In the hands of distributors, all products can be profitable, as most people know, but it's not always the case; it depends on many situations! Therefore, building a good product portfolio is a key concern for every distributor. But with so many brands, how to position, select, combine, and execute? Let's first look at the characteristics of the three types of brands!
Distinct Characteristics of the Three Types of Brands
Based on the level of distribution gross margin, FMCG products can be broadly divided into three categories, which we may call first-tier, second-tier, and third-tier brands. First-tier brands include some world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove; they also include well-known domestic brands such as Wahaha, Yili, and Mengniu. Generally speaking, the return on investment for first-tier brands is not high, with the common "6+1" or "7+1" profit model, i.e., 6% to 7% distribution gross margin plus 1% annual rebate, with the highest distribution gross margin generally below 11%, and they usually implement a no-return policy. After deducting warehousing and distribution costs, personnel salaries, expenses, losses, and taxes, the net profit is minimal. However, first-tier brands have many advantages: they have strong brand support, products sell well, and the manufacturer provides a large terminal market maintenance team, so distributors can operate these brands with less hassle; Distributors can obtain shorter payment terms or even cash settlement from downstream distributors, resulting in rapid capital turnover and basically no operational risk; sales volume is large, with annual regional sales ranging from several million to hundreds of millions. First-tier brands are typically "must-sell" in the channel, allowing distributors to quickly build a sales network and obtain favorable terms in retail transactions. Second-tier brands usually refer to brands with high product quality, no large-scale brand operation, but with proactive and skilled channel promotion support. The return on investment for second-tier brands is relatively high, typically between 12% and 20%. The characteristics of second-tier brands include: generally lower brand awareness, some appearing as regional brands; no terminal market maintenance team or a small team, with terminal maintenance work undertaken by the distributor, and the distribution gross margin includes terminal maintenance costs of about 1% to 1.5% of sales; Distributing second-tier brands can also achieve high sales, with annual regional sales reaching several million or more; second-tier brand products have longer payment terms in modern channels, requiring significant capital, and distributors must bear the corresponding bank interest; market management is at a lower level and less standardized, placing higher demands on distributors. Third-tier brands have essentially no brand awareness. They typically target low-income groups or narrow markets, or use prices far below those of first- and second-tier brands of similar products to impact the market. The characteristics of third-tier brands include: low brand awareness, non-transparent pricing, and distribution gross margins reaching 30% to 40% or more; due to lower quality and lack of good marketing planning, sales are generally not large, with annual regional sales below several hundred thousand; they are prone to slow sales, with high returns and losses; distributors must bear the risk of market investment costs; product life cycles are short. Distributors operating third-tier brands face high risks, but due to distribution gross margins of 30% to 40% or more, it presents a picture of "infinite scenery at the perilous peak." Some distributors leverage their keen market observation to find products that meet local market demand among the vast number of third-tier brands, implementing "short, flat, and fast" operations, and can also reap substantial profits. Operating third-tier brands requires continuous elimination of products and introduction of new ones to address the short product life cycle.
The Best Product Operation Model for Distributors
Let's first analyze the returns of investing one million yuan of working capital separately in each of the three types of brands. Investing in first-tier brands: Assume a distribution gross margin of 7%. Taking a typical warehouse sales model as an example, distribution costs 2%, personnel salaries 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, and monthly interest 0.5%. Assume a payment period of 15 days, ignoring in-transit factors, with two turnovers per month. Monthly net profit is: (7%-2%-1.2%-0.3%-0.2%-1.4%-0.5%) × 1,000,000 × 2 = 28,000 yuan. Investing in second-tier brands: Assume a distribution gross margin of 15%. Distribution costs 2.5%, personnel salaries 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, and monthly interest 0.5%. Assume a payment period of 60 days (varies by region and outlet), ignoring in-transit factors, with one turnover every two months. Monthly net profit is: [(15%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 39,000 yuan. Investing in third-tier brands: Assume a distribution gross margin of 30%. Distribution costs 3%, personnel salaries 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, and market investment costs 6%. Assume a payment period of 75 days (varies by region and outlet), ignoring in-transit factors, with one turnover every two and a half months. Monthly net profit is: [(30%-3%-1.5%-0.6%-1.5%-2.2%-6%)/2.5 months - interest 0.5%] × 1,000,000 = 55,800 yuan. From the above analysis, we can see that investing solely in first-tier brands yields the least profit; investing solely in second-tier brands, despite longer payment terms, yields higher monthly profits; investing solely in third-tier brands yields the highest monthly profit. In fact, if a distribution company operates solely with third-tier brands, although profits are highest, sales are very unstable, and it is difficult to establish influence in the channel, with negotiations with retail outlets always in a disadvantageous position. Frequent "sudden death" of products can cause significant harm to the company's stable operations. Operating solely with second-tier brands, although profits and sales stability are relatively high, requires a large amount of capital. Operating solely with first-tier brands, although sales are not a concern and risks are low, profits are not high. Therefore, if a distribution company selects several brands from each of the three categories for combined operation, it can complement the advantages of the three types, reduce opportunity costs, and achieve optimal returns and operational stability.
Tasks in This Operational Combination
Tasks of first-tier brands: Bear the basic operating costs of the company and ensure normal survival; bundle with second- and third-tier brands in negotiations with retail outlets to improve trading conditions for second- and third-tier brands, such as shortening payment terms and reducing fixed monthly and annual deductions. Assist second- and third-tier brands in quickly covering the sales network; dilute distribution costs, salaries, and management expenses for second- and third-tier brands. They also contribute some net profit. Tasks of second-tier brands: After first-tier brands bear the basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, distribution companies allocate significant personnel, warehouses, vehicles, etc., to meet their operational needs, which become a heavy burden if the distribution rights are lost for some reason. At this point, second-tier brands can ensure the company's normal survival and enhance its ability to resist risks; they provide terminal market maintenance teams for third-tier brands. Tasks of third-tier brands: With first- and second-tier brands as backing, third-tier brands further increase profit margins, and only need to control losses to generate extremely high profits. Since third-tier brands have very small per-SKU sales, their sales weight should not be too large; otherwise, excessive SKUs can lead to management issues and reduce profitability. Generally speaking, for a well-developed distribution company, the optimal product operation model is to control the sales weight of first-, second-, and third-tier brands at 40%, 40%, and 20%, respectively. At this point, the return on investment for every one million yuan of capital can reach about three times that of investing solely in first-tier brands. Specifically, the optimal number of brands is 1-2 first-tier brands, 4-6 second-tier brands, and 5-8 third-tier brands. This article is from Sugar Tobacco Wine Weekly. -END-