---
title: "The Bloodbath of Distributor Stockpiling Triggered by Big Brands' 'Transformation'"
description: "Distributors in transition need a portfolio of brands. Which brands offer both reputation and profit? Which look good on the surface but are rotten inside, with thin margins, even growing by eroding their own and channel profits? Looking at the worsening data, Lao Gao grows increasingly alarmed. Lao Gao is a distributor for a famous FMCG brand. To outsiders, he seems prosperous: in the provincial capital's center, he owns a multi-thousand-square-meter compound with a four-story office building in front, large warehouses in back, nearly a hundred vehicles, and a team of over 200 people. But in reality..."
author: "段文智"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2016-07-17"
language: "en"
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# The Bloodbath of Distributor Stockpiling Triggered by Big Brands' 'Transformation'

> Distributors in transition need a portfolio of brands. Which brands offer both reputation and profit? Which look good on the surface but are rotten inside, with thin margins, even growing by eroding their own and channel profits? Looking at the worsening data, Lao Gao grows increasingly alarmed. Lao Gao is a distributor for a famous FMCG brand. To outsiders, he seems prosperous: in the provincial capital's center, he owns a multi-thousand-square-meter compound with a four-story office building in front, large warehouses in back, nearly a hundred vehicles, and a team of over 200 people. But in reality...

Distributors in transition, especially, need a concept of brand portfolio combination. Which brands have both a good name and good profits? Which brands look good on the surface but are rotten inside, with thin profits, even growing by excessively eroding their own and channel profits?

Looking at the increasingly bad data, Lao Gao becomes more and more alarmed.

Lao Gao is a distributor for a famous FMCG brand. To outsiders, in the provincial capital's central area, he owns a several-thousand-square-meter compound with property rights, a four-story office building in front, large warehouses in back, nearly a hundred vehicles, and a team of over 200 people. The business seems big and wealthy.

But in reality, the profits Lao Gao earns from this brand are declining year by year. In the second half of 2015, after calculating labor costs and market costs, with monthly sales of seven to eight million yuan, profits were less than 100,000 yuan! This does not even include fixed asset depreciation and bank financing costs! Working from dawn to dusk, feeling upset and stifled, earning such little money—what else is he but a loading worker for the manufacturer?

Like Lao Gao, most of this company's clients are facing a common problem: sales have increased a lot, but they occasionally suffer losses?

But even so, in 2016, the huge growth pressure from the manufacturer shows no sign of easing.

Finally, after seeing the "friendship boat capsizing" between Lao Liu, a distributor in the neighboring provincial capital, and the company, Lao Gao firmly decided to exit. It is worth noting that Lao Liu had always been a benchmark client at the regional level for this manufacturer, with good cooperation and strong execution. But because he failed to meet stockpiling targets for several consecutive months, the manufacturer split his territory. This sent a chill down Lao Gao's spine.

Using pressure to maintain growth must not excessively damage distributors' profit margins.

Against the backdrop of economic downturn, shrinking demographic dividends, and reduced channel dividends, many brands, including big ones, choose the easier and more convenient path of transferring pressure to the channel rather than the more difficult path of cultivating new growth models. Most marketing managers also support this choice; they prefer "short, flat, fast" tactics to quickly squeeze the channel to its limits, and distributors are the most important nodes for bearing and releasing that pressure.

As for the "transformation" that many manufacturers emphasize, it is just a change of clothes; in essence, it is still the old path of coercion. Take Lao Gao's experience: the so-called "product upgrade" reverted to the path dependence of stockpiling in the form of product activity and order fulfillment rates. Then look at "cost coercion": it may squeeze out sales in the short term, but from a larger perspective, it only deepens the contradiction between product sell-through and inventory until it collapses.

When Lao Gao gave up the agency, the company even said: "Our company led the industry in growth rate in 2015. Where else can you find such a business? Such a brand? Hold on a little longer, build a solid market foundation, and you'll be counting money until your hands are soft?"

But the company completely misunderstood. The problem is not how strong its brand is, nor that the growth rate is still high, but that this growth model comes at the cost of excessively sacrificing distributors' profit margins, driven by stockpiling, and this is bound not to last.

Facing the high-pressure stockpiling of big brands, how can distributors save their profits?

1. Diversify operations; don't put all eggs in one basket.

Voluntarily exiting like Lao Gao is one option, but the premise is that you have a way out. If, like Lao Liu, you cripple yourself to cater to the manufacturer, kicking out other similar brands, focusing on "exclusive" agency, or opening "exclusive" brand stores, you only multiply operational risks and end up forced to accept the manufacturer's design.

Distributors need a brand portfolio concept: which brands look good on the surface but are rotten inside, with thin profits, even growing by excessively eroding their own and channel profits? Which brands have both a good name and good profits? Under this, they must also consider the positioning of product groups within brands: which are volume-driving products? Which are high-margin products? Which are sniper products?

Distributors need a high-quality operational structure mindset. They should sort out the brand and product portfolios they represent, clarify product positioning, product mix, and product hierarchy, determine the appropriate combination of brand and product groups, improve the profitability of the product mix, and enhance the ability to resist risks.

Only through diversified design can they effectively hedge against the potential risk of manufacturers eroding profits.

2. Focus on channel classification and management; don't "seek all and be greedy."

For FMCG companies, distribution rate is a very useful means to assess distributors. You say the task is high; I check the distribution rate. If the distribution rate is low, it means there is still a lot of market space! If the distribution rate meets the standard, is the per-store inventory enough? Can it match the industry leader? Or even say, can you distribute to channels that have a slight connection to the product?!

But the problem is that some outlets are either newly opened, have insufficient foot traffic, overstock to obtain sales fees, or are not suitable for selling such products. Ignoring the digestion capacity of these stores, "seeking all and being greedy" and "over-distributing" will only result in having distribution and displays, but in the end, most goods are returned, and you have to spend more money to handle them. Unknowingly, distributors suffer hidden losses.

Therefore, distributors should work with manufacturers to define an "effective distribution rate" that suits the regional economic environment. They should not blindly distribute to any terminal that can sell; they must be wary of over-distributing to ineffective and low-efficiency outlets.

The terminal outlet ledger should not be just a file; nor should it simply classify types by hardware such as business area. Instead, it should gradually establish a model that classifies terminal types based on sales volume, then clarify the basic distribution items for different terminal types, the approximate turnover days for each product category, the base quantity for a single distribution, and the inventory units that should be retained per store per unit time. Ultimately, focus on high-quality outlets to improve the quality of terminal outlets.

3. Distributors must manage their own warehouses and pay attention to value and quantity changes.

Many big-brand salespeople, even managers, like to treat distributors' warehouses as their own. Often, without the distributor's consent, they directly place orders on behalf of the distributor or force allocation of goods. This behavior, which only cares about completing tasks but ignores regional consumption differences, is most despicable. To complete tasks, they turn the company's inventory into the distributor's inventory, and forcibly turn products that are not suitable for the region into the distributor's inventory.

Distributors must manage their own warehouses, have a clear judgment on the trend, sell-through, and inventory of different products, and cannot hand over the ordering rights of products to others. They should pay attention to the monthly inventory turnover rate and monthly product sell-through rate of products in the warehouse, and use value and quantity changes to judge and reduce their inventory risk. In this way, when manufacturers allocate goods unreasonably, they can counter with reason and evidence.

4. Optimize internal management, avoid unreasonable management replication, and reduce hidden management costs.

Distributors should sort out their management systems, quantitatively decompose each position, and introduce input-output analysis in management links and channel construction to reduce hidden management costs.

In particular, they must avoid replicating management models that are not suitable for them. Take the delivery staff salary reform required by Manufacturer A: the plan set basic salary, item salary, market infrastructure salary, and sales commission salary, and limited personnel to full-time delivery staff. In Lao Gao's provincial capital, the basic salary is 2,000 yuan per person, with two people per vehicle, and the brand's average gross margin is less than 15%. So "one vehicle per month would need to increase sales revenue by nearly 30,000 yuan to offset the basic salary cost," plus the "dedicated vehicle and dedicated delivery" where operating costs cannot be shared by other brands, and other detailed assessments and product commissions, making operating costs very high. Therefore, in an increasingly saturated channel environment, when manufacturers attempt to embed "high-end" management systems, distributors must be vigilant, because this may significantly devour the profits they have worked hard to earn.

Selected from "Sales and Marketing" Issue 12, 2016

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