Click to read the original text for details Definition of second-tier distributors Second-tier distributors in FMCG refer to wholesalers who purchase from upstream wholesalers or distributors and sell to terminal retail stores, acting as a link between retail terminals and upstream distributors in the FMCG industry. They mainly rely on precise knowledge of downstream retail points, certain category aggregation capabilities, and simple logistics tools to earn profits through price differences. During the rise of the FMCG industry, whether under the large distributor system or intensive channel cultivation, second-tier distributors, as one of the most important touchpoints to retail terminals, contributed significantly to the industry's development. The survival strategies of second-tier distributors With the times, factors such as channel informatization, insufficient channel profit distribution, and rising operating costs have become prominent. Second-tier distributors now face new survival environments: changes in the business environment, downward pressure from upstream brand owners and distributors, upward pressure from downstream retail terminals, and intensifying competition from new entrants. Where will second-tier distributors go? Will they exit the historical stage after completing their mission? Or will they adapt to changes, transform their roles, and make a graceful turn? First, the gradual regularization of the business environment puts pressure on the family-based business model of second-tier distributors in terms of taxation, labor costs, and compliance. Ten years ago, tax pressure came from compliant KA customers and upstream brand owners; Seven to eight years ago, tax pressure gradually shifted to brand distributors, while second-tier distributors remained a tax haven and were not noticed; In the last three to five years, tax regularization pressure has fallen on second-tier distributors. Taxes are no longer a source of profit but an operating cost added to daily operations. What's more, they are at a loss due to the joint liability of tax policies, exposing the drawbacks of non-compliant operations. A case I personally experienced: A second-tier distributor operating a certain beverage brand had business cooperation with another second-tier distributor two or three years prior. During a tax audit, some tax invoices were found not to have been deducted, and the deadline had passed. The partner had already deregistered the company, so the tax could not be deducted or otherwise handled. The tax authority demanded either full payment of the tax or a high fine as per law. The profits accumulated over several years were not enough to cover the settlement, and the matter was left unresolved. Exhausted, the distributor left the industry. Second-tier distributors mainly rely on small-scale employment relationships for logistics. As labor policies advance, while employee costs rise, employee output gradually declines. During market visits, chatting with familiar second-tier distributors, their concept of labor costs is that they have more than doubled in five years: First, direct salary increases—five years ago, 4,000-5,000 yuan could hire a delivery person; now 6,000-8,000 yuan may not even find someone, as most have joined food delivery and courier services. Adding nearly 0.3 times the social insurance and housing fund costs, labor costs above 8,000 yuan have become the norm. Additionally, while employee costs rise, output declines. Working hours have shifted from 7 AM to 10 PM to 9 AM to 7 PM, with rest breaks in between, so output certainly decreases in terms of working hours. Second, upstream brand owners, due to changes in their own environment, are also transmitting pressure downward. Channel profit compression, channel security requirements, channel digitalization needs, and shortening channel length reflect real conflicts and long-term plans. As manufacturing costs increase, brand owners gradually raise ex-factory prices and reduce channel resource investment, develop and launch iterative new products, and attempt to raise terminal prices of mature products. Over the years, brand owners have achieved some success in control, but few have succeeded in new product iterations. Mature products rarely see price increases at retail terminals, resulting in further compression of channel profit space. When facing strong distributors and flexible terminal stores, second-tier distributors become the most direct and earliest victims of this channel profit compression. Second-tier distributors do not rely entirely on a single brand and are highly flexible. In brand owners' positioning, they are neither insiders (cannot be forced to be loyal to a brand) nor outsiders (may be called upon to bear some responsibility when needed). As brand owners increasingly value channel security, the position of second-tier distributors becomes more awkward. Consequently, in the channel digitalization process, second-tier distributors are left with only logistics functions, while information flow and business flow functions are gradually replaced. But to what extent can second-tier distributors improve logistics efficiency? Can they withstand the impact of formal logistics companies? Whether this will become their core competitiveness in the future is too uncertain for anyone to predict. Brand owners increasingly realize that the supply chain is one of the core future competitive factors. Logistics competition in the supply chain depends on efficiency and chain length. More and more brand owners plan to operate directly to terminals or require distributors to directly control terminals. In this process, second-tier distributors are basically ignored or abandoned. When future product flows form direct brand-to-terminal operations or through distributors or e-commerce direct-to-terminal, second-tier distributors will have no value in this chain. Third, downstream retail stores face increasing pressure: rising operating costs and intensified competition. In this situation, increasing their own profitability becomes the primary choice: pursuing higher profits, emphasizing the essence of business profitability, higher requirements for goods aggregation, and joining chain transformations. Changes in operating factors Retail terminal information is more transparent; distributor prices, other second-tier distributor prices, and e-commerce prices provide sufficient comparison. The advantage of information asymmetry that second-tier distributors once had is gone. Retail terminals will purchase from channels with relative price advantages. In interviews, many retail store owners have contact information for multiple e-commerce apps, second-tier distributors, and brand business personnel. Their choices are no longer based on face-saving as in the past; they used to buy a little from anyone who came to sell. The value of personal relationships is weakening. Store owners focus more on business essentials like price, service quality, and delivery speed, and pay less attention to door-to-door sales. The business relationships that second-tier distributors built with downstream retail stores through personal connections are increasingly challenged. Similarly, retail store owners are increasingly concerned about product completeness, ranking after price, service quality, and delivery speed. This is precisely the fatal flaw of small-scale operators like second-tier distributors. They cannot integrate large-scale sources of goods, and the ability to integrate sources varies significantly among category second-tier distributors. Moreover, during integration, there are many uncertainties in price, product completeness, and integration costs. An order may result in a lose-lose outcome: customer dissatisfaction and no profit for themselves. During operations, retail terminals have increasing demand for franchising due to factors such as stable supply, adding more categories, learning experience and strategies, and enhancing their own brand. Traditional convenience store franchise models like 7-11 and Lawson are relatively long but stable. Local franchise models like Meiyijia are attracting increasing attention from industry insiders. B2B e-commerce platforms like Alibaba Retail Link, JD New Path, and Zhongshang Huimin are also gradually exploring franchise models. Additionally, there are invisible loose alliances such as various business alliances, local chamber of commerce alliances, and regional alliances. In the future, terminal stores will be divided among these franchise brands, and one of the important conditions in these franchise models is control over store product sources. In the future, second-tier distributors will face the gradual loss of downstream terminals. "Without the skin, what can the hair adhere to?" Finally, channel restructuring or transformation brings changes in channel structure and competitive dynamics. Distributors' efforts to build core competitiveness and brand owners' repositioning of distributors both determine the trend of distributor downscaling—distributors directly operating terminals—which is irreversible. The living space of second-tier distributors in the channel is directly squeezed. Sources are in the hands of distributors, and downstream is also in the hands of distributors. The space for second-tier distributors in the cracks is increasingly difficult. They can only do business that distributors are unwilling or unable to do, or seek sources across channels, using price advantages to grab a share of retail terminal points. The entry of B2B e-commerce has the greatest and most direct impact on second-tier distributors: Direct-operated B2B directly takes away retail terminal stores, bypassing distributors and second-tier distributors to build a new track; Matching B2B connects distributors, playing the aggregation game at the distributor level, basically leaving second-tier distributors out. This group has become the opponent in B2B's double play, and the pressure they face in the future is imaginable. The downstream terminal points of second-tier distributors also include some special service points, which are gradually being eroded by new retail. For example, office shelves take away some closed points in office areas, community group buying takes away some closed points in communities. Wherever second-tier distributors have closed touchpoints, there are more cross-border entrants, making these closed points no longer closed. The advantages of second-tier distributors will increasingly disappear. The future path for second-tier distributors In summary, second-tier distributors are about to complete their historical role in FMCG channels. Under the dual effects of environmental changes and competition, they must either transform and upgrade into upstream brand distributors, or, leveraging the opportunity of channel digitalization, use their flexible operating advantages to transform into forward warehouses, providing services to upstream distributors and new retail enterprises. Upstream brand owners, in requiring distributors to go downstream, will basically subdivide distributors' operating areas. On the other hand, some distributors may have vacant areas due to willingness or experience. Second-tier distributors should seize this opportunity to establish direct cooperation with brand owners, upgrade to brand distributor customers, and combine their experience with downstream terminal customers to buy some survival time. This is not a problem! Another way out: Most new retail enterprises are currently building a business model. When development enters the second phase, the supply chain efficiency of new retail enterprises will be the key to victory. In the process of supply chain construction, new retail enterprises will heavily rely on social forces to integrate logistics. The warehouses of second-tier distributors scattered across the country will be a natural choice for forward warehouses in balancing coverage and delivery distance. How to build competitiveness in warehousing and distribution, leverage their advantages to integrate into this system, will be another way out for second-tier distributors!