---
title: "Seven Keys to Distributor Transformation (Part 2)"
description: "This article discusses two more transformation paths for FMCG distributors: verticalization and servitization. Verticalization involves extending upstream to brand ownership or downstream to retail, as exemplified by Huaze Group's creation of the Jinliufu brand and Huazhi Wine Shop. Servitization means moving beyond traditional distribution to offer supply chain services, as illustrated by Shangyuan's evolution from distributor to brand operator to channel operator to supply chain service provider."
author: "朱志明"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2014-09-14"
language: "en"
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# Seven Keys to Distributor Transformation (Part 2)

> This article discusses two more transformation paths for FMCG distributors: verticalization and servitization. Verticalization involves extending upstream to brand ownership or downstream to retail, as exemplified by Huaze Group's creation of the Jinliufu brand and Huazhi Wine Shop. Servitization means moving beyond traditional distribution to offer supply chain services, as illustrated by Shangyuan's evolution from distributor to brand operator to channel operator to supply chain service provider.

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**Distributor Transformation Path 4: Verticalization**

Verticalization, meaning “vertical extension development,” refers to a distributor extending its business upstream or downstream to achieve value chain integration. There are two directions: one is extending upstream, where the company often positions itself as a brand operator, establishing its own brand, OEM for upstream manufacturers, or even building factories or acquiring production facilities. The other is extending downstream, establishing its own direct sales outlets or exclusive terminals.

**Case Study: Huaze Model**

As a downstream distributor, only by breaking free from dependence on major brands can one gain true initiative. Therefore, leveraging its existing channel advantages, Huaze Group creatively created the “Jinliufu” brand. However, as a brand operator, it often faced restrictions from upstream production links. Thus, Huaze Group integrated second- and third-tier brands into its upstream value chain through mergers and acquisitions. After effectively integrating brand operations and production, but lacking a nationwide channel brand, Huaze Group founded “Huazhi Wine Shop,” thereby connecting all links of the baijiu industry and achieving true full-industry-chain coverage.

**1. Upward Extension: OEM Brand Operation**

In 1998, competition in the baijiu market was at its peak. However, this harsh reality did not deter some brave pioneers, and Wu Xiangdong was one of them. As a distributor, Wu's days were clearly getting tougher. Not only were the bulk of profits taken by major brands, but these brands also often “killed the goose that laid the golden egg,” canceling agency qualifications or demanding distributors stock up, leaving distributors with almost no say and highly unstable business.

Wu Xiangdong wanted to create his own brand. Leveraging the good relationships built over years of representing “Wuliangye,” Wu approached Wuliangye's decision-makers and signed an OEM agreement. Under the agreement, Wuliangye handled production, while Wu handled brand building and sales. The brand “Jinliufu” was conceived in this environment.

From selling the first bottle of Jinliufu in 1998 to the end of 2008, Jinliufu's annual turnover exceeded 6 billion yuan, creating a miracle in the baijiu industry from nothing to something, from small to large in just 10 years. It leaped to become the “third place” after Moutai (8.2 billion yuan) and Wuliangye (7.9 billion yuan), firmly holding the third position in the baijiu industry. According to the “China's 500 Most Valuable Brands” list released by the World Brand Conference, in 2009, Jinliufu's brand value reached 6.037 billion yuan, ranking 136th overall and 17th in the food and beverage industry.

However, despite Jinliufu's success in brand operations, its “borrowed womb” birth imposed many constraints. Huaze Group itself did not produce liquor; it only handled brand operations and sales, inevitably subject to supplier constraints. As sales scale expanded, friction with manufacturers was unavoidable. In 2002, Wuliangye unilaterally decided to change Jinliufu's packaging bottle, a forced decision that reduced Jinliufu's sales revenue by over 50 million yuan. Therefore, after gaining a foothold, Jinliufu decided to expand into upstream liquor production to escape the predicament of being controlled by producers.

**2. Upward Extension: Acquiring Local Players**

Baijiu is a special industry, constrained by craftsmanship, environment, water quality, and other factors. Building a distillery from scratch is time-consuming and may not guarantee quality. On the other hand, the market has an oversupply of small and medium distilleries with idle assets, making M&A integration of upstream distilleries a feasible and convenient path.

At the end of 2001, Jinliufu invested 31 million yuan to acquire 55.97% of Yunnan Shangri-La Wine Co., Ltd., becoming the new owner of brands like “Shangri-La” and “Zangmi.” In July 2003, it acquired Hunan Shaoyang Distillery and renamed it Hunan Xiangjiao Liquor Co., Ltd. In January 2004, it acquired Anhui Zhonghua Yuquan Distillery and renamed it Linshui Distillery. In this wave of acquisitions, Huaze also brought under its umbrella more than 20 local baijiu enterprises, including Zhonghua Zhongheng Huachun Distillery, Jinghe Liquor, Hengyang Huiyanfeng Distillery, Heilongjiang Yuquan Liquor, Guangxi Quanzhou Xiangshan Distillery, Jiangxi Lidu Liquor, and Shaanxi Taibai Liquor.

**3. Downward Extension: Building Own Terminals**

Wu Xiangdong believes that future business competition is not between one company and another, but between one value chain and another. After gaining massive baijiu production capacity and ample brand marketing capabilities, and knowing that the baijiu terminal market had not yet formed an oligopoly, Huaze Group quietly extended its reach to terminals and founded “Huazhi Wine Shop.”

In terms of brand positioning, Huazhi Wine Shop chose one thing: a specialty store that does not sell “fake liquor.” The market generally believed that specialty stores were bases for selling “fake high-end liquor.” In terms of operation model, Huazhi Wine Shop adopted a cooperative model between the company and local partners. The partner's financial strength was not the primary consideration; the key was whether they had a sufficiently strong network of relationships. Huazhi Wine Shop hoped to leverage partners' solid local resources to continuously input its mature service system and diverse product lines. In 2009, Huazhi Wine Shop delivered impressive results: sales exceeded 1 billion yuan, net profit reached 200 million yuan, and its chain outlets numbered over 500. Wu Xiangdong admitted: “Huazhi Wine Shop's agency + chain model” is the first of its kind in China's comprehensive liquor industry and is the biggest selling point for attracting investors.

Huaze Group started as a distributor, focusing on the vertical chain of “liquor,” and in just 10 years completed a full liquor industry value chain covering manufacturer, brand operator, terminal operator, and capital group.

**Distributor Transformation Path 5: Servitization**

Servitization means that distributors transcend traditional distribution functions, update business concepts, use modern management tools, and provide comprehensive supply chain value services to achieve value-added distribution functions and value. It is generally believed that the distribution functions of distributors include channel sales, warehousing and transportation, and capital advances. If today's distributors only perform these basic functions, they cannot fully reflect their premium value. Only by transcending these traditional distribution functions and achieving comprehensive services (such as financing, market promotion, business consulting, logistics and warehousing) can they fully demonstrate their unique distribution value.

**Case Study: Shangyuan's Three-Level Transformation**

As is well known, “Shangyuan” started in 1994 and, like all distributors, initially represented the Anhui liquor “Kouzijiao.” In the words of Chairman Zhu Yueming: “The distributor stage is simple: buy low, sell high, that's all.”

**First-Level Transformation: From Distributor to Brand Operator**

In 1998, through negotiations with Xinjiang's “Yilite,” Shangyuan obtained the operating rights for Yilite liquor below 40 degrees and transformed into a brand operator. Although transitioning from distributor to operator is now a very common transformation path, Shangyuan achieved great success on this path, laying a solid financial and market foundation for future explorations. However, after 2003, Zhu Yueming suddenly felt a sense of confusion: Although “Yilite” was operated very successfully in the Zhejiang market by Shangyuan, the brand did not truly belong to Shangyuan. Although Shangyuan maintained good cooperative relations with the distillery, if the brand suddenly changed one day, what would happen to Shangyuan? These were not things Shangyuan could control. If one only acts as a brand operator, the risk is significant. Zhu Yueming realized that a pure operator positioning was not the best choice for a trading company.

Zhu Yueming's confusion at this stage also exists among current operators, and indeed some trading companies have become victims. It is not uncommon for brands that operators have worked hard to build up to be taken back by distilleries or have their sales radius reduced. How to reduce risk in brand operation is a question operators must consider. With this in mind, Shangyuan began its second-level transformation.

**Second-Level Transformation: From Brand Operator to Brand + Channel Operator**

In 2003, the SARS epidemic cooled the entire baijiu market. At that time, Shangyuan had already become one of the top players in the Zhejiang market with substantial financial strength. Zhu Yueming made another unexpected move: Shangyuan invested over 200 million yuan to form joint venture subsidiaries with 22 distributors in the Zhejiang market. Shangyuan provided funds, management models, and personnel to help distributors build channels and grow stronger. While helping these small distributors develop, Shangyuan's hotel channel in the Zhejiang market rapidly expanded to 10,000 outlets, and its nightclub and supermarket channels also saw significant growth. At that stage, when the industry mentioned “Shangyuan,” it no longer only mentioned “Yilite” but placed its strong terminal control first. In 2006, Shangyuan was no longer satisfied with competing for terminal channels; instead, it made building its own channels the top priority, and “Jiujiajiu” came into being. This can be considered another benchmark in Shangyuan's development. In 2006, it opened more than 30 self-built chain terminals in the Zhejiang market and quickly opened over 70 directly operated Jiujiajiu chain stores within four years.

On the issue of uniting distributors and expanding channel operations, Zhu Yueming encountered problems again: Before cooperating with Shangyuan, small distributors typically had annual sales of 30-40 million yuan in their local markets. After cooperation, Shangyuan could help them achieve annual sales of over 100 million yuan locally. It can be said that more than 20 partners are now channel leaders, and their local connections and direct sales structures are extremely reasonable. After five or six years, Shangyuan achieved annual sales of around 2 billion yuan through united distributors. However, in each local subsidiary, Shangyuan holds 51% of shares, while the partner holds 49%, and the chairman and general manager are all from the partner side. Uniting to do channels is a practice many distributors are currently undertaking. However, almost none can form a perfect partnership. Incompatibility in survival and models, disagreements over shares, overlapping channels, conflicts of interest... the difficulties on this path can be described as riddled with contradictions. Even though Shangyuan can provide capital, models, and personnel, it is still difficult to truly bind everyone together. In 2009, the financial crisis highlighted the problems between Shangyuan and its partners. The difficulties of being a large channel operator prompted Shangyuan to begin its third transformation.

**Third-Level Transformation: From Brand + Channel Operator to Supply Chain Service Provider**

At Tsinghua University, Zhu Yueming studied many supply chain service providers, including Hong Kong Runfeng International Business Consulting Co., Ltd. and Shenzhen Yiyatong Supply Chain Co., Ltd. Zhu Yueming believes that today's business competition is definitely not competition at a single point, but competition across the entire industry chain or supply chain.

Can we do what upstream cannot do? Can we do what downstream cannot do? These became the core questions Zhu Yueming pondered daily. This led to Shangyuan's later move to spend 1 million yuan on 100 mu of land and invest 100 million yuan in logistics, using the logistics platform as a base to help upstream manufacturers solve difficult supply chain issues such as distribution and warehousing. At the distributor level, it helps distributors solve procurement plans, capital solutions, and management solutions. Zhu Yueming explained: For manufacturers, January to March is the peak season, making them very busy, while June to September is the off-season, when many factories are idle, which is a cost waste for manufacturers. Shangyuan agreed with manufacturers that during the off-season, manufacturers would produce according to Shangyuan's plan and ship to Shangyuan's warehouse, with Shangyuan bearing the warehousing costs. This helps manufacturers solve supply chain capacity issues. Such transactions are also beneficial to Shangyuan because with physical assets like logistics companies and products, loan negotiations with banks become easier. It is well known in the industry that distributors find it difficult to get loans because banks find it hard to recognize the core of distributor operations—channels. But with fixed assets and turnover, things are different.

In terms of cooperation with distributors, Shangyuan still works closely with more than 20 distributors, but instead of the previous potential channel conflicts, the core positioning is now “common good.” Shangyuan has transformed from a partner into a service provider in these distributors' supply chains, standardizing the entire company through a shareholding system. Zhu Yueming believes that even if the chairman or general manager of a partner company no longer wants to continue, they can easily preserve a decades-old company through share transfers. Shangyuan can also serve downstream distributors more directly. For example, if a downstream distributor lacks funds, Shangyuan can, after communication, help the distributor directly borrow from a bank with Shangyuan as guarantor. Shangyuan's services to downstream also extend to procurement: having been a brand operator and channel operator, Shangyuan's understanding of brands, potential analysis, knowledge of the Zhejiang market, and analysis of distributor characteristics can all help downstream distributors procure the most suitable brands.

After transforming into a supply chain service provider, Zhu Yueming has a new interpretation of the “Shangyuan” brand: “I built the Shangyuan brand; it is not a baijiu brand, nor a beer brand, but a service brand. Its value lies in providing supply chain services, which both upstream and downstream will appreciate.”

In the industry chains of various sectors in China, different people play different roles. Therefore, for a trading company to develop, it must first clarify several questions: First, who am I? In the entire industry chain, what role do I actually play, and what role can I become? Second, what do I advocate? As a company, you must have a proposition; without a proposition or ideology, truly building a brand is impossible. Third, what kind of company do I want to become? On Chinese soil, it is easy to grow companies worth 1 billion, 2 billion, or 5 billion yuan. Therefore, distributor companies must position themselves clearly based on their own circumstances. In summary, distributor transformation requires proper positioning; finding what suits you is good. You cannot follow others blindly—what suits others may not suit you. (To be continued)

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