Preface: Recently, while attending a class at Dedao University, a friend asked me what a supply chain is. I replied, "It's the intermediate steps that transfer product A from the production plant to the retail store. Simply put, it's the movers." Perhaps he wasn't satisfied with that answer, or he had a deeper meaning. He continued, "You said 'movers,' meaning middlemen, right? By the way, everyone is talking about disintermediation now. Do middlemen in your industry still have a future?" "Well, how could they not have a future? Middlemen are not just middlemen who buy from one hand and sell to the other. The value of middlemen is not as simple as outsiders think." After the "struggles" of recent years, it has become a consensus across industries that traditional offline markets cannot be replaced by online e-commerce. On the consumer side, the "experiential" and "immediate" nature of offline retail is being fully proven and practiced. As the last mile of consumption, stores provide a place for consumers to experience and purchase products. If the retail end cannot be replaced, what about the distributor group? This group, which on the surface seems to just do the work of moving goods, can it be replaced? Where exactly does its value lie? -01- Where is the value of the "mover"? According to the latest 2018 financial report of Tingyi Holding, Tingyi has 28,415 distributors. These distributors are spread across the country. Divided by the 333 prefecture-level administrative regions, there are an average of 85 distributors per prefecture; divided by the 2,845 county-level administrative regions, there are an average of 9 distributors per county. Although the number of distributors in a region is unevenly distributed, depending on local population density, area, and economic level, overall, Tingyi distributes its products to various terminal small stores through a large number of local distributors. There are about 6.5 million traditional circulation small stores in China, plus catering stores (also beverage terminal outlets) and various special channels and chain stores, totaling about 17 million. With so many small stores, no brand can reach them all by itself; it must rely on social forces and division of labor. The above is the reality that requires brands to do this. At the bottom of the business system, any business activity has three elements: information flow, capital flow, and logistics. Let's break these down one by one in the context of the FMCG industry to see if these so-called "middlemen" can really be replaced. 1. Mover—the value of logistics The most direct value of middlemen as movers is logistics. In the classic book "Marketing," in the section "How Channel Members Add Value," it is stated that the existence of distributors (middlemen) actually reduces the number of logistics moves and improves the efficiency of the overall supply chain. As shown in the figure above, if the brand (producer) directly reaches consumers (or retail stores), the number of transactions and moves is 3*3=9 times, meaning 9 times the cost. With middlemen (i.e., distributors), the number of moves is only 6 times. From the frequency, it is obvious that middlemen reduce costs and improve efficiency. Of course, it's not just that; distributors also have a "reservoir" function at the logistics level. Mr. Zhao Bo, founder of New Distribution, once explained that most FMCG products have peak and off-peak seasons, especially food, beverages, and alcohol. On the demand side, there are peaks and valleys, which is not good for the production side. Because the production line capacity of upstream brand factories is relatively constant. Take Nongfu Spring as an example: one of its water production lines has a regular capacity of 72,000 boxes. Summer is the peak season, winter is the off-season. If demand-driven, in winter some production lines would basically be shut down, and in summer some would need to be added. Shutting down production lines means idle and wasted equipment, and behind idleness is cost. So the common practice in the industry is to configure the number of production lines based on comprehensive sales volume, then allocate it relatively evenly to each month. But then, in winter, so many goods are produced, and warehouse space is limited; it's impossible to stockpile so much in one's own warehouse. At this point, the best way is to make full use of the warehouses of local distributors, letting middlemen help brands solve warehouse problems. The transfer of inventory effectively balances constant production capacity with fluctuating demand. Therefore, the distributor's warehouse is actually a "reservoir," balancing the time and space of goods, achieving efficient matching between supply and demand. So we can see that the routine action of beverage companies every year is: from January to February, the sales department pushes goods to distributors; from February to March, distributors push goods to wholesalers; from March to April, they push goods to retail stores. 2. Mover—the value of capital flow As a production enterprise, besides operating costs, it also needs to pay various upstream suppliers. Once a production line runs, all costs come out. Therefore, the transfer of inventory also brings improved capital turnover efficiency. Payment before delivery, distributors pool funds, paying for the brand's upstream suppliers and their own operating costs. So, the mismatch in time between supply and demand can be adjusted through distributors. "When consumers are thirsty, you need to sell my goods; when they're not thirsty, don't I need to survive? I have to survive, and the only way is through middlemen adjusting. That's the optimal solution." Therefore, pure B2B platform companies cannot effectively solve the problem of capital advance behind the supply-demand mismatch. You might wonder, can the platform adjust payments? But you must know that FMCG is a trillion-yuan market. Even if a platform can connect to a million small stores, it cannot pay in advance and completely "swallow" the brand's trillion-yuan goods. Without the function of providing capital advances, brands naturally cannot hand over their goods entirely to B2B platforms. Therefore, we see that existing B2B platforms either are another form of distributor (platform service providers) providing financial support; or they use ultra-long payment terms and borrowing to adjust the capital turnover of different categories and enterprises within the platform, to improve capital efficiency. Not to mention whether this approach is feasible, from a business perspective, the platform's essence is still the role of a distributor. 3. Mover—the value of information flow Before talking about information flow, let me give a simple example to understand "information flow." There are two supermarkets: one is a traditional grocery store, the other is a 7-11 convenience store. Both stores place an unknown beverage in the most prominent position. Which store is more likely to sell this beverage? The answer is undoubtedly 7-11. Why? Because 7-11 is a well-known convenience store chain. For a well-known chain store, I believe this unknown beverage shouldn't be too bad. This is the value of information flow. Therefore, in essence, information flow solves the problem of "awareness and trust." Back to the intermediate link: where does this unknown beverage come from? From the distributor. The small store owner chooses to sell this new product rather than other new beverages. Profit is part of the reason, but the distributor and the salesperson under the distributor are key factors. Past frequent cooperation and service make the store trust the distributor and salesperson. This trust is not only in the quality of the product (non-well-known brand) but also in the subsequent sales and after-sales service. Behind the trust is a series of actions such as shelf display, material posters, promotional activities, all centered on sales and consumer experience. Therefore, for the distribution of a non-well-known product, distributors have huge value in solving the information flow of awareness and trust. For a non-well-known product to be distributed to stores before it becomes a well-known brand, it can only be done with the trust endorsement that distributors have accumulated at terminal stores. Of course, for well-known brands, different companies have different approaches. Brands like Tingyi and Coca-Cola take on the information flow function themselves, using direct operations with their frontline sales reps to do the market. Other brands like Yili and Arawana guide and empower distributors to take on the information flow function, even training distributor salespeople to do the market. But in recent years, an interesting phenomenon has emerged. Around 2014, Nongfu Spring began channel reform, converting its original direct sales reps into distributor-exclusive or co-owned sales reps, letting distributors do the market. It is understood that Snow Beer and Uni-President are also gradually trying to let distributors take on information flow functions in addition to logistics and capital flow. Why this shift? The reason is that the internet has brought rapid market changes, especially changes in consumption scenarios. In the past, retail stores were single and fixed; now they are becoming diversified. At the same time, consumer demand itself is becoming increasingly diverse. The past single rigid need for thirst-quenching has added a layer of emotional needs for recognition, respect, understanding, and liking. Multiple scenarios, multiple demands, and the consumption environment are becoming increasingly complex. In fact, the overall market changes are requiring brands to "return" the information flow to distributors, letting them tap into incremental growth based on local characteristics and integrate localized traffic for sales promotion. In the past, traffic scenarios were fixed, but now they are intertwined. The efficiency of distributors in integrating information will be far higher than that of brands. -02- The core value of middlemen lies in "efficiency" Besides production costs, a product also has logistics costs, distribution costs, display costs, brand costs, etc. For a bottle of beverage, the production cost is far lower than other costs. Yet in people's perception, only the production cost is recognized. In fact, brands can do all the above cost items themselves. But frankly, if they did it all themselves, the cost would be far higher than using local distributors. Therefore, the core value of middlemen is to improve efficiency at the same cost; and to reduce cost at the same efficiency. Of course, this "high efficiency" is being reconstructed again, which is also the key reason why distributors have been criticized and called out to disappear in the past two years. -03- What disappears is not the "middleman" role Acknowledging the value of middlemen does not mean they don't need to change. The reason for change is that with the application of external internet tools, middlemen can further integrate and re-divide logistics, capital flow, and information flow among themselves, further improving efficiency; internally, middlemen themselves cannot achieve an effective balance between efficiency and cost, leading to poor management, thin profits, and inability to sustain operations. As shown in the figure above, middlemen 1, 2, and 3 previously represented different brands in the snack category. Middleman 2, through integration—such as merging or acquiring middlemen 1 and 3, or obtaining agency rights from upstream brands—becomes a category middleman, further improving operational efficiency. Therefore, what disappears is not the "middleman" role, but the reduction in the number of middlemen, the increase in their size, and the improvement in efficiency. In addition, the reorganization and integration of the "three flows" is another form. As shown below, the number of middlemen increases, but overall efficiency still increases. Is anyone doing this? Yes. It is understood that Budweiser is piloting a program in a certain place, stripping logistics from 8 local distributors and handing it to a third party, while distributors focus on capital flow and information flow. -04- Middlemen will not disappear; they will become more important In the "three flows," logistics integration will gradually advance toward intensification. The middlemen handling logistics will become fewer and larger, and they will become more important to brands. In terms of information flow, as mentioned earlier, with changes in consumption scenarios and demand, retail terminals are becoming increasingly fragmented and complex. Brands are unlikely to take on the information flow work for retail terminals through direct operations. Instead, middlemen, with their grasp of local markets, can organize personnel for efficient communication to solve awareness and trust issues. Similarly, in this process, middlemen will only become more important to brands. Mr. Zhao Bo often says that middlemen will not disappear, but the rapid iteration of the market requires middlemen to clearly recognize what functions they undertake. The clearer the function, the stronger the professionalism and momentum, and the more important they are in the supply chain! Therefore, middlemen will not die; only the functions they undertake will change! Focus on FMCG distributor new distribution/brand new marketing cases If you want to communicate with the author, you can add WeChat by long-pressing. When adding, please indicate your company, position, and name. If your tip is adopted, you will be paid 400-2000 yuan.