---
title: "Practical Analysis of How Distributors Make Money by Handling First-, Second-, and Third-Tier Brands"
description: "A distributor's profitability is directly linked to its product portfolio. FMCG products can be broadly divided into three categories: first-tier, second-tier, and third-tier brands. First-tier brands typically offer low returns (6-7% margin plus 1% rebate), while second-tier brands yield 12-20% margins, and third-tier brands can yield over 30-40% but carry high risks. The optimal product mix is 40% first-tier, 40% second-tier, and 20% third-tier in sales weight, which can triple the return on investment compared to handling only first-tier brands."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2015-06-04"
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# Practical Analysis of How Distributors Make Money by Handling First-, Second-, and Third-Tier Brands

> A distributor's profitability is directly linked to its product portfolio. FMCG products can be broadly divided into three categories: first-tier, second-tier, and third-tier brands. First-tier brands typically offer low returns (6-7% margin plus 1% rebate), while second-tier brands yield 12-20% margins, and third-tier brands can yield over 30-40% but carry high risks. The optimal product mix is 40% first-tier, 40% second-tier, and 20% third-tier in sales weight, which can triple the return on investment compared to handling only first-tier brands.

A distributor's ability to make money is directly related to its product portfolio. Fast-moving consumer goods can be broadly divided into three categories, which we may call first-tier, second-tier, and third-tier brands.

**First-tier brands**
These include world-class international brands such as Coca-Cola, Wyeth, Unilever, Nestlé, and Dove, as well as well-known domestic brands like Wahaha, Yili, and Mengniu. Generally, first-tier brands offer a low return on investment, commonly following a "6+1" or "7+1" profit model, i.e., 6%-7% distribution margin plus 1% annual rebate. The highest distribution margin is generally below 11%, and they typically have a no-return policy. After deducting warehousing and delivery costs, staff salaries, expenses, losses, and taxes, net profit is minimal.

However, first-tier brands have multiple advantages: they have strong brand support, products sell well, and the manufacturer provides a large terminal market maintenance team, making it easier for distributors to operate. Distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and minimal operational risk. Sales volume is large, with annual regional turnover ranging from several million to hundreds of millions. First-tier brands are often "must-stock" items in channels, allowing distributors to quickly build sales networks and secure favorable terms with retail outlets.

**Second-tier brands**
These typically refer to brands with high product quality but without large-scale brand building, yet they offer proactive and skilled channel promotion support. The return on investment for second-tier brands is relatively high, usually between 12% and 20%. Characteristics include: generally lower brand awareness, sometimes appearing as regional brands; no or few terminal market maintenance staff, so terminal maintenance is the distributor's responsibility, with distribution margins including about 1%-1.5% of turnover for terminal maintenance costs.

Distributing second-tier brands can also generate high turnover, with annual regional sales reaching several million or more. However, payment terms in modern trade channels are longer, tying up significant capital, and distributors must bear the corresponding bank interest. Market management levels are lower and less standardized, placing higher demands on distributors.

**Third-tier brands**
These have virtually no brand awareness. They typically target low-income groups or niche markets, or use prices far below first- and second-tier brands to impact the market. Characteristics include: low brand awareness, opaque pricing, and distribution margins of 30%-40% or more. Due to lower quality and lack of good marketing planning, turnover is generally small, with annual regional sales below several hundred thousand. They are prone to slow sales, high returns, and losses. Distributors must bear the risk of market investment costs, and product life cycles are short.

Distributors face high risks with third-tier brands, but the high margins of 30%-40% or more present a "limitless scenery on the precipice." Some distributors leverage their keen market observation to find products among the vast array of third-tier brands that meet local market demand, employing a "short, fast, and direct" approach to reap substantial profits. Operating third-tier brands requires continuous elimination and introduction of products to address short life cycles.

**The optimal product operation model for distributors**
Let's analyze the returns from investing one million yuan of working capital separately in each of the three brand categories.

**Investing in first-tier brands**
Assume a distribution margin of 7%. Using a typical warehouse sales model: delivery cost 2%, staff salaries 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment terms of 15 days, with no transit time, allowing two turnovers per month. Monthly net profit: (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 margin of 20%. Delivery cost 2.5%, staff salaries 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment terms of 60 days (varying by region and outlet), with no transit time, allowing one turnover every two months. Monthly net profit: [(20%-2.5%-1.2%-0.4%-0.3%-1.8%)/2 months - interest 0.5%] × 1,000,000 = 64,000 yuan.

**Investing in third-tier brands**
Assume a distribution margin of 40%. Delivery cost 3%, staff salaries 1.5%, management expenses 0.6%, losses 1.5%, taxes 2.2%, monthly interest 0.5%, market investment 6%. Assume payment terms of 75 days (varying by region and outlet), with no transit time, allowing one turnover every two and a half months. Monthly net profit: [(40%-3%-1.5%-0.6%-1.5%-2.2%-6%)/2.5 months - interest 0.5%] × 1,000,000 = 95,800 yuan.

From the above analysis, we find that investing solely in first-tier brands yields the least profit; investing solely in second-tier brands, despite longer payment terms, yields higher monthly profit; investing solely in third-tier brands yields the highest monthly profit.

In reality, 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, leaving the company in a weak position in negotiations with retail outlets. Frequent "sudden death" of products can severely harm stable operations. Operating solely with second-tier brands offers higher profit and sales stability but requires significant capital. Operating solely with first-tier brands ensures sales and low risk but yields low profits.

Therefore, if a distribution company selects several brands from each of the three categories and operates them in combination, it can leverage the strengths of each to complement the others, reduce opportunity costs, and achieve optimal profitability and operational stability. In this combination:

First-tier brands' tasks: Cover basic operating costs and ensure the company's survival; bundle with second- and third-tier brands in negotiations with retail outlets to improve terms for the latter, such as shortening payment periods and reducing fixed monthly and annual deductions; assist second- and third-tier brands in rapidly covering the sales network; dilute delivery, salary, and management costs for second- and third-tier brands; and contribute some net profit.

Second-tier brands' tasks: After first-tier brands cover basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, distributors allocate significant personnel, warehouse space, and vehicles to meet operational needs, which become a heavy burden if distribution rights are lost for some reason. In such cases, second-tier brands ensure the company's survival and enhance its ability to withstand risks; they also provide terminal market maintenance teams for third-tier brands.

Third-tier brands' tasks: With first- and second-tier brands as backing, third-tier brands further increase profit margins, and with careful loss control, they can generate extremely high profits. Since third-tier brands have small per-SKU turnover, their sales weight should not be too large; otherwise, management issues from too many SKUs may reduce profitability.

Generally, 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 ratio, the return on investment per million yuan of capital can be about three times that of investing solely in first-tier brands. In terms of brand quantity, the best is 1-2 first-tier brands, 4-6 second-tier brands, and 5-8 third-tier brands.

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