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Case: The Rise of a Large Secondary Distributor
Zhu, a new distributor for a food brand, initially chose Xiao, a secondary distributor with strong network capabilities, to handle sales in three townships to quickly launch the market. Xiao exceeded expectations, rapidly increasing market share and dominating the area, making it nearly impossible for other brands to sell. Xiao's sales accounted for one-fifth of Zhu's total.
Xiao's rapid rise was due to: first, his influence in the three townships, with three transport vehicles covering the area; second, strong support from both the manufacturer and Zhu.
To boost Xiao's volume, Zhu provided Xiao with promotional funds and items several times more than other secondary distributors. However, as Xiao grew, problems emerged and intensified.
As the market expanded, Xiao demanded favorable policies, which Zhu tried to satisfy, eventually supplying Xiao at nearly factory prices. Zhu hoped Xiao would stabilize sales while Zhu profited from other markets.
But the situation worsened: Xiao began demanding even lower prices and larger territories. If Zhu agreed, he would sell to Xiao below factory cost. Moreover, because Xiao's purchase price was lower than other township secondary distributors, Xiao's goods began flowing into other townships. To retain customers, other secondary distributors had to cut prices. Channel prices fell into chaos, and a market crisis loomed.
Facing Xiao's pressure, Zhu was in a dilemma: if he stopped supplying Xiao, sales in the three townships would plummet, and Xiao would likely promote competing products, potentially leading to a costly market war with uncertain outcomes. If he allowed Xiao to continue, the entire market would soon collapse, with prices continuing to fall, ultimately killing the product.
Diagnosis: Root Cause of Channel Conflict
During the product introduction phase, manufacturers and distributors often grant exclusive rights to a secondary distributor in a township or assign several townships to one secondary distributor. This creates high profit margins and uncontested territories, incentivizing aggressive promotion. However, this approach can backfire as these secondary distributors become price-cutters when the product reaches maturity.
Price chaos is the primary cause of channel conflict. Traditional multi-tier channels often lead to price confusion, with each layer adding margins, providing opportunities for cross-region dumping. Large profit margins create risks of price undercutting. Additionally, with mixed channel structures and increasingly powerful retailers, prices are driven down, and transparency increases due to competitive price cuts. Secondary distributors in the middle find it harder to maintain price discipline, and those who try lose sales—an undeniable fact.
In today's China, manufacturers have relatively mature management methods for distributors, but managing secondary distributors is a headache. Secondary distributors are price killers because manufacturers focus on distributors (the closest tier). With numerous and scattered secondary distributors, supervision is difficult.
Effectively managing secondary distributors is challenging: manufacturers can require exclusive distribution from distributors but cannot control secondary distributors' sales; they can dictate distributor prices but not secondary distributor prices.
Secondary distributors use branded products to build customer relationships, not to profit from them, so they compete by cutting prices to attract customers, profiting from lesser-known products.
Many market price conflicts and dumping activities originate from secondary distributors. For mature products, once channel prices spiral out of control, it can lead to product death or even brand destruction.
Prescription: The Battle to Break Down Secondary Distributors
Given this situation, the manufacturer's sales supervisor advised Zhu not to concede to Xiao's demands but to raise prices. Zhu hesitantly agreed.
Seeing his demands unmet, Xiao sourced goods from other markets and undercut prices, trying to force Zhu and the manufacturer to capitulate. Xiao reduced purchases from Zhu and took on a competing product, promoting it aggressively. The market deteriorated rapidly, and sales plummeted.
Facing an anxious Zhu, the supervisor advised a firm halt to supplies to Xiao. Before stopping, they inspected Xiao's warehouse and confirmed it was nearly empty, then cut off supply.
Xiao's intention was merely to pressure Zhu and the manufacturer; his dumping targeted townships outside his own. Xiao understood his dependence on Zhu's products: without them, he couldn't deliver many goods and would lose downstream customers. This is a common mindset among large secondary distributors, which manufacturers and distributors must exploit when breaking them down.
After stopping supply to Xiao, the manufacturer and Zhu concentrated manpower and transport to deliver directly to secondary distributors and retailers in Xiao's three townships at the same prices and policies as elsewhere. Sales rose instead of falling.
Before breaking down Xiao, the distribution model was: Zhu supplied Xiao, who then supplied other secondary distributors in his townships. Zhu gave Xiao lower prices, but Xiao earned a margin from delivering to others. Xiao's prices to other secondary distributors were roughly the same as Zhu's prices to them. So, when Zhu delivered to Xiao's downstream secondary distributors at the same prices as to others, plus promotional items, it naturally avoided resentment.
More importantly, these products were so popular that secondary distributors needed them to attract customers. Previously, they had to rely on Xiao and sometimes couldn't get stock. Direct delivery by Zhu ensured all secondary distributors had access.
Zhu's number of secondary distributors increased, and their enthusiasm rose; even those selling competing products began selling Zhu's products. It was natural that Zhu's sales in these three townships increased.
The manufacturer gradually took control of Xiao's network, and Zhu's profits recovered. The price increase applied only to Xiao, making it unprofitable for Xiao to supply other secondary distributors, so all were supplied by Zhu. The price increase had no impact on retailers, as Xiao and his secondary distributors had charged retailers similar prices. During the breakup, the manufacturer and Zhu conducted a blanket distribution to the three townships, offering retailers the same prices as before. Retailers were even happier with better service.
Because these products were highly popular in the three townships, secondary distributors and retailers needed them to retain customers. With one distribution layer removed and better service, competitors had no chance to enter these townships' channels, especially retail. This created a monopoly, making it essential for secondary distributors and retailers to carry these products.
Within two weeks, Xiao came back voluntarily, as his business had declined sharply. Although the manufacturer and distributor had relied on him, his business also depended heavily on their products; many of his goods sold only because of the brand. His competing product performed poorly.
Facing Xiao's return, Zhu set three principles:
- Reduce Xiao's sales territory from three townships to one.
- Do not supply Xiao's retail customers directly, but treat him equally in price and policy as other secondary distributors.
- If Xiao engages in price undercutting or cross-region dumping again, supply will be permanently cut, and his retail customers will be served by other secondary distributors.
By breaking down Xiao's territory, the manufacturer's product sales in those townships doubled. Additionally, Xiao's supply price was aligned with other secondary distributors, eliminating his ability to undercut, and channel prices stabilized.
Insights: Five Practical Strategies for Breaking Down Large Secondary Distributors
Many marketers and distributors, fearing sales impact, tend to appease large secondary distributors like Xiao, leading to more reckless behavior and ignoring price undercutting. This causes other secondary distributors to lose confidence, worsens price chaos, and can quickly kill a product or collapse the market system.
So, how should marketers and distributors handle large secondary distributors with price-cutting tendencies?
- Do not concede to their further demands.
- Since price undercutting already harms the price system, be firm: raise prices and stop supply.
- Quickly mobilize resources to supply and control their downstream customers—this is the primary task and a prerequisite for successful breakup.
- If they wish to continue selling, reduce their sales territory and cancel preferential policies to eliminate their ability to undercut and reduce their influence.
- If they persist in undercutting, firmly cut off supply and inform other markets not to supply them. But ensure their inventory is cleared before stopping supply to prevent market disruption.
(Expert: Mao Xiaomin)
Reference Excerpts:
□ Quotes from Dong Mingzhu "One wrong move and you lose everything. My game with distributors is thrilling. However, we all seek common rules, hoping for a 'positive-sum game'—not you eating me, nor me eating you. It's a chess game that never ends."
□ Chess Across the World "So-called 'game' is simply 'playing chess.' You move, I move; you want to capture me, I want to capture you. But unlike pure games, economic games are not about who eats whom, but about cooperating to achieve mutual growth."
"In all economic activities, every enterprise has its own interests, seeking to maximize self-interest. The problem is that resources and market share are limited; if you get more, I get less, creating conflicts. Even with common interests, there's the issue of fair distribution, requiring strategic play within the rules."
"Some ignore the rules and resort to deception, so you must guard against it—'As the saying goes, the devil is always a step ahead.' As players, it's best if both follow the rules, but if one doesn't, don't fear. You need a trump card to counter, which is competition. The more you compete, the more robust your steps and defenses become. Thus, game theory suggests that 'institutions' are built through repeated games."
"We engage in economic activities daily, or 'play chess' daily. In economic activities, 'policies from above, countermeasures from below' or 'violations below, penalties above' are normal 'game' phenomena. Only then does the game become interesting and alive. As long as economic activities continue and people use their wisdom, it's an endless game. No rules, institutions, or chess manuals are perfect; both sides must constantly find loopholes and seize opportunities."
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