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With wolves ahead and tigers behind, squeezed by the dual pressures of manufacturers' direct operations and the rapid growth of large supermarkets, and further hit by booming e-commerce, the decline in sales and profits for many traditional distributors in major cities is inevitable, making strategic transformation urgent.
In this new era, strategic transformation for distributors involves reflecting on and rejecting past business models. Companies must reposition themselves and seek new development directions. Specifically, the author (Luo Jianxing) summarizes six strategic transformation directions for traditional distributors.
Direction 1: Specialization – Professional Delivery Distributor
Theoretically, as core members of the distribution industry, distributors provide manufacturers with warehousing, delivery, financing, information feedback, product aggregation, extension of sales force, and after-sales service. However, in practice, to control channels as much as possible, manufacturers' sales teams often take on the sales functions (such as negotiating with retailers, product placement, display, order taking, and promotional activities), information collection and feedback (trained sales teams have the responsibility for market information), and after-sales service (manufacturers are more anxious and responsible when consumer complaints arise).
Distributors' local warehousing, delivery, and financing (advance payment) functions cannot be easily replaced by manufacturers due to distance, high direct supply costs, delivery time constraints, capital scale limits, and collection risks. This is the unique advantage of professional channel delivery distributors and the foundation of their survival and growth.
To firmly control the market and channels, European and American companies like P&G, Johnson & Johnson, and Nestlé often set up dedicated sales teams at distributor locations, managed by factory representatives. As long as distributors have sufficient funds, warehouse space, and transportation capacity, all other sales and wholesale matters are handled by the manufacturer.
Even for some supermarkets directly supplied by manufacturers, due to the dual constraints of delivery costs and timeliness, many manufacturers still have to ask local distributors to deliver on their behalf and pay a delivery fee with a certain margin.
Manufacturer direct supply to key accounts (KA) is indeed the trend, but with Walmart, Carrefour, Wumart, Beijing Hualian, etc., having stores nationwide, how can timely delivery be ensured? Except for a few large companies with central warehouses like Coca-Cola and P&G, the only solution for other companies is to seek help from local distributors, with delivery fees typically ranging from 3% to 8%.
Positioning as a professional delivery distributor has advantages such as simple management and stable business (reaping without sowing). For distributors with sufficient funds but limited operational capabilities, this is a good choice (ideally, they could seek joint ventures with upstream brand manufacturers to minimize risks). However, the alias for professional delivery distributor is "senior porter," and the scale and profits are relatively limited. Distributors earn hard-earned money. For proactive bosses with strong comprehensive management skills, this transformation may be too simple and may not fulfill their life values; they might need an integrated/diversified transformation strategy.
Direction 2: Specialization – Professional Channel Distributor
Traditional distributors' customers are typically local retail stores, but the trend is that these customers are either directly managed by manufacturers or suffer from the impact of KA stores, leading to declining business. Are there special sales channels that serve specific customers, have sufficient sales volume, and are difficult for manufacturers' sales forces to cover?
In the FMCG industry, distributors specializing in campus channels, catering channels, entertainment venues, transportation hubs (railway, bus stations), and welfare group purchases hold irreplaceable positions.
In B2B industries like software and office supplies, distributors with special backgrounds in government, education, finance, and telecommunications are highly favored by manufacturers.
The advantages of being a professional channel distributor are clear: close relationships with professional clients, making it difficult for manufacturers to bypass them, and stable sales. However, the disadvantages are also obvious: without certain social connections, entering these professional channels is difficult; maintaining client relationships often requires expensive entertainment and operational costs; and product price transparency must be low with high margins to ensure profitability.
Having good social connections locally is a core resource that is hard to imitate and difficult for ordinary manufacturer sales personnel to build. If traditional distributors have certain social backgrounds and maintain them, focusing on becoming specific professional channel distributors, they will become targets for manufacturers of specific products.
Direction 3: Specialization – Professional After-Sales Service Provider
In fields like home appliances, IT, digital communications, with the rapid development of online sales platforms like JD.com and the maturity of large retail terminals like Suning and Gome, many distributors have disappeared. Those who persist see shrinking margins due to reduced wholesale-retail price differences, leading to a decline year after year.
Actually, home appliances, IT, digital communications differ from FMCG. In the sales value chain, after-sales service not only holds an extremely important position but also brings substantial profits to related companies. Once the warranty period expires (and for accidental damage within warranty), service providers dictate parts prices and labor fees, and the profit margins are considerable.
Although some first-tier brands like Lenovo and Haier have built their own after-sales service systems in major cities, many other brands outsource after-sales service to local distributors or third parties, considering management and cost factors. Samsung, Philips, and other brands outsource after-sales service in first-tier cities, and second-tier brands in second- and third-tier cities are no exception.
The 21st century is the era of home appliances, digital products, IT, and mobile devices, and the market value of after-sales service is significant. If traditional distributors in this field can successfully transform into after-sales service providers for home appliances, IT, and digital products, they may not get rich but can live comfortably.
The advantages of transforming into professional after-sales service providers include: good relationships with upstream manufacturers, making it easier to obtain authorization under the same conditions; professional customer service awareness, better able to consider issues from the customer's perspective compared to technical repair shops, and meet customer needs while maintaining the manufacturer's brand image. The disadvantages include: insufficient technical expertise in after-sales service, requiring the establishment of a new service and repair team; and dependence on manufacturers.
Direction 4: Forward Integration – Retail Specialty Store
Distributors and retailers belong to the same distribution industry and share many management similarities, such as cost control and inventory management. Some ambitious distributors, once they complete initial capital accumulation, find it relatively easy to transform through forward integration – investing in their own retail specialty stores, including opening stores on platforms like Taobao, Tmall, and JD.com.
Home appliance chain giants like Suning and Gome started as home appliance distributors. In many counties and cities in Zhejiang and Guangdong, the owners of supermarkets are local distributors of daily chemicals and food. Many Tmall flagship stores are operated by local distributors.
Investing in specialty stores offers advantages such as ample product supply, higher gross margins, and shared cost and inventory management experience. However, risks include poor location selection (location is critical for retail success, except for online stores), neglect of in-store shopping atmosphere (distributors accustomed to simple office environments often overlook store design), and lack of professional daily operations management. Forward transformation may seem simple but carries hidden risks.
Direction 5: Backward Integration – Brand Operator
Creating own brands and becoming brand operators to seize the most profitable part of the industry value chain is the most ambitious and proactive strategic transformation!
Well-known brand companies like Wahaha, Nongfu Spring, Jinliufu, and Digital China all transformed from distributors. Bosses in Yiwu wholesale market, to break through development bottlenecks, have recently launched their own brands (even acquiring brands, such as the former famous trademark "Xiafei" falling into the hands of Yiwu distributors), using existing channels for sales, and some companies are developing very well.
Many distributors, once they complete initial capital accumulation, often have the urge to engage in backward integration, OEM production, and brand operation. Indeed, distributors have many advantages in brand operation: familiarity with industry characteristics, easy understanding of customer needs, rich industry connections, and shared sales networks. If distributors decide to build their own brands, they should act quickly. "Being first" is the first law of marketing; the later you act, the fewer valuable market segments remain, and the lower the probability of success.
Of course, moving from distribution to brand operation makes business management more complex and requires higher comprehensive management skills. However, they can use professional consulting/planning companies to compensate for their lack of experience.
Direction 6: Diversification – Cross-Industry Development
This is the most helpless and risky strategic transformation, and during the current economic transition period with internal and external troubles, it should be approached with caution.
Distributors' development is affected by channel changes on one hand and by the life cycle of the products they distribute on the other. If the distributed products are in decline and market demand is shrinking, then no specialization or integration can save them; when the nest is overturned, no egg remains intact.
Distributors must objectively and rationally analyze the prospects of various products in their field. If the answer is negative, they should decisively and thoroughly transform and develop other industries. In recent years, in East China, many bosses who made their first pot of gold in distribution have invested in real estate, catering, entertainment, and leisure services, and are doing well.
Overall, the author (Luo Jianxing) believes that if distributors have relatively limited comprehensive management capabilities and modest goals, specialization (professional delivery, special channel, or service provider) is a good strategic choice.
If distributors are confident in their comprehensive abilities and have ambitious goals, they can consider forward/backward integration or diversification strategies. After all, China's economy is in a period of rapid development rarely seen in history, and there are still many business opportunities in various market segments.
Rather than dying like a frog in slowly heating water, it's better to actively seek new "cheese." As long as distributors leverage their strengths, find the right direction, and decisively transform, success will surely continue.
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