Recently, I visited some distributors in Southwest and South China to discuss this year's business situations. These distributor friends all had some feedback and feelings, which I have recorded for discussion. Since these distributors are very influential in the industry, their real names will be hidden in the cases below. Only business and cases will be discussed:
Distributor Y in a certain area of Southwest China This distributor is one of the top distributors in the local area, mainly operating in the leisure food category, and almost exclusively represents all first-tier leisure snack products in China. Annual sales are about 130 million yuan. From my communication with this distributor, here is some feedback he gave me:
1. For the first-tier brands he represents, front-end gross profit almost makes no money, relying entirely on the factory's backend rebates. To improve gross margin, he had to represent many non-famous leisure food brands to improve the gross profit structure.
2. He voluntarily withdrew from representing and supplying the local KA system. In the past two years, hypermarkets have not been doing well, but their fee requirements are getting higher and higher. Without strong support from manufacturers, it is impossible to make money.
3. The digitalization done by the first-tier brand manufacturers he represents is a joke. Here are a few cases he discussed, but I won't mention which brands to avoid embarrassment.
A. A certain brand needs to check distributor inventory at any time, so they installed a plugin on the distributor's computer. A well-known domestic inventory management software company, in response to the distributor's needs, provided a "fake" electronic inventory account set for the distributor. The manufacturer's crawler can only crawl data from this fake account set, not real data. The reason is that the manufacturer has minimum inventory requirements for new products in stock, and if not met, fines are imposed.
B. A distributor's salesperson has four or five brand apps installed on their phone to meet the online ordering needs of different manufacturers. Many manufacturers' apps do not consider the working conditions of distributor salespeople, are very complex to operate, and have many non-humanized functions that cause the salesperson to suffer and resist. But they have to operate them, otherwise they cannot get fees and rewards.
C. A certain brand has a series of assessments on market distribution rate, key item purchase rate at retail points, and terminal merchandising. However, the brand has four or five distributors in the provincial capital market. Several distributors pooled together, each contributing 1,000 yuan, to hire a clerk to "statistically" compile the data needed by the manufacturer's business manager. The reason is that if these indicators are not completed, fines and fee deductions will occur. But the front-end gross profit given by the manufacturer cannot support the distributor's operating costs, and they rely entirely on backend rebates for profit, which forces distributors to falsify data.
D. To complete tasks and obtain fee rebates, they cross three provinces to smuggle goods to the Hunan snack market. The demand for goods in Hunan snack stores comes from the manufacturer's business manager.
E. In the local market, goods from the wholesale market are flying everywhere. A certain brand of chewing gum is smuggled from Shanghai, with a price difference of 40 yuan per box! Another leisure food product has a chaotic price. When complaining to the manufacturer, the manager swears that if you take back the goods, they will compensate the fees and price difference. But when asked why only the downstream is blocked and not the upstream, the reason is that they are a foreign company and need to avoid China's anti-monopoly law and be compliant...
F. This distributor is the largest distributor of a leisure food brand in Southwest China. In three years, he has only met this regional manager once, and even that time, they didn't discuss work or go to the market, only played mahjong for an afternoon...
Distributor Z in Southeast China This distributor is one of the top national distributors of a famous western liquor brand, mainly operating in the South China market. Previously, he was the provincial agent for the brand, but now he has been cut down to only a few districts in a super first-tier city in South China, with annual sales of 120 million yuan.
1. This distributor focuses on this first-tier liquor brand, and the growth momentum has been strong in the past two years, but the pressure of business growth is very high, basically with growth targets of over 50%.
2. The price inversion of this brand's products is very serious. The terminal retail price is close to the ex-factory price, and when supplying to the channel, the price is basically lower than the ex-factory price. To complete tasks, all backend rebates have to be used up.
3. The 100 billion subsidy from JD.com and Pinduoduo makes offline business very difficult. A large number of famous cigarette and liquor stores purchase goods nationwide, buying from whoever has the cheapest price.
4. This distributor said that the manufacturer talks about price control every day, but the means of price control is to notify distributors of an imminent price increase, forcing distributors to pay and ship goods, and then control supply after the price increase. However, the company's price control is like child's play. Once they find that tasks are not completed, they immediately lower prices and release goods nationwide.
5. The manufacturer is promoting one-item-one-code and is currently renovating the production line. After the renovation, five codes can be combined, and there will be no possibility of smuggling or reselling goods.
6. The manufacturer has accumulated nearly 10 million yuan in fees that have not been verified and settled. Distributors' profits depend entirely on year-end rebates. It is said that last year, all distributors did not make money. To prevent distributors from causing trouble at the annual meeting, the manufacturer centralized a batch of fee verification and returned 4.8 million yuan to this distributor. Adding this rebate, the distributor calculated that 2022 was barely break-even.
7. They have also started deep distribution, with the manufacturer bearing the basic wages of 13 salespeople to assist in developing terminal outlets.
8. The conclusion expressed by this distributor: Looking good on the surface, but full of bitterness inside.
Distributor L in Southeast China This distributor is a water beverage distributor in South China, who gradually changed to a water beverage wholesaler, with annual sales scale of over 80 million yuan, mainly operating in a first-tier market in South China. The distributor's feedback:
1. When asked why he changed from a distributor to a wholesaler, Mr. L responded that after leaving the manufacturer, he took on many first-tier brands as an agent, thinking that with manufacturer experience, he would not be cheated. But unexpectedly, he had to advance fees, bear tasks, face huge sales task pressure, daily fines, and fees being trapped and not easily redeemed, which was unbearable.
2. The sales structure changed from all agency to a ratio of 3:7 agency to wholesale, meaning most is wholesale and a small part is agency.
3. This distributor is quite thoughtful. He once raised 40 million yuan in funds to do B2B, but the market was very special, and the 40 million was quickly burned without results. The conclusion is that doing B2B depends on both the market and one's own capabilities.
4. Currently, he has partnered with a craft beer factory to launch a private label beer in local community group buying and Hema Fresh channels. Because it is a white label, the gross margin is very high. He plans to strategically transform to operate this white label next.
5. When talking about the future, this distributor is very confused and does not have much strategic planning. He thinks that the distributor business is getting harder and harder, and it is not easy to survive.
Feelings Based on the communication with the above three distributors, here are my feelings:
1. The distributor business has been very difficult in the past two years. When asking most distributors, nine out of ten say they don't make money, and even if they do, it is very difficult. Wholesale, online, group buying, especially foreign brands that do not do deep distribution, every brand has a chaotic market price.
2. The channel has been cut into pieces, which has a great impact on distributors. Especially large distributors doing KA channels, almost none of them make money. With the continuous decline of hypermarket traffic, the operating pressure on distributors will only increase.
3. Distributors are generally confused. Especially distributors doing single brands and KA channels. The former is constrained by manufacturers, and the latter is constrained by channels. These two types of distributors have very limited room for business expansion and growth, and transformation will be very difficult. In the next few years, these types of distributors are likely to be the first to collapse.
4. Compared to the above, distributors doing leisure food, mixed operations (agency + wholesale), or new channels (community group buying, B2B) will be relatively better off. But the entry threshold and the scale requirements for starting are very high.
5. B2B mini-programs are almost standard for distributors. When asking each one, either the manufacturer provides it or they configure it themselves, almost all have B2B mini-programs. But overall, whether it is the manufacturer or the distributor, online operations are very basic, just an online ordering tool, and they do not pay attention to operations.
6. The data that manufacturers currently get from distributors is basically fake. Inventory, inventory management, most of it is also distorted. It is not that distributors want to do this, but the problem is that if they don't, they cannot get fees... Digitalization can help, but don't cause trouble! If you want to know the distributor's inventory, don't assess the distributor's inventory; if you want to know the real terminal data, don't assess terminal data... As long as "assessment" is added, threatening the distributor's gross profit, the manufacturer should not expect to get real data. Today's market really does not lack goods; what is lacking is methods for sell-through. Use digital tools to think about sell-through gameplay and strategies. Valuing the process is more valuable than valuing the result.
7. The gross profit of distributors is really too low. The result is that distributors are forced to transform towards supply chain platformization. When talking with Distributor Y, his direct feedback was that he will reduce the proportion of agency and increase the quantity of wholesale. He doesn't want to be trapped by fees, doesn't want to make fake data, and will only make money if there is profit; if not, he would rather not do it. His thinking is almost the same as L.
Suggestions for Distributor Transformation Based on these feelings, I have some suggestions for distributor transformation:
The supply chain transformation of distributors is an inevitable result. Doing agency for a single brand and distribution for a single channel will only narrow the road. While there is still business to do in the next two years, I strongly suggest that distributors with transformation capabilities transform quickly! Here are three transformation suggestions:
1. Gradually transform from an agency model to an agency + distribution model: The general logic is similar to what Distributor Y suggested. Be a distributor, try not to sign agency agreements, reduce tasks, reduce advance fees, make more money from front-end gross profit, and reduce the impact of backend fees on the distributor's operations. Change the business thinking from single-brand agency to multi-brand distribution, and gradually shift the business structure from agency-based to wholesale-based. Don't underestimate wholesale; the logic of wholesale is one-stop service for downstream customers. This places extremely high demands on the distributor's logistics, product management, product mix, and operational efficiency. In the past, all the capabilities of distributors came from how to operate the market. In fact, today's distributors need to have the ability to provide one-stop services to downstream customers.
2. Gradually extend upstream and downstream 1. Upstream, do white labels. At present, the supply chain infrastructure of upstream production enterprises is very complete. As long as distributors have the ability to promote white labels, they must add white label products to their product structure, continuously optimize their operational and promotional capabilities, and gradually develop brand operation capabilities. New Distribution will also officially establish the Top 500 Super Supply Chain Alliance at the Autumn Sugar Fair in October this year, aiming to help distributors who intend to do white labels find suitable supply chains and products that sell themselves, helping distributors improve their gross profit structure.
2. Downstream, do retail. The retail here does not mean letting distributors open retail stores, but rather opening lightning warehouses. The advantage of lightning warehouses is that there is no need to consider site selection or worry about traffic issues. As long as the warehouse management is done well, operations and traffic can be supported by Meituan, allowing distributors to gradually develop retail capabilities and improve their supply chain backend.
3. Upgrade to a platform supply chain The supply chain platform here is not just wholesale or B2B, but refers to the ability to provide one-piece drop shipping, one-stop supply, and one-stop services for upstream brands and downstream retailers in the local market. This includes complex capabilities such as warehousing, logistics, commerce, brand services, retail, marketing, consulting, finance, and data. Previously, when communicating with Mr. Fan Qi of Jiayun City, his suggestion was that the distributor's agency business + wholesale turnover must reach about 300 million yuan or more before making the corresponding upgrade. This is also the core reason why I suggest distributors must do "wholesale + lightning warehouse". If agency sales reach 300 million, the internal complexity of the distributor will increase exponentially. But doing "wholesale + lightning warehouse", on the one hand, downstream C-end data feeds back to the distributor, allowing the distributor to quickly optimize product mix; on the other hand, it can accelerate the entry and optimization of upstream wholesale goods into the warehouse. Through this combination, reaching a scale of 300 million+ and then transforming to a supply chain will avoid a long loss period for the distributor, and the transformation will be relatively easier.
Final Thoughts During this period of visits, I deeply felt that the existing business model of distributors, including the manufacturer's distribution management methods, have reached a stage where they must be changed. The question is how to change and what to change into. This needs to be demonstrated. From the distributor level, after years of exploration, New Distribution has basically found some means and methods. But for manufacturers, how to find new growth models and methods without affecting the market, and do a good job of converting old and new kinetic energy. I think this is a topic that every FMCG enterprise must face.
The 5th China FMCG Conference and the 1st China FMCG Distributor Conference in 2023 will be held grandly in Shenzhen from October 9 to 11. At that time, I will share on the theme "Rebuilding the Marketing System, Doing a Good Job of Converting Old and New Kinetic Energy" at the conference, discussing with everyone the ideas and paths for enterprise transformation. Welcome all manufacturers and distributors to attend and exchange!