---
title: "Practical Analysis of How Distributors Make Money by Handling First-, Second-, and Third-Tier Brands"
description: "A distributor's profitability is directly related 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% gross margin plus 1% rebate), while second-tier brands offer higher returns (12-20%) but require more capital. Third-tier brands offer the highest margins (30-40%+) but carry high risks. The optimal strategy is to combine brands from all three tiers, with a sales weight of 40% first-tier, 40% second-tier, and 20% third-tier, to maximize profit and stability."
author: "New Distribution"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2019-10-03"
categories: "Dealer Operations"
language: "en"
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original_source: "https://mp.weixin.qq.com/s/LZpf_O3d3i8s6ImJ60z5og"
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citation: "New Distribution. “Practical Analysis of How Distributors Make Money by Handling First-, Second-, and Third-Tier Brands.” New Distribution, 2019-10-03. https://xinjignxiao.com/en/articles/practical-analysis-of-how-distributors-make-money-by-handling-first-seco-9e94b84d/"
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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 related 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% gross margin plus 1% rebate), while second-tier brands offer higher returns (12-20%) but require more capital. Third-tier brands offer the highest margins (30-40%+) but carry high risks. The optimal strategy is to combine brands from all three tiers, with a sales weight of 40% first-tier, 40% second-tier, and 20% third-tier, to maximize profit and stability.

A distributor's ability to make money is directly related to its product portfolio. FMCG products 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 such as Wahaha, Yili, and Mengniu.

Generally, first-tier brands offer a low return on investment, with a common "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 implement a no-return policy. After deducting warehousing and delivery costs, personnel wages, expenses, losses, and taxes, net profit is minimal.

However, first-tier brands have many advantages: they have strong brand support, products sell well, and the manufacturer provides a large terminal market maintenance team, making it relatively easy for distributors to operate these brands.

Distributors can obtain shorter payment terms or even cash settlement from downstream distributors, ensuring rapid capital turnover and essentially no operational risk. Sales volume is large, with regional annual turnover ranging from several million to hundreds of millions.

First-tier brands are often "must-stock" items in the channel, allowing distributors to quickly build a sales network and obtain favorable trading terms with retailers.

**Second-tier brands**
These typically refer to brands with high product quality but without large-scale brand building, yet they provide proactive and skilled channel promotion support. The return on investment for second-tier brands is relatively high, usually between 12% and 20%.

Second-tier brands have the following characteristics: brand awareness is generally low, some appear as regional brands; there is no terminal market maintenance team or the team is small, so terminal maintenance is the distributor's responsibility, with distribution margin including about 1%-1.5% of turnover for terminal maintenance costs.

Distributing second-tier brands can also generate high turnover, with regional annual turnover reaching several million or more. However, payment terms for second-tier brands in modern trade channels are longer, requiring significant capital and interest costs for the distributor. Market management is less mature and standardized, placing higher demands on the distributor.

**Third-tier brands**
These have virtually no brand awareness. They typically target low-income groups or niche markets, or compete by pricing well below first- and second-tier brands in the same category.

Third-tier brands have the following characteristics:
1. Low brand awareness, opaque pricing, and distribution margins can reach 30%-40% or more.
2. Due to lower quality and lack of good marketing planning, turnover is generally small, with regional annual turnover below several hundred thousand.
3. They are prone to slow sales, with high returns and losses; distributors bear the risk of market investment costs.
4. Product life cycles are short.

Distributors face high risks when handling third-tier brands, but with margins as high as 30%-40% or more, it presents a "limitless scenery at the perilous peak" scenario.

Some distributors leverage their keen market observation to find products among the vast number of third-tier brands that meet local market demand, implementing "short, flat, fast" operations, and can reap substantial rewards. Handling third-tier brands requires continuous elimination of old products and introduction of new ones to address the short product life cycle.

**The optimal product operation model for distributors**
Let's first 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%, personnel wages 1.2%, management expenses 0.3%, losses 0.2%, taxes 1.4%, monthly interest 0.5%. Assume payment terms of 15 days, ignoring 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%, personnel wages 1.2%, management expenses 0.4%, losses 0.3%, taxes 1.8%, monthly interest 0.5%. Assume payment terms of 60 days (varies by region and retailer), ignoring 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%, personnel wages 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 (varies by region and retailer), ignoring transit time, allowing one turnover every 2.5 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 can see 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 retailers. Frequent "sudden death" of products can severely damage the company's stable operations.

Operating solely with second-tier brands offers relatively high 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 complement the advantages of each category, reduce opportunity costs, and achieve optimal profit and operational stability. In this combination:**

**The role of first-tier brands:** Cover basic operating costs and ensure the company's survival; bundle with second- and third-tier brands in negotiations with retailers to improve trading terms for the latter, such as shorter payment periods and reduced fixed monthly and annual deductions.

Assist second- and third-tier brands in quickly covering the sales network; dilute the delivery costs, wages, and management expenses for second- and third-tier brands. Fifth, contribute some net profit.

**The role of second-tier brands:** After first-tier brands cover basic operating costs, second-tier brands become the main profit contributors; since first-tier brands have large sales volumes, the distribution company must allocate significant personnel, warehouse space, vehicles, etc., which become a heavy burden if the distribution rights are lost for some reason.

At that point, second-tier brands can ensure the company's normal survival, enhancing its ability to resist risks; provide terminal market maintenance teams for third-tier brands.

**The role of third-tier brands:** 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 point, the investment return per million yuan can be about three times that of investing solely in first-tier brands. Specifically, the optimal number of brands is 1-2 first-tier, 4-6 second-tier, and 5-8 third-tier brands.


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## Citation metadata

- Publisher: New Distribution
- Author: New Distribution
- Published: 2019-10-03
- Canonical: https://xinjignxiao.com/en/articles/practical-analysis-of-how-distributors-make-money-by-handling-first-seco-9e94b84d/
- Original source: https://mp.weixin.qq.com/s/LZpf_O3d3i8s6ImJ60z5og

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