Click the image for details Once upon a time, second-tier distributors were an unavoidable and insurmountable term in our industry. Especially for new product launches and township network coverage, it was impossible to move forward without them. Now, e-commerce companies under the banner of disruptors are clamoring to eliminate second-tier distributors, and even traditional manufacturers are bypassing them to directly control terminals through refined management. Second-tier distributors have become a dispensable term, and many companies even regard them as the chief culprits hindering market development. So, what is a second-tier distributor? In simple terms, a wholesaler who can undertake distribution, market coverage, and capital reservoir functions for first-tier distributors is called a second-tier distributor. In the past, what enabled second-tier distributors to exist and show vigorous vitality? 1. Distribution Capability Second-tier distributors each have their own small territories. Through diligent visits and deliveries, they have cultivated loyal retail networks in their areas. Especially in the era of extensive management, first-tier distributors aimed for big profits and looked down on the small earnings from such deliveries, willingly letting second-tier distributors handle secondary distribution to retail points. Over time, this formed a tacit understanding. Moreover, second-tier distributors do not specialize in a single brand. If they did, their competitiveness would be weak, and small regional outlets would not recognize them. This is a significant difference from first-tier distributors who focus on one or several brands. Because of this, second-tier distributors do not pursue profit maximization for a single brand but focus on the overall profit of a delivery transaction—how much can I earn from the entire order from a retail point? Rather than how much profit a single product brings. This reduces delivery costs, something first-tier distributors could not do before. Of course, there are also second-tier distributors who specialize in one or two brands. If so, the volume for that brand must be large and profitable enough to satisfy their profit pursuit; otherwise, such exclusivity would not be attractive. 2. Capital Recovery Capability When first-tier distributors cooperate with manufacturers, sometimes to complete tasks or achieve phased inventory pressure, the funding gap can be significant. Relying solely on the first-tier distributor's own resources may not meet the manufacturer's capital requirements. At this point, advance payments from second-tier distributors can alleviate the first-tier distributor's financial pressure. Because first-tier distributors often collect payments from second-tier distributors in advance through promotions, while second-tier distributors, under storage pressure, also pay upfront to secure promotional policies. The goods are actually stored in the first-tier distributor's warehouse. Leveraging this time difference, the first-tier distributor uses the prepaid funds from second-tier distributors to pay the manufacturer, greatly easing their own capital strain. If the product is fast-moving and managed well, the first-tier distributor not only avoids using their own funds but can also use second-tier payments to subsidize the funding gap for less popular brands, thereby expanding business and earning interest. One of our clients, while handling our products, also handled popular brands like Red Bull. Their Red Bull payments were entirely rotated through advance payments from second-tier distributors, with almost zero use of their own funds. A few years ago, when I managed a health liquor brand, due to monthly limited supply and planned promotion, the first-tier distributor's payments were also made possible by advance payments from second-tier distributors, rarely using their own funds. These are examples of the capital reservoir function of second-tier distributors. There is also a capital advance function: second-tier distributors provide credit sales to downstream customers, especially to hotels. This credit risk is borne by the second-tier distributor. If a first-tier distributor bypasses them, they would be pulling the risk onto themselves. 3. Control over Hotel Terminals Second-tier distributors have a certain degree of control over hotel terminals in their areas. As the regional distributor, many hotel supplies are directly provided by them, which establishes good relationships. These relationships are very useful when second-tier distributors introduce new products, much more effective than salespeople directly negotiating with hotel terminals. Most importantly, second-tier distributors control a limited number of hotels in their area, allowing them to develop deep relationships and develop these hotels more thoroughly than salespeople. 4. Faster Delivery and Greater Convenience Second-tier distributors deliver within a small area centered on their own stores. If a retail point needs goods, they can usually arrive within half an hour. This convenience is a hard requirement and pain point for small outlets, which first-tier distributors find hard to match. Unless the first-tier distributor has sufficient vehicles and personnel, but after calculating costs, the profit loss would be significant, so they often give up. This function is even more prominent for township second-tier distributors. In the past, when roads were not smooth, it was unimaginable for a first-tier distributor to achieve full coverage of township outlets without the cooperation of second-tier distributors. 5. Faster New Product Distribution In the past, manufacturers often demanded 80% outlet coverage within a week or two for new products. How to achieve this? Usually, they would gather the second-tier distributors in the area, allocate outlets, and set distribution rewards. Once the second-tier distributors' enthusiasm was mobilized, and the manufacturer assigned a salesperson to assist and supervise one or two second-tier distributors, the weekly coverage target was easily achieved. Some might say that holding order meetings can also achieve fast distribution. But who will notify all these outlets? Can salespeople do it? Why would outlets trust a salesperson they see only once a month? So, for fast and effective new product coverage, you really cannot do without second-tier distributors! 6. Market Push Effect is Also Significant The previous points describe passive cooperation by second-tier distributors, responding to the demands of first-tier distributors and manufacturers. Second-tier distributors sometimes also have their own initiatives. For example, if they have a good relationship with a manufacturer's salesperson or a first-tier distributor, that manufacturer's or first-tier distributor's products will be actively promoted by the second-tier distributor, resulting in better performance than similar competing products. Therefore, manufacturers and first-tier distributors compete for second-tier distributors, sometimes even replacing them in an area to better cooperate, which is a game process not elaborated here. However, the push by second-tier distributors is limited to their own small areas. Without linkage with other areas, the overall market impact is limited, which is also the fundamental reason why second-tier distributors cannot fundamentally shake a manufacturer's brand foundation. We often see a common phenomenon: if the second-tier distributor for Wanglaoji is strong in an area, then Wanglaoji's sales will definitely outperform JDB's, and vice versa. To put it bluntly, if the second-tier distributor for Dongpeng Teana is strong in an area, Red Bull's sales will not have an advantage there. This is the endorsement effect of strong second-tier distributors on brands and a clear manifestation of their market push effect. The above lists some of the responsibilities second-tier distributors once undertook. In today's context, some are outdated or less important. If a thing's existence no longer demonstrates value or significance, its disappearance is only a matter of time. Currently, companies like Niulanshan and Luzhou Laojiao are implementing channel reforms to de-second-tier, weakening their functions and roles; platform and e-commerce companies like Yijiupai are even proposing to eliminate second-tier distributors. What caused the once-flourishing second-tier distributors to reach this situation? 1. Weakening of the Capital Reservoir Function First-tier distributors, through years of accumulation, are now financially strong. Capital is not a problem, especially with increasingly relaxed credit. Many first-tier distributors now have money but nowhere to invest. In this case, their demand for second-tier distributors' capital is increasingly fading. Another point is the weakening of the inventory pressure function at retail points. With information transparency, retail points are reluctant to stock up, preferring to buy only what they sell to avoid capital occupation. When second-tier distributors cannot collect payments, constrained by profits, they naturally do not proactively pay deposits to the upper level. Some even demand credit terms from first-tier distributors, further losing the value of the capital recovery function. 2. Information Transparency Forces Chain Shortening Previously, second-tier distributors profited from the price difference between upstream and downstream. With the spread of mobile internet, the price difference from manufacturer to consumer has been repeatedly compressed, leaving no room for second-tier distributors to make money. First-tier distributors can offset reduced profits through manufacturer subsidies and the small profits from numerous outlets; but what can second-tier distributors rely on? The price difference is too small to cover the interest on capital turnover, and they still have to provide credit to terminals. The pressure is immense. If they stop, their outlets will shrink and eventually be abandoned by both manufacturers and terminals. The prices second-tier distributors charge outlets cannot be as high as in the era of information opacity due to e-commerce influence, while the price difference offered by first-tier distributors is fixed. They cannot sacrifice their price system for second-tier distributors, affecting the overall market. In this dilemma, first-tier distributors either reluctantly cancel second-tier distributors and supply directly, or compress their profits, letting them earn just enough to cover transportation costs to maintain the fragile cooperative relationship. 3. Intensified Competition Among Manufacturers Squeezes Second-Tier Distributors' Living Space Competition among manufacturers is multifaceted. Product cost-performance is one aspect, but more comes from the competition between frontline market teams. Wars are still fought by people; no matter how advanced the weapons, without operators or developers, they are just scrap metal. The ultimate goal of manufacturer competition is to control outlets and terminals directly, even consumers. Directly controlling consumers is, of course, the best—companies like Xiaomi, JD.com, and Jiuxian.com are doing this. But directly controlling outlets and terminals is what most liquor companies are doing, especially in recent years with shrinking government consumption and rising consumer consumption. Even Moutai and Jing Brand have succumbed to the wave of channel flattening, moving away from large distributor cooperation models. How can ordinary small and medium liquor companies resist? Therefore, under the wave of refined management, it is not surprising that second-tier distributors are left high and dry again. What is refined management? It emphasizes direct control by manufacturers over all outlets, including small ones, achieving one-step distribution from manufacturer to outlet. First-tier distributors have been reduced to delivery agents, earning a small logistics fee. Previously, direct distribution and deep distribution considered leveraging the combined strength of first-tier and second-tier distributors, but now manufacturers are directly engaging in the market. For example, the US pursued Asia-Pacific rebalancing, previously instigating Japan, the Philippines, and Vietnam to confront China. After the South China Sea arbitration, no country dared to use force against China, so the US had to send two aircraft carriers for direct confrontation. Second-tier distributors are like Japan and the Philippines under the US; when they cannot win, manufacturers bypass them and enter the market for a decisive battle. 4. Intensified Competition Among Second-Tier Distributors Weakens Their Control Over Small Areas Second-tier distributors are also evolving. Some have developed well and become first-tier distributors. The small profits once offered by first-tier distributors no longer satisfy their appetites. Where there is profit, there will be people! If you, as a second-tier distributor, are thriving in this small area, new challengers will inevitably emerge. This is exactly what first-tier distributors and manufacturers urgently need, especially new brands that want to support loyal second-tier distributors to counter the old ones. As a result, small outlets in the area become picky. Previously, there was only one distributor, so no negotiation was possible. Now, with many suitors, they can be selective and make demands. The control of individual second-tier distributors over regional outlets is clearly weakened, and some even lose their voice. Are such second-tier distributors still useful? Do they deserve a portion of the manufacturer's profits? 5. Inability to Learn and Adapt Leads to Disappearance in the Tide of the Times The second-tier distributors said to be eliminated are basically those who do not learn or adapt, always dwelling on past glories. Times change; if you do not, your past advantages become disadvantages, trapping you in a cycle. Those second-tier distributors with strong learning ability and courage to adapt are still thriving, but their identity has changed—they have become first-tier distributors, franchisees, liquor specialty stores, e-commerce partners, custom product distributors, or shareholders/partners in second-tier alliances. One thing is certain: major changes breed major development! The elimination of second-tier distributors means new models will emerge to replace them. Just as the decline of SMS gave rise to WeChat. According to the law of conservation of energy, the disappearance of one form of energy does not mean its death but its transformation into another form. Therefore, your learning ability determines the height of your transformation, and the same applies to second-tier distributors. Discussions about second-tier distributors should be objective. Each stage has its focus. Heroes are made by the times. Second-tier distributors have had past glories and current difficulties, but it is premature to say they are completely unnecessary now. How to break through the current bottlenecks and smooth the development of second-tier distributors is beyond the scope of this article and will be discussed separately. Disruptors' words can sometimes be alarmist, aimed at building their image. As bystanders, we can listen but not take them seriously. But since they can disrupt you, they must have some skills. As a party involved, you cannot be as leisurely as a bystander; you must seriously consider countermeasures, how to amplify your advantages, or even break out of the existing competitive deadlock. In martial arts, there is a technique called "returning the opponent's own move against them," meaning I use your skill to defeat you. I think this is excellent. Isn't your skill formidable? I will use it to beat you! At this point, it comes down to internal strength and fundamentals. So, second-tier distributors with solid internal strength and foundations need not worry about threats from manufacturers or e-commerce, because the space for transformation is vast! Introduction: Tang Jianghua, a senior industry professional and contributing writer for multiple industry media outlets, author of "The First Book on Baijiu Marketing" and "The First Book for Baijiu Distributors," who practices the motto "write what I do, do what I write," currently serving at Kaikouxiao Sales Company under Jindong Capital (Huaze Group). Email: tjh7374@163.com -END-