Is the distributor business profitable? Some may laugh at this question, thinking, "I've been in business for decades, of course I know if I'm making money; if not, why would I do it?" But that's not necessarily true. Perhaps from some perspectives, you aren't making money, or with the same investment, you're earning far less than you could.
During research for brand owners, we found that each distributor has a completely different method for judging profitability or calculating accounts. Different calculations yield different results: some calculate that they are profitable, others that they are not. The difference lies in how you calculate.
How do you determine if a distributor business is profitable? Today, we analyze this through the underlying logic of the distributor business to see if it's worth doing.
-01- Why Is It Hard for Distributors to Make Money?
In recent years, the distributor business has become increasingly difficult. The most obvious change is that more and more distributors are seeking transformation. Business is tough, profits are lower than before, and costs keep rising, leaving many feeling there's no clear path forward.
Undeniably, seven or eight years ago, distributors did make money, but now it's genuinely hard. Why has it become harder? There are both external market reasons and issues within the distributors' own development.
1. Channels have changed. Ten years ago, e-commerce had not yet risen. The path from manufacturer to consumer was: manufacturer → distributor → sub-distributor → secondary wholesaler → retail outlet → consumer. Information was underdeveloped, market price chaos was rare, and profits were sufficient to support each link.
Now, sub-distributors and secondary wholesalers are gradually disappearing, but e-commerce channels, B2B, community group buying, and other platforms are increasing. Prices are transparent, cross-regional dumping and price chaos are common, and products even bypass distributors to reach consumers directly. Profit margins have shrunk, channel competition has increased, and naturally, earnings have decreased.
2. The market has changed. The market is increasingly segmented, and market share is shrinking. Take drinking water as an example: not to mention how many brands exist, drinking water can be divided into mineral water, natural water, purified water, oxygenated water, mineralized water, and more. Just drinking water alone has this many subcategories.
The market is like a cake; it's only so big. As more players enter, each takes a slice, leaving less for everyone else. Additionally, market segmentation accelerates product iteration, with new products constantly emerging. Last year's old products can only be sold at low prices, yielding no profit.
3. Consumers have changed. The main consumers now are the post-90s and post-00s generations, whose consumption concepts differ greatly from previous generations. Original consumers valued practicality and low prices, while today's consumers pursue personality, novelty, and innovative experiences.
But consumers have changed, while distributors' operating methods and upstream manufacturers' product features haven't. Distributors aren't selling what consumers seek, so business naturally suffers.
4. Service requirements have changed. Services are now more refined. Previously, distributors acted as agents for manufacturers, simply distributing products to retail outlets and doing basic display and maintenance, earning the price difference without much effort.
But now, retail outlets have more demands, and such basic service is far from sufficient. You need to provide more, broader, and more professional services.
For example, teaching small shop owners how to create eye-catching displays, manage shop operational data, and use community operations to increase customer loyalty.
These services go beyond the scope of an agent, posing a huge challenge for distributors. If not done well, the value of distributors will only diminish until they are eventually replaced.
-02- How to Determine if a Distributor Is Profitable?
Let's look at a case: Changjiu Trading is a distributor for a beverage group, operating in a second-tier city for over a decade, with an annual contract task of over 100 million yuan. In 2019, Changjiu's shipment value was 140 million yuan, with a weighted gross margin of 18.2%, total expenses of 24 million yuan, and manufacturer rewards of 200,000 yuan.
Changjiu's investment situation: cash flow of 3.5 million yuan, average monthly inventory of 6 million yuan, accounts receivable of 13 million yuan, unreimbursed prepaid expenses of 2.5 million yuan, and long-term bank loans of 7.5 million yuan.
Let's calculate its net profit: 14000 x 18.2% - 2400 + 20 = 168 (in ten-thousands). A net profit of 1.68 million yuan a year—do you think it's profitable?
Some bosses might think earning over a million a year is quite profitable. Many distributors calculate profitability this way: earnings minus expenses. But is that enough? Obviously not.
Have you considered that the money you invest now could earn the same in other brands? Whether you're profitable should depend on whether the input-output ratio is appropriate, i.e., Return on Investment (ROI).
ROI = (Earnings - Expenses) / Investment. We can calculate Old Liu's ROI using the following formula.
Calculation: Earnings: Gross profit = 14000 x 18.2% + 20 = 2568 (ten-thousands); Expenses: 2400 (ten-thousands); Investment: Working capital = 350 + 600 + 1300 + 250 - 750 = 1750 (ten-thousands); ROI: (2568 - 2400) / 1750 = 9.6%.
Is this ROI high? Obviously not. The average ROI in FMCG is around 20%. Large brands typically have 12-15%, while small brands have 30-40%.
Perhaps averages don't tell the whole story. What should ROI be compared to? There are four main aspects:
1. Compare with similar industries and categories. ROI varies greatly across industries. For example, if you're in milk, compare with dairy products; if in beverages, compare with similar beverage brands.
2. Compare with similar regions. Different regions have different levels of market competition. The larger the city, the lower the ROI. ROI should be compared with regions of similar size.
3. Compare with similar channels. Channel differences bring different risks and costs. Generally, foodservice and special channels have higher risks and higher returns.
4. Compare with similar scales. Scale mainly includes two types:
First, brand scale. As a brand's influence grows, the larger your business, the greater your profit amount. But as profit increases, investment increases, operational risk increases, and ROI naturally decreases.
Second, the distributor's own scale. After a distributor grows bigger and stronger, costs for personnel, warehousing, logistics, and other capital investments increase, and ROI decreases with increased investment. Generally, large distributors have lower ROI than small distributors.
Knowing how to compare, you must avoid common pitfalls. Two common mistakes distributors make:
Mistake 1: Only looking at ROI levels. Some distributors only look at ROI and won't do business if ROI is too low. By only doing high-ROI products, you might lose other business opportunities, such as those with payment terms or higher risk.
This will keep your business small, preventing growth, and the net profit you earn will be small, so you won't make much money.
Second, brands with low ROI are usually high-circulation, well-known ones. They have low profits and high capital requirements, so why do them?
These brands are key to building distribution networks and supporting scale. Without them, your business can't grow, or without these brands, small shops won't even look at you. They value you because you carry a well-known brand, which is why they do business with you.
Mistake 2: Ignoring input costs. In daily operations, many distributors only focus on how much product they sell each day and how much money they make, often ignoring the various costs associated with products, such as labor, warehousing, and transportation.
As market competition intensifies and new channels emerge, profit margins have been squeezed. For distributors, money is definitely getting harder to earn, and a single misstep could lead to losses. Additionally, upstream manufacturers are difficult to reimburse expenses for, often imposing various sales tasks, and it's considered good if all expenses are reimbursed by year-end.
Therefore, distributors must not ignore costs. They should compile data on the costs and outputs of different products, focusing on brands with high input-output ratios. For products with low input-output ratios and no growth potential, they can be abandoned.
-03- Summary
Returning to the initial question: Is the distributor business profitable? The answer is definitely yes, but it was easier to make money in the past; now it's harder.
The distributor business has indeed become more difficult. To make money, you must adapt to digital transformation, do data analysis well, and find a balance between profit amount and ROI. Use data to judge whether you're profitable, and use data to cure your own "diseases."