I Make 3 Million Yuan a Year as a Distributor in a County Town

"In the long run, relying on distributors to develop our sales network is the right path. The so-called decentralization, this internet thinking, is poison, a lack of understanding of sales." Tang Binsen reflected at Genki Forest's distributor conference at the end of 2022. In China, distributors are a huge group. Beverage giants like Coca-Cola and Nongfu Spring have mature distribution channel management systems. As of May 2020, Nongfu Spring had 4,454 distributors, covering more than 2.43 million terminal retail outlets nationwide. Despite the increasing number of emerging channels and the difficulty for traditional distributors to make money, there are still a group of offline distributors quietly making a fortune. He Li, a beverage distributor in Shangqiu city and Yucheng County, Henan, told the author that he can achieve annual revenue of 60 million yuan in these two markets, with a gross margin of 10% and a net profit margin of 5%, meaning a net profit of 3 million yuan a year. What kind of business is distribution? "During the dividend period, beverage distributors could achieve a gross margin of 60%," said Li Bin, a fashion beverage distributor in Wuhan. That batch of distributors basically enjoyed the dividend and completed their initial capital accumulation. Of course, that was before the rise of e-commerce. Now, in the traditional distribution industry, he believes there is no longer huge profits; it is more like a transit station business—distributors connect upstream with brand manufacturers and downstream with terminal outlets. Wang Wei, a beverage distributor from a county under Baoding, Hebei, told reporters that the core of making money for distributors now is mainly through volume—small profits but quick turnover. He Li believes that this industry is hard work—beverage distributors are like loaders, transporting goods from the factory to their own warehouse, then loading them onto trucks and delivering to stores everywhere. In interviews, these distributors all share a consensus: the "prosperous" era of distributors has clearly passed. "Now it's about comprehensive strength, competing to see who can hold out longer," Li Bin said.

Thinner and Thinner Profits

In Wang Wei's view, "Currently, in FMCG, there are no (distributors) with too high profits." He revealed that even for beverage categories, which have relatively high profits in FMCG, most now can only achieve a gross margin of 10% to 15%. After deducting labor, vehicles, warehousing, and other expenses, the net profit is around 4% to 5% for good ones, and only 1% to 2% for poor ones. If converted into numbers, it is more intuitive. For example, a beverage distributor in a county town can sell 20 million yuan a year. Before the rise of e-commerce, his annual gross profit could reach 12 million yuan, but now it is only 2 million yuan. The entire profit space has shrunk significantly. It is increasingly difficult for distributors to make money. However, for veterans in the distribution industry who hold channels, it is indeed a stable business that is hard to lose money on. In Li Bin's view, it is difficult for distributors to go out of business due to "losses." "As long as the channel network is built a little better, you won't lose money." He has been in the distribution industry for over 30 years, working in food and beverages, beauty products, and other major FMCG fields. He currently does fashion beverage products in Wuhan, Hubei. He has also witnessed the development of the distribution industry. From huge profits to thin profits, the domestic distribution industry has roughly gone through three stages: Before e-commerce, distributors had huge profits, which was the first dividend era for distributors. Li Bin said that at that time, as long as you were a distributor, your gross margin could reach 60%, "a stage where distributors quickly completed their initial capital accumulation." After e-commerce developed, prices gradually became transparent, and many offline shopping malls and hypermarkets appeared in China. In this era, distributors with financial strength and manpower advantages could also develop with the hypermarket channels, and these people enjoyed the second wave of dividends. The third wave of dividends came after the penetration rate of e-commerce in the domestic market significantly increased. Distributors began to go to various closed channels or special channels such as universities to find their own niches. Currently, Li Bin only retains special channels such as schools and enterprises and institutions. Now, the industry dividends have long been exhausted. In Li Bin's view, the distribution industry has entered an era of comprehensive strength competition.

Reasons for Going Out of Business

In the past, if you had a store, capital, and a stable supply of goods, you could be a distributor. But now, in addition to these, it increasingly depends on comprehensive strength. A beverage distributor from Handan, Hebei, told reporters that now, to be a distributor, in addition to capital and stores, you also need to have ideas, vision, foresight, and the ability to select products. First is financial strength. As a distributor, you pay the upstream manufacturer first, then goods are shipped. For downstream large chain supermarkets, there may be situations where goods are delivered first and payment is made later. This back-and-forth creates an account period. Because of the account period, being a distributor requires a certain amount of financial strength—often you need to advance money out of your own pocket. For the amount of capital, there is a calculation formula in the industry: expected annual turnover divided by 12 months, multiplied by 2.5, is the basic amount of capital needed for this business. If the capital is insufficient, accumulated inventory and the payment cycle of large supermarkets will cause cost pressure for distributors. Including turnover efficiency, it also affects business profits. FMCG emphasizes turnover rate; fast turnover means higher capital efficiency; slow turnover means invisibly increasing costs. These are all fatal issues for distributors. Li Bin said that in the past two years, many distributors who went bankrupt did so because of insufficient financial strength, coupled with wrong decisions. Second is the outlet channel. In Li Bin's view, as long as a distributor builds the channel network a little better, they won't lose money. Currently, distributors in the industry usually have been in the industry for more than ten years, and most have already established long-term cooperative outlet channels. "Unless the distributor makes wrong decisions, especially mismanages people, and every time a team member leaves, they take a piece of the distributor's network with them, which is very troublesome. " Li Bin said. Third is product selection ability. A strong distributor will first care about the brand manufacturer's regional layout, and then whether the manufacturer's products can sell well in their own channels. He Li's rapid development in recent years is due to the development dividend of the brands he works with. His two markets in Henan have grown from an annual volume of several million yuan when he started to the current annual revenue of 30 million yuan. According to Euromonitor International data, from 1997 to 2022, the compound annual growth rate of the domestic soft drink market reached 10.83%, maintaining high growth. In 2022, the scale of China's soft drink industry reached 583.159 billion yuan. But the industry has also seen differentiation, from sugary to sugar-free, from carbonated to healthy, with mixed results for beverage companies. In 2008, He Li entered this industry. In the early years, he also worked with several well-known FMCG brands, but later stopped. He told reporters that some brand manufacturers have unclear market planning and imprecise market control, so distributors cannot make money. In He Li's view, distributors and brand manufacturers are mutually successful. If you develop rapidly, I can make money along with you. In addition to deeply binding with one brand, some distributors focus on specific categories to ensure business stability. For example, in county markets, they only do essential products like water, milk, and instant noodles, or they mix products with different profit levels—some high-profit products, some with decent profits, and some bestsellers with thin margins that bring in customers.

Young People Can't Take the Hardship

Although he has been in this industry for over 30 years, Li Bin believes the future of the distribution industry is bleak because fewer and fewer young people are willing to do this job. "Young people are unwilling to endure the hardship of this industry," Li Bin lamented. Distributors who have worked for decades and are near retirement age also find that their next generation is unwilling to take over. "They simply don't want to participate in such hard work," Li Bin said. In his view, this industry not only lacks new entrants, but old players are also being eliminated. In the past two years, many distributors have quit. Li Bin said, "Those who quit are the majority; those who continue are holding on with their last strength." Some distributors quit because they are getting older and their physical strength and energy are declining. Li Bin told reporters that there are still many distributors who drive 14 hours a day to deliver goods to various places. When he was young, he had abundant energy and could work every day, earning money every day. But at 60, he felt it was unnecessary to work so hard, and his physical strength couldn't keep up. It can be said that current distributors are earning hard-earned money. Some distributors who need to do delivery themselves, during the peak sales season, have to drive at least 10 hours a day to deliver goods. Handling hundreds of cases of water a day, moving goods, reconciling accounts, and issuing invoices are tests of physical strength and energy. At the same time, the requirements for team members are getting higher and higher. This industry requires employees to be able to move goods, drive, do sales, make spreadsheets, understand verification, take photos, operate computers, calculate profits with customers overall, and understand accounting. "But in reality, employees with these skills have gone out to become distributors themselves. " Li Bin said that without high profits, it is difficult to retain people. At the same time, the labor cost for ordinary personnel is also getting more expensive. The beverage distributor from Handan, Hebei, mentioned above told reporters that workers used to cost 50 yuan a day, but now it is 150 to 200 yuan a day. To reduce costs and achieve asset-light operations, Li Bin is also trying to reduce the number of team members. Currently, Li Bin's team has 13 people, mainly responsible for customer liaison and finance, while other delivery and logistics are outsourced. Even so, with the development of the internet and the rise of new channels, although the theory of removing middlemen and distributors is often discussed in recent years, it is actually difficult to eliminate distributors. Especially offline, distributors play many roles such as middlemen, delivery providers, and service providers, occupying an important place in traditional channels. As for the problem of not being able to afford people, Li Bin thinks robots might be a solution. The future distribution industry may be replaced by robots. "Large-scale robots entering this field can handle driving, delivery, moving, accounting, communicating with customers, and introducing products. This may be the future trend. " Li Bin said. Note: He Li, Li Bin, and Wang Wei in the article are pseudonyms. PS: From March 14-16, 2024, the 9th China FMCG Innovation Conference, the 2nd China FMCG Hard Discount Conference, and the 2nd China FMCG Distributor Conference will be grandly held in Chengdu! This conference will focus on the theme 「Supply Chain Revolution」. Over 3 days, with 1 main forum, more than ten sub-forums and closed-door exchange meetings, we will meet with thousands of FMCG brand owners, distributors, retail transformers, and industry service providers from across the country in Chengdu to discuss the challenges and opportunities, changes and ways out in the era of supply chain revolution.** In this era of supply chain revolution, a new business era will be born. We hope every participant will still have a place in this wave. We believe this will be a worthwhile meeting! 🔺Scan the code for ticket consultation🔺