---
title: "How Should Second-Tier Distributors Transform?"
description: "This article discusses the historical evolution and current challenges of second-tier distributors in China's FMCG industry, and proposes two transformation paths: upgrading to first-tier distributors or controlling rural retail terminals."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2014-07-12"
language: "en"
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original_source: "https://mp.weixin.qq.com/s/KcGTvTWaFvqdkWO3yu-gMQ"
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---

# How Should Second-Tier Distributors Transform?

> This article discusses the historical evolution and current challenges of second-tier distributors in China's FMCG industry, and proposes two transformation paths: upgrading to first-tier distributors or controlling rural retail terminals.

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**The Evolution of Second-Tier Distributors**

In the late 1980s and early 1990s, corporate market operations relied on two key elements: first, advertising pull—companies that rose during that era mostly did so through heavy advertising; whoever dared to spend lavishly on ads had the opportunity. Second, distribution radiated from wholesale markets in central cities (or regional cargo hubs) to surrounding areas, achieving product coverage through the network penetration of large distributors. In that era, corporate sales branches (offices, subsidiaries, or sub-companies) were typically set up in provincial capitals. First-tier distributors were usually in provincial capitals (or regional cargo hubs), second-tier in prefecture-level cities, and third-tier in county-level cities.

Around 1997, well-known companies like Master Kong, Wahaha, and Shuanghui began shifting their marketing strategies. On one hand, they reduced the proportion of advertising in promotions and increased on-site promotions, gradually transitioning marketing activities from "air warfare" to "ground warfare." On the other hand, they lowered the marketing focus: first, sales branches were set up at the prefecture level; second, customers were moved down, with first-tier distributors also set at the prefecture level. At the time, the media described these companies as "taking action against big accounts," but in essence, they were "cutting off the retreat of first-tier distributors" by upgrading outstanding second-tier distributors to first-tier. Correspondingly, second-tier distributors moved down to the county level. In the 1997 marketing transformation, many once-glorious companies faded from the market because they failed to keep up with the pace of change.

Around 2000, the marketing focus of companies again generally moved down to the county level. Although sales branches were not universally set at the county level, first-tier distributors were basically designated by county. The county market had become the basic unit of marketing activities. Correspondingly, second-tier distributors gradually moved down to townships.

Although second-tier distributors exist at every market level, currently they are mainly in townships. When we talk about second-tier distributors now, we mainly refer to township second-tier distributors, which are the mainstream.

**The Awkward Position of Second-Tier Distributors**

How do first-tier distributors survive? They are connected to manufacturers on one side and second-tier distributors on the other. The key to their survival is, first, representing a good brand—leaning against a big tree to enjoy the shade; second, building a network of second-tier distributors to distribute products through them.

How do retail terminals survive? Their characteristic is monopoly over their trading area, that is, winning customer loyalty through quality service. Terminals are not loyal to any company or brand; they typically sell whatever sells well. Due to the relatively high markup rates in retail, as long as they win repeat customers, they can operate well.

How do second-tier distributors survive? Currently, they are in a very awkward position. Larger terminals try every means to bypass second-tier distributors and buy directly from first-tier distributors or even manufacturers. Under the guidance of "winning at the terminal," first-tier distributors or manufacturers are also attempting to bypass second-tier distributors and supply terminals directly. Squeezed by both terminals and first-tier distributors, the living space for second-tier distributors is shrinking. At the same time, unlike first-tier distributors who have manufacturer support and can build brands to gain market position, and unlike terminals that profit through higher markup rates, second-tier distributors' profit margins are also shrinking.

**The Current Situation of Second-Tier Distributors**

First-tier distributors have guidance and help from manufacturers, so their transformation is relatively fast. Currently, the most prevalent practice is training for first-tier distributors. Those who failed to transform have already been eliminated.

Terminals have the demonstration effect of modern retail commerce; many have become community service providers. In recent years, terminals will be the fastest-transforming commercial institutions.

Only second-tier distributors are like orphans—without support, without help, without manufacturer backing, and without advocates in the marketing world. They are the forgotten corner.

Due to the lack of guidance and breakthroughs in business thinking, second-tier distributors engage in fierce price wars, compressing profit margins to the limit. "Products that sell well don't make money, and products that make money don't sell well" is the most prominent problem they face.

**The Hope for Second-Tier Distributors**

As early as 1998, Mr. Jin Huanmin, when discussing the key to competition in the instant noodle market, said: "Whoever can effectively control second-tier distributors will truly control the market." Unfortunately, most companies have not yet found methods to effectively control and guide second-tier distributors. Currently, second-tier distributors have moved down to townships, which is almost the limit of their descent. We cannot yet imagine whether they will continue to move down further.

From my understanding, many manufacturers are indeed seriously studying how to effectively guide and control second-tier distributors, and some in the marketing world have begun research in this area. Second-tier distributors should see a glimmer of hope from this.

**The Transformation of Second-Tier Distributors**

Do township second-tier distributors have value? I believe they will continue to have value for a considerable period. This needs to be discussed in the context of China's rural market.

China's rural market has several characteristics: First, it is dispersed. Rural areas are vast, with sparse population distribution (especially in mountainous areas), making it difficult for manufacturers or first-tier distributors to bypass second-tier distributors and deliver directly to rural terminals. Second, rural terminals are generally small in scale, with small delivery batches, making direct delivery by manufacturers or first-tier distributors uneconomical. Third, rural transportation is generally poor, making it very difficult for large delivery vehicles from manufacturers or first-tier distributors to reach rural terminals. The president of a well-known domestic instant noodle company once envisioned serving rural terminals directly, but practice in local markets proved that "it's not only impossible but also unaffordable." Based on the reality of the rural market, I believe township second-tier distributors will still have value for a considerable time.

Where is the way out for township second-tier distributors? I see two paths: one is to move upward and become regional first-tier distributors; the other is to move downward and control rural terminals.

"Second-tier distributors dream of becoming first-tier," and they have such a need. "Distributors who have never been first-tier are the easiest to control," and many manufacturers, when developing distributors, tend to upgrade outstanding second-tier distributors to first-tier. This provides both opportunity and possibility for second-tier distributors to move upward.

Many companies complain that it is now difficult to find first-tier distributors. One method is to find them among existing large first-tier accounts, but manufacturers find such first-tier distributors may be "disobedient." Another method is to find them among existing small first-tier accounts, but manufacturers quickly find such first-tier distributors may be "incompetent," otherwise they would have become large accounts long ago. Some manufacturers have proposed "developing promising second-tier distributors into first-tier" and "turning small accounts into large accounts while expanding the market." The problem with developing township second-tier distributors into first-tier is: how can a township second-tier distributor achieve coverage of the entire county market? Some companies propose: first break through in some townships, then achieve county-wide market coverage.

Only a very few can upgrade from township second-tier to first-tier, and upgrading implies a change in function. For distributors still performing second-tier functions, the only remaining way out is to control rural terminals, thereby gaining the attention of manufacturers or first-tier distributors and obtaining a more favorable distribution position (such as monopoly operation in the township market).

The operating rights of first-tier distributors are usually exclusive, and their monopoly in the regional market typically brings monopoly profits. Second-tier distributors usually do not have exclusive operating rights in the regional market, and excessive price competition may leave all second-tier distributors without profit margins. Only through monopoly operation in the regional market can they escape the dilemma of excessively small profit margins. The regional monopoly rights of second-tier distributors can only be obtained through effective control of rural terminals.

During my research in rural markets, I found that some forward-thinking second-tier distributors are no longer sitting merchants waiting for customers to come, but are actively delivering to rural terminals, building regional distribution networks through delivery, and thereby gaining a higher market position.

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