---
title: "Lost Profits, Disrupted Market: Can Distributors Successfully Transform into B2B Platforms?"
description: "After the Chinese New Year, many distributors are planning their 2019 business strategies. Reflecting on 2018 and planning for 2019 is a key task for every distributor. In recent years, due to sluggish business growth and the impact of FMCG B2B platforms, more distributors are pursuing transformation. However, a distributor in eastern Guangdong who transformed into a regional B2B platform found the experience painful: he lost profits and disrupted his market."
author: "袁来"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2019-02-15"
language: "en"
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---

# Lost Profits, Disrupted Market: Can Distributors Successfully Transform into B2B Platforms?

> After the Chinese New Year, many distributors are planning their 2019 business strategies. Reflecting on 2018 and planning for 2019 is a key task for every distributor. In recent years, due to sluggish business growth and the impact of FMCG B2B platforms, more distributors are pursuing transformation. However, a distributor in eastern Guangdong who transformed into a regional B2B platform found the experience painful: he lost profits and disrupted his market.

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After the Chinese New Year, many distributors are preparing their business plans for 2019. The saying "a year's plan starts with spring, and spring determines the whole year" emphasizes the importance of layout and planning. Reflecting on 2018 and planning for 2019 is a topic every distributor should consider.
In the past two years, influenced by sluggish business growth and FMCG B2B platforms, more and more distributors are embarking on transformation. Looking back at 2018, how did this year go?
Recently, a distributor from eastern Guangdong, Wang Hua (pseudonym), who transformed into a regional B2B platform with annual sales of 200 million yuan, chatted with me about whether distributors are suitable for transforming into B2B platforms.
At the beginning of 2018, impacted by Alibaba's Ling Shou Tong, JD's New Channel, and other regional B2B platforms, Wang Hua began his transformation. But after a year, he found it extremely painful: he lost profits and disrupted his market.
Wang Hua told New Distribution that when planning the transformation, he considered that he had agency rights for many first-tier brand products, so a localized platform would definitely have advantages. However, after the transformation, he discovered that to promote the platform and get small shop owners to accept the ordering app quickly, they had to attract them with price discounts. In three months, although they secured 800 outlets, when they calculated the accounts, problems emerged. After transforming into a B2B platform, through subsidies and discounts, the distribution business only earned 3-4 percentage points. In traditional distribution, there were over ten percentage points, and now these few points couldn't even support the team.
Transforming into a B2B platform, he ended up disrupting his own distribution system. For small shop owners, they don't care whether your ordering app is local or national. Even if you tell them that your platform can't offer subsidies and discounts like Ling Shou Tong or Zhang Gui Bao, they won't understand; they only care about whether the product prices are competitive enough, and they'll buy from whoever is cheaper.
When distributors build localized platforms, to get small shops to register and repurchase, they have to benchmark against national B2B platforms. Small shop owners are very shrewd; with one Ling Shou Tong, one Zhang Gui Bao, Yi Jiu Pi, and many other platforms, comparing them, profit decline is natural.
01 **Lost Profits, Disrupted Market**
"I'm not a middleman; I'm a legitimate distributor. To get small shop owners to place orders on my platform, I lowered my gross margin, which is equivalent to disrupting my own market. This seems quite different from my initial plan to transform into a regional B2B platform to expand the distribution business and achieve regional monopoly..." Wang Hua said to me with a wry smile.
This made me think: can distributors build regional B2B platforms locally, and what type of distributor is suitable for building their own B2B platform?
To resolve my doubts, I asked several distributors who had relatively successful transformations whether they had similar problems. The answer was yes; profits do decline during the transformation period. **But the key to why some distributors transformed relatively smoothly lies in the category structure of their distribution.**
For distributors holding a large number of leading brands, when transforming into a platform, a slight reduction in gross margin can win over terminal owners. But it's like "killing one thousand enemies at the cost of eight hundred of your own"—you get small shop owners happily ordering on the app, but in the end, you can't sustain yourself.
According to New Distribution's observations, distributors who transformed relatively successfully, in addition to having first-tier products, also held a large number of non-leading brand products, with average gross margins above 16%-17%. For transforming distributors, first-tier products are just "cannon fodder" to attract small shops to get used to the platform.
Li Bin, the operator of Hebei Dongjie Supply Chain Company, told New Distribution, "Most of the brands we represent are second- and third-tier brands, which Alibaba and JD don't have. The purpose is simple: to prevent price hedging by national platforms. In the 2019 plan, we specifically set KPI assessments for the operations department to strictly maintain a 15% gross margin, preventing the pursuit of scale at the expense of profit during the transformation. For some categories like snacks and general merchandise, gross margins can even reach over 30%. **Therefore, during the transformation and expansion, although we sacrifice some profit from first-tier products, we compensate for that loss by increasing the scale of distribution.**"
Qin Xian, CEO of Rongcheng Yigou, told New Distribution that whether distributors transform into B2B platforms or not, profit decline is an inevitable trend. As product distribution information becomes transparent, distributors will find it hard to survive with traditional methods. In the future, to gain a firm foothold, distributors must consider breakthroughs in both scale and cost: expand scale and reduce costs.
02 **What Type of Distributor Is Suitable for Building a Platform?**
> First, regional "leading" distributors with multiple brands, multiple SKUs, and comprehensive trading companies;
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> Second, distributors of snacks, condiments, daily care, home care, personal care, frozen foods, etc., with a large number of SKUs, and upstream brand owners have weaker control over distributors compared to beverages and alcohol. Most distributors have independent distribution capabilities and strong links with small shops;
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> Third, comprehensive large-scale wholesalers.
In summary, for distributors transforming into regional B2B platforms, first, in terms of distribution categories, besides regular high-frequency categories (such as water and beverages, dairy products), they must configure diversified categories spanning snacks, general merchandise, condiments, daily care, home care, etc. Regular high-frequency categories ensure small shop owners' daily attention; low-frequency categories, with relatively low brand concentration and larger gross margin space, ensure corporate revenue and profit.
In terms of distribution brands, having too many first-tier brands makes them vulnerable to the impact of national B2B platforms. Pay more attention to non-first-tier long-tail products to achieve product differentiation. Non-first-tier products are often not available on national B2B platforms, or the brands are different, so use brand differences to achieve high gross margins.
For example, a distributor with annual sales of 100 million yuan in a local area, where over 50% of revenue comes from the Mengniu brand, is not suitable for transforming into a B2B platform. The proportion of first-tier product revenue is too high, and after transformation, it's easy to be affected by price chaos from national B2B platforms. **Similarly, the key reason these distributors face profit decline or even losses after transformation is that they have too few non-first-tier products. Although they hold many first-tier products, this becomes a shackle for transforming into a regional B2B platform.**
Distributors transforming into regional B2B platforms should also focus on: **the configuration of frontline sales staff**. Because the core profit source is non-first-tier and long-tail products, this requires distributors to have independent distribution capabilities, and the key to independent distribution is frontline sales staff. Don't fantasize about giving up frontline sales and driving small shop owners to order through B2B plus subsidies. First-tier products can work, but non-first-tier products simply cannot be promoted this way.
03 **If You Can't Build a Platform, How to Use B2B?**
In a regional market, very few distributors can meet the conditions for transforming into a regional B2B platform—maybe less than 10%.
In a prefecture-level market, there are many distributors with agency rights for first-tier products and revenues in the tens of millions. How should they use B2B, or leverage B2B to improve their distribution business?
New Distribution suggests that distributors first treat B2B as a tool, like the inventory management software they used in the past. **When B2B is seen as a tool, not a source of business, distributors can think clearly about how to use B2B to improve their distribution business.**
**The essence of a tool is not empowerment, but it's not a source of business either. The business is still the same; it hasn't changed, only the operational methods have been adjusted.** With B2B tools, here's what to do specifically:
Step 1: Achieve Paperless Sales
What is paperless sales? A simple example: a beverage distributor, by cooperating with a third-party SaaS service provider, puts all product distribution work online. In the past, sales orders and sales rebates were recorded by sales staff in sales ledgers and then entered into financial software. Now, with B2B tools, sales orders and rebates are directly entered into the B2B system in one go, eliminating paper records and reducing secondary handling.
Step 2: Data-Driven Business Improvement
After completing the first step of paperless sales, all relevant sales data is online. Fully utilize the accumulated data for digital business analysis. Focus on the following key metrics:
> **1. Outlet Digital Metrics**
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> 1) Classification: by GMV / by gross margin contribution;
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> 2) Type: CVS / traditional grocery / BC-class supermarkets / KA stores / A-class restaurants / B-class restaurants / C-class restaurants;
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> 3) Tags: location (station/community/office building/), area, etc.;
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> 4) Activity: weekly/monthly/quarterly/yearly purchase frequency;
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> 5) Customer relationship: display/exclusive/regular.
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> **2. Product Digital Metrics**
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> 1) Sales volume:
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> 3) Turnover:
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> **3. Minimum Unit Metrics:** daily/weekly/monthly... single product * single store * sales volume * gross margin * net profit
**Step 3 Goal: Data Insights to Achieve Business Growth**
With the above data, start trying to guide operations based on data to achieve distribution business growth. **Core strategy: preserve existing volume + create incremental volume.**
> **1. Preserve existing volume:** First, set standard metrics for single-store sales to increase per-store sales; second, set standard metrics for single-store profit to increase per-store profit;
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> **2. Create incremental volume:** First, increase the number of outlets; second, increase the product mix. In terms of product mix, focus on introducing new product distribution, using data to screen potential stores/customer-relationship stores/opportunity stores/TPO50 stores, etc.
**Step 4 Goal: Drive the Transformation of the Overall Trading Company's Organization, Business, or Commercial Model Through Data**
After completing the above three steps, at the fourth step, distributors can basically consider the direction of transformation. **There are roughly three types of transformation paths for distributors:**
> **First, organizational innovation:** Upgrading and transforming the internal organization and management of distributors. Common examples include "Amoeba" and "platform + partner" organizational innovation.
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> **Second, business model innovation:** Distributors distribute products to small shops without changing the original distribution business structure, only changing the distribution method. For example, building their own B2B to meet small shops' "one-stop ordering"; using B2B to outsource or upgrade certain functions, focus on core functions, and improve distribution efficiency.
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> **Third, commercial model innovation:** Distributors completely change their past main business, no longer relying on purchase-sale price differences as income. For example, joining a B2B platform and earning income through commission or points; third-party warehousing and logistics, where income is no longer from product distribution but from providing warehousing and distribution services; chain franchising, earning store revenue, etc.


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