A few weeks ago, a distributor friend called me. The situation was that in his county-level market, a wholesale supermarket suddenly appeared, flipping small stores in their market, and two or three had already joined. This meant that customers he had served for years were lost in an instant. He was very anxious. After years of competing with peers on service and price, thinking that once he outcompeted them, the business would be his, he never expected a "barbarian at the gate" to suddenly appear. It's like a group of people playing at a card table, and then a character you never expected comes and flips the table. Why is this happening? What exactly is going on? Today, through this article, I'll share with you what I've recently seen and thought. I believe in the saying: nothing happens suddenly; if you think something happened suddenly, it's only because you haven't understood many phenomena. Let's go back two years, to 2022, when we were still in the pandemic. Although it was hard, frankly, the market was better than now. At that time, phenomena like supermarkets de-distributorization, small store chainization, and big distributors squeezing small ones were already evident. I wrote an article mentioning a viewpoint: the transaction structure of channels is changing. What does that mean? It means that although the distribution chain seems to add layers of markup, the entire chain operates as the lowest transaction cost method, but this "lowest" is dynamic—there are two forces constantly pushing transaction costs lower. One is technological progress, such as the internet and online payments allowing us to buy more goods at lower prices online; the application of various digital tools greatly reduces transaction costs caused by information asymmetry and opaque credit. Another force superimposed on this is market competition. Local KAs require direct supply from manufacturers because channel profits are insufficient, and they need to compress intermediate costs. Behind small store chainization is a more efficient supply chain system replacing wholesalers. And big distributors squeezing small ones is actually using scale efficiency advantages to offset rising delivery and fulfillment costs. So, everyone feels business is getting harder, but what's the essence? The natural market increment is gone, forcing the market to adjust transaction structures. And structural changes always move toward lower costs. Therefore, distribution will inevitably move toward scale, standardization, and intensification. I admit, at that time, my vision was limited to distributors, seeing only internal competition among distributors. It wasn't until 2023, with the rise of hard discount led by snack discount stores, that things changed. In the "China Snack Hard Discount White Paper" I published last year, I mentioned a concept: integration of distribution and retail. Snack stores seeking direct supply from manufacturers is not de-distributorization; it's internalizing the distributor's functions. In 2024, retailers are increasingly seizing distributors' business, and this trend is becoming more obvious. Many call this zero-supply integration, which is the same as distribution-retail integration. However, I still want to tell the broad distributor community about "distribution-retail integration"—different expressions affect different thinking, and this is important. Let me explain. Half of 2024 has passed, and I've spent at least half my time on the road. From manufacturers to distributors, discount stores, and traditional retailers, I've had in-depth exchanges with many friends. I've found that manufacturers still care about growth and channels. But from distributors to retailers, the most mentioned word is—supply chain. When distributors talk about supply chain, a large part are those transforming into B2B platforms, continuously strengthening their role as local supply chains. B2B essentially relies on digital tools to achieve scale coverage and distribution, thereby building efficiency advantages. "Distributor" is a term from the brand's perspective, an external team for manufacturers. "Supply chain" is a term from the end customer's perspective, an independent enterprise. I've always said this involves a difference in underlying thinking, or it's a matter of business values. This statement was correct in the past—in recent years, many distributors transformed to B2B, driven more by the boss's mindset shift. But now, when distributors want to transform to B2B, industry forces are more prominent. B2B operations expert, Teacher Yunchuan, shared two data comparisons with me. **First, in China, the number of suppliers serving one small store is 45-55, while in Japan, it's 3-5. Second, for 100 million yuan of terminal business, the required warehouse area in Japan is one-seventeenth of China's. I knew there was a gap in distribution efficiency between China and developed markets, but these two intuitive data points still shocked me. Now everyone feels business is hard, but the road to scale and intensification in China's distribution is just beginning. B2B is an industry change direction that New Distribution has been promoting in recent years, and now more distributors are seeking transformation. That's not wrong. But I want to say, this logic is the logic within the distributor community of "competing to death with yourself and peers." I believe for distributors, focusing only on peers is far from enough. Why? Because retailers are also talking about supply chain. This is actually normal; retail is the field connecting people and goods, and supply chain management is a core part of their business. But here, "supply chain" carries another meaning: it's not aimed at their own retail system, but at external supermarkets, small stores, and other retail terminals that distributors have long served. There are several forces here. First, discount retail. In 2024, discount retail is accelerating expansion; the essence of franchise expansion is supply chain output, supplying not only their own chain stores but also external terminals. Second, traditional supermarkets. Capable supermarket systems are accelerating de-distributorization, evolving into trading companies themselves; in essence, they are building new supply chain platforms to output goods to other supermarkets and even broader retail terminals. Third, convenience stores. In the past two years, convenience store business has also declined sharply. The head of a convenience store system's supply chain company told me they are also considering outputting their supply chain externally. He estimates at least half of convenience stores are considering this. Scaled, chainized retailers are de-distributorizing, but in fact, they are internalizing distributors, and not only internalizing but also spilling over their supply chains to seize distributors' business. Why is this happening? The truth is, the trend was already there; it just accelerated suddenly. The reason for acceleration is competition, and extreme competition leads to involution, which is caused by shrinking volume. There's no increment, and we don't need to talk about stock; in fact, we have officially entered the era of shrinking volume! From August 20-22, the 6th China FMCG Conference, themed "Crossing the Shrinking Volume Era," will invite different roles in the FMCG industry—retailers, brand owners, distributors, etc.—to brainstorm how to find growth points and how to sell goods. I gave an example. The market is like a lake. In the increment stage, the water surface expands, and large boats, small boats, and sampans can all navigate relatively orderly. In the past, although there was competition, overall, manufacturers, distributors, and retailers each did their own business, and order could be maintained. In the shrinking stage, the water level drops. There are too many boats! They will inevitably collide with each other, not only peers but also upstream and downstream. Upstream and downstream collisions, as in the case I mentioned at the beginning, you've cultivated and served for years, you've outcompeted peers, and someone else flips your table. Today's wholesale supermarket may not last long, but that doesn't matter; the industry trend is such that if A doesn't work, maybe B will come, and ultimately it has nothing to do with you. The once clearly separated distribution and retail links are infinitely approaching each other, and in the future, they will be strongly bound. From a retail perspective, it's zero-supply integration. From a distributor's standpoint, it's distribution-retail integration. This expression is meant to let more distributors see the essence of change: the era of simple handling and distribution is over. To survive in the future, you must have retail thinking, and you must have the ability to (help terminals) sell goods. Let me talk about several situations I've seen. First, distributors transforming into B2B supply chains is not the endgame; the endgame is distribution-retail integration. Small stores have no loyalty; your competitors are not only peers but also supply chains extended by retailers. In the future, whoever can lock in high-quality retail points in the region and form strong binding relationships with them will win. Many distributors transforming to B2B say, "I want to empower small stores." If you don't understand retail yourself, how can you empower small stores? You need to develop merchandise management capabilities and be able to help small stores sell goods better. This is a topic that regional B2B platforms will inevitably face now or in the future—depending on their development stage and market competition. Second, distributors with advantages in a certain category, such as snacks, daily chemicals, condiments, etc., can strengthen their advantages and output supply chains to more regions. Currently, distributors doing package deals have better survival pressure than those doing simple distribution coverage because they are closer to retail and consumer demand. Recently, many friends in retail have added my WeChat, asking if I have resources for supplying goods. Can't they find supply chains locally? Definitely not. They are looking for supply chains with price advantages. But price advantage alone isn't enough; ideally, it's a combination of price, selection ability, and operational capability. This is an opportunity for distributors deeply cultivating a category. Third, distributors with capability, resources, and cognition can directly enter retail. For many, "I specialize in distribution; I haven't figured this out yet. How can I do such a big leap to retail?" In fact, New Distribution has reported many successful cases of regional distributors transforming to retail, such as Tangshan Yihe, Xuzhou Jintong, etc. In fact, some very large convenience store and snack discount store owners also come from distributor backgrounds. Of course, not every distributor can transform to retail. It depends on specific circumstances, as each distributor's category, capabilities, regional retail format, and competition are different. Overall, I want to say, building merchandise management and operational capabilities is an important topic for distributors. The era of making money by simply distributing brands and warehousing to terminals is over. Distributors used to earn money by helping manufacturers with distribution coverage. In the future, to make money, you either sell yourself or provide quality product assortments for retail to help them sell better. **Final Thoughts **Today's content is just one perspective on observing industry changes; due to space limitations, it's certainly incomplete. In fact, not only distributors, but since 2023, all roles in the industry chain, including manufacturers/brands and retailers, have felt increasing difficulty. Why? Essentially, China's distribution system is undergoing a profound transformation. The so-called transformation means the old order can't be maintained, and the new order hasn't been established yet; it's a chaotic state! What exactly is happening in the industry? Where is the way out? What good cases can we learn from? What dialogue and collaboration are needed between upstream and downstream?From August 20-22, 2024, the "2024 6th China FMCG Conference" with the theme "Crossing the Shrinking Volume Era," along with the "3rd China FMCG Hard Discount Conference" and the "3rd China FMCG Distributor Conference," will be held grandly in Shanghai. This is a conference that brings together all roles in the FMCG industry chain to deeply discuss industry challenges and opportunities. With keynote speeches, roundtable dialogues, report interpretations, closed-door salons, and networking dinners, the format is rich! Brand executives, outstanding national distributors, traditional retail representatives, discount retail founders, industry research experts, and many other roles will gather to conduct in-depth discussions and exchanges on topics such as the essence of change, direction, and way out, and efficiently connect cooperation opportunities. Gain insights into industry trends, find breakthrough paths, and secure future survival and development space—you must not miss it! 🔺Scan for ticket inquiries🔺 Recommended Reading