Private Enterprise Internal Management Research/Pan Wenfu

The distribution industry has a characteristic: those in it often tire of their trade, feeling that their own industry is the most arduous, stressful, and costly, ultimately earning little, while envying bosses who make money easily.

When distributors grow weary of distribution, they naturally entertain ideas such as switching industries or business types. Of course, more often, they consider expanding upstream or downstream based on their current distribution business. Upstream expansion means entering production, while downstream expansion means directly opening retail stores.

Here, let's discuss distributors opening their own retail stores. Why do they want to open retail stores (even planning to franchise)? Often, it's due to the following reasons:

  1. They believe retail business is easier, as suppliers must cater to retail stores; the more stores, the greater the bargaining power. Even as a large distributor, in the eyes of manufacturers, they are merely a replaceable sales tool. In other words, they've had enough of being the second party and want to experience being the first party.
  2. Suppliers deliver goods to terminals on credit settlement, while retail stores receive cash daily from sales. This inflow and outflow results in substantial cash flow. Eventually, they might even open stores without using their own money, leveraging suppliers' funds.
  3. They have a wide range of products, and relationships with other distributor companies are good, so product sourcing shouldn't be an issue. Especially, their own distributed products, which are just inventory in the warehouse, can be displayed on their own retail shelves, offering daily opportunities for monetization.
  4. Opening retail stores allows them to better understand the terminal market, grasp the characteristics of retail stores, and better connect with and serve the vast number of retail stores. After all, only by running their own retail store can they effectively empathize with the practical problems retail stores face.
  5. Large amounts of returns, damaged goods, and near-expiry items used to be piled up in warehouses, sold cheaply, or even discarded. Now, with their own retail stores, they can directly put them on shelves for sale.
  6. The company also needs diversified investment; don't put all eggs in one basket. Since doing business in a familiar field is better, opening a retail store is within their familiar scope and a good diversification investment direction.
  7. It serves as a channel to absorb surplus personnel, especially veteran employees who lack ambition and can't withstand harsh weather. They can't be easily fired, and placing them in business roles is unsuitable, but in retail stores, the work is relatively simpler.
  8. When downstream customers face settlement difficulties, they can offset debts with goods, which can be directly sold in their own retail stores to realize cash.

With all these factors combined, they naturally feel confident and think there shouldn't be any problems. However, ideals are plump, but reality is skinny.

Distributors opening their own retail stores rarely succeed; most close or transfer them after a period. What are the reasons? The author analyzes the following possible causes:

  1. Different Professionalism Retail and wholesale are not the same; you can't simply transplant wholesale experience to retail. In terms of technical complexity, retail business of the same amount is more than seven times more complex than wholesale. It involves trade area research, store positioning, customer traffic generation, event design, market research, product structure design, in-store traffic flow design, category planning, on-site safety, membership management systems, loss prevention systems, etc. Can distributor bosses really handle all these?

  2. Reserve of Professional Talent To open a retail store, directly transferring existing employees can only fill positions like sales clerks. For roles requiring certain professionalism, such as store manager, buyer, or other specialized positions, current employees may not be competent. Without early human resource reserves, they'd need to recruit externally. Whether they can hire all needed staff in the short term is a question. Even if they do, without a complete store operation system and professional managers, designing job positions, arranging them, and ensuring coordination between positions becomes another headache.

  3. Cost Control In distribution, it's easy to have a margin of 10-20 points, but retail doesn't have such high profits because fixed costs and losses are significant. Achieving an average gross margin of 5 points is considered good. Without good cost control, if you're a bit loose, that margin disappears. Of course, hoping to compensate through suppliers' credit periods and fees requires reaching a certain sales volume first.

  4. Different Nature of Interaction Wholesale deals with acquaintances; the secondary wholesalers and retailers below are familiar, and if discussions don't go well today, they can be revisited next time. But retail deals with strangers daily; if relationships aren't handled well, they might not come back tomorrow.

  5. How Long to Endure When distributors receive new products, they can immediately distribute them to downstream retail stores and get them on shelves the next day. But in retail, you can't just pull people off the street into your store. Even with promotions and advertising to attract customers, it takes time. You have to endure quiet days, possibly even days with zero sales.

In wholesale, every salesperson generates sales daily, but in retail, sales clerks may not generate sales every day, and you can't blame them. If customers don't come in, what can they do?

  1. Service Awareness Wholesale business is relatively rough; having brand, price, and commercial policies is enough. Poor service is acceptable; when goods are in short supply, downstream customers come with cash to pick up goods. Therefore, distributor companies often have weak service awareness. But in retail, it's mainly service that wins repeat customers. Whether it's service awareness, habits, or specific measures, distributor companies are lacking in this area.

Of course, it's not entirely impossible. With early planning, introducing professional technical teams, and independently designing operating systems, retail stores can be successful. Alternatively, taking a stake in existing retail stores is a simpler and safer entry method.

Having started as a private business owner and managed a family distributor company for years, the author has also served concurrently as a business manager and trainer in several production enterprises. Research focuses on internal management of small and medium-sized private enterprises, with main topics including personnel management, cost control, management backend setup, and transitioning military veterans into private enterprises. Continuously breaking down over 400 topics related to internal management of private enterprises, and maintaining material collection and solution updates.

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