Secondary Distributor Grows Too Big Zhu, a distributor for a food brand, initially chose Xiao, a secondary distributor with strong network coverage, to handle sales in three townships to quickly launch the market. Xiao lived up to 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 volume. Xiao's rapid rise was due to: first, his influence in the three townships, with three delivery vehicles covering the area; second, strong support from 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 mostly granted, 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 a larger territory. If Zhu complied, he would sell below factory cost. Since Xiao's purchase price was lower than other township secondary distributors, Xiao's goods began flooding into other townships. To protect their customer bases, other secondary distributors were forced to cut prices. Channel prices spiraled into chaos, and a market crisis loomed. Facing Xiao's pressure, Zhu was torn: stopping supply would cause a sharp sales decline in the three townships, and Xiao would likely switch to competing products, potentially leading to a costly regional battle with uncertain outcomes. Allowing Xiao to continue would ruin the entire market, with prices falling to unsustainable levels, likely killing the product.

Diagnosis: Root Causes of Cross-Region Dumping During product introduction, manufacturers and distributors often grant exclusive sales rights to a single secondary distributor per township or assign several townships to one, creating high profit margins and uncontested territories to motivate them. However, this approach, while quickly launching the market, often breeds problems: these secondary distributors become price-cutters and dumpers once the product matures. Price chaos is the primary culprit behind channel dumping. Traditional multi-tier channels often lead to price confusion, with each layer adding margins, and the profit space supporting multiple tiers often facilitates dumping. Larger profit margins create risks of price undercutting. Additionally, with mixed channel models and increasingly powerful retailers, prices keep dropping, transparency rises due to competitive price cuts, and secondary distributors in the middle struggle. It's an accepted fact that those who try to maintain price stability lose sales. In today's China, manufacturers have relatively mature management for distributors, but secondary distributor management is a headache. Secondary distributors are price killers because manufacturers focus on distributors (the closest tier). With many scattered secondary distributors, oversight is difficult. Effectively managing secondary distributors is challenging: manufacturers can require exclusive distribution from distributors but cannot control secondary distributors' exclusive 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 aggressively cut prices to attract customers and profit from lesser-known products. Many market dumping and price-cutting incidents originate from secondary distributors. For mature products, once channel prices spiral out of control, the product—or even the brand—can die.

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 dumped them to force Zhu and the manufacturer to capitulate. Xiao reduced purchases from Zhu and picked up a competing product, promoting it aggressively. The market deteriorated rapidly, and sales plummeted. Facing Zhu's anxiety, the supervisor instructed Zhu to stop supplying Xiao immediately. Before cutting supply, they inspected Xiao's warehouse and confirmed it was nearly empty. Xiao's intention was merely to pressure Zhu and the manufacturer; his dumping targeted townships outside his own. Xiao understood his business's dependence on Zhu's products: losing them would halt his deliveries and lose downstream customers. This is a common mindset among large secondary distributors, which manufacturers and distributors must leverage when breaking them down. After stopping supply, 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. Surprisingly, sales increased rather than decreased. Before breaking down Xiao, the distribution model was: Zhu supplied Xiao, who then supplied other secondary distributors in his townships. Zhu's price to Xiao was low, but Xiao earned a margin from other secondary distributors. Xiao's price to them was roughly the same as Zhu's price to other secondary distributors. So, when Zhu supplied Xiao's downstream secondary distributors at the same price as to others, plus promotional items, they had no reason to object. 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 from Zhu ensured all secondary distributors received goods. Zhu's number of secondary distributors increased, and their enthusiasm rose; even those selling competing products began selling Zhu's products. Naturally, Zhu's sales in these three townships grew. 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 him to supply other secondary distributors, so all were supplied by Zhu. Retailers were unaffected: Xiao and his secondary distributors had charged retailers similar prices, and the manufacturer's intensive distribution offered the same prices but better service. Because these products were highly popular, secondary distributors and retailers needed them to retain customers. By eliminating a distribution layer and improving service, competitors had no chance to enter these townships' channels, especially retail. This created a monopoly, making it clear that leaving these products would hurt their businesses. 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 needed these products to sell. His competing product performed terribly. When Xiao returned, Zhu set three principles:

  1. Reduce Xiao's territory from three townships to one.
  2. Do not supply Xiao's retail customers directly, but treat him equally in price and policy as other secondary distributors.
  3. If he engages in price-cutting or dumping again, supply will be permanently cut, and his retail customers will be served by other secondary distributors. By breaking down Xiao's territory, sales in those townships doubled. Xiao's supply price was aligned with others, 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, which emboldens them and leads to unchecked price-cutting. This erodes other secondary distributors' 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?

  1. Do not concede to their further demands.
  2. Since price-cutting already harms the price system, be firm: raise prices and stop supply.
  3. Quickly mobilize resources to supply and control their downstream customers—this is the primary task and a prerequisite for successful breakdown.
  4. If they wish to continue selling, reduce their territory and cancel preferential policies to strip their ability to undercut and diminish their influence.
  5. If they persist in price-cutting, decisively 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)