation in form, content, or packaging must adapt to consumers' consumption habits, aesthetics, and values. Products that are too alternative or ahead of their time are hard for consumers to accept in a short time. Generally, traditional products with fashionable elements, industrial processes, and exquisite packaging are easier for consumers to accept.
At the same time, if the industry is highly mature, the development space is very small. In highly mature industries, one to three monopolistic enterprises have already formed, creating a market protection barrier, which makes it very difficult to promote new products. For example, after Wanglaoji introduced the herbal tea concept, many companies followed, but so far, no successful case has emerged. Therefore, distributors must be cautious when choosing products in highly mature industries. The market may have large capacity, but it is difficult to get a share.
Quality and professionalism of grassroots personnel. There is a saying in the industry: "Sales are done by people." The core element of any enterprise's development is people. The quality and professionalism of grassroots personnel often reflect the enterprise's management level. When evaluating grassroots personnel, consider the following: 1) Familiarity with the products they sell, including quickly quoting ex-factory prices, retail prices, competitor retail prices, and basic sales volumes for each system. 2) The company's operational approach after entering the market. A mature company will have a complete operational plan and management system for its products, including market positioning, consumer group definition, promotion expense ratio, and future development forecasts, which determine the company's professionalism and future trends. 3) The professionalism of grassroots personnel. If they are perfunctory, lax, and just getting by, it indicates low management level and weak execution. Grassroots sales personnel are often the direct executors and promoters of the company's sales policies. Weakness in ability, quality, work attitude, and passion will directly lead to failure in the regional market.
Market capacity of the product. If the market capacity of a new product is too small, it means distributors will find it hard to profit in the short term. The manufacturer might talk about the product's future prospects, but the future has many variables. During the long process of market expansion, consumer cultivation, and product education, the manufacturer needs continuous investment. Perhaps the market hasn't opened up yet, and the enterprise can't survive. Or just as the market starts to improve, a larger and stronger enterprise enters; the real winner may not be the pioneer. Distributors should be very cautious with products that are too ahead of their time and hard for consumers to accept in a short time.
Three to five year growth trajectory. When selecting products, distributors should also avoid short-term products. These may have sales for a while, but their lifespan is very short. For example, some small enterprises follow big brands with similar packaging and names but at lower prices. These companies are just trying to make a quick buck and move on. This is short-term behavior. Distributors who pursue small profits by distributing such products often lose more than they gain. So when choosing a product, a qualified distributor should at least see its development over the next three to five years. Distributing a product with growth potential is the most profitable.
Manufacturer's market investment ratio and continuity. Distributors generally pay attention to the manufacturer's market investment ratio, but it is not true that the higher the investment, the better. Generally, the investment ratio for a product entering the market should not exceed 20% of the supply price. If it exceeds this, it indicates the product is a "profiteering" product, which means it is hard for consumers to accept, and the price can only be maintained for a short period. When distributing such products, distributors need to closely monitor the continuity of the manufacturer's market investment and the impact of competitors entering the market, and leave themselves a way out as early as possible.
Whether the product matches existing channels. In the FMCG industry, distributors' business scopes are becoming more refined. Focusing on their advantageous products and abandoning some "chicken ribs" products is a wise choice for savvy bosses. Different product categories have different sales channels, business models, and operation methods. For example, a beverage distributor would find it difficult to operate alcohol. Distributors should concentrate their main energy on their advantageous areas to enhance their influence in a certain category and maximize benefits. Therefore, when selecting products, distributors must consider whether the new product matches their existing channels. Adjusting the existing channel structure for one or two new products is often more harm than good.
Risk coefficient in operation. Every decision by a business owner hides operational risks. The more risk-free a business behavior seems, the higher the risk coefficient. For example, if a manufacturer's salesperson unconditionally promises you many preferential conditions, it seems like a sure win, but distributors need to be more vigilant about the likelihood of the manufacturer fulfilling those promises. When making decisions, distributors should plan for the worst and work toward the best. All possible risks must be controlled within a range they can bear. The loss from an unexpected event should at least not affect the company's current normal operations.
Input-output ratio. Many distributors often focus on the profit space a product leaves them but ignore the input-output ratio. There is a strange phenomenon in the domestic consumer goods industry: products that sell well don't make money, and products that make money don't sell well. Famous brand products have high sales volume and fast capital turnover but thin profits. Products with larger profit margins have low sales volume and slow capital turnover. Therefore, distributors should learn to calculate the input-output ratio for each product. The higher the input-output ratio, the greater the contribution to the company. Such products are your "money trees."
The domestic FMCG market is truly a huge kaleidoscope, dazzling you. Bosses must have sharp eyes, not be tempted by false benefits, and see through the surface to the essence. Only then can you sit firmly in the fishing boat and remain invincible.
Daonong recently opened a public account specifically about how traditional enterprises can do WeChat marketing. If you are interested, you can follow it. Search for the WeChat ID above or scan the QR code below to follow.
--------------------------------------------