A couple of days ago, I talked with a distributor who lamented that no product category has been profitable in the past two years. Existing brands don't make money, new brands don't move, and taking on other brands would lose even more. Sales have been declining for two years, and he has tried other investments, but none have made money. The problem is that this situation is not new. Since 2018, many distributors have seen their business growth slow to single digits, and some have even experienced no growth for years. This distributor is confused and asked me what to do. After carefully examining his situation, I found that his predicament is not unique but quite common. In recent years, few people have paid attention to the constraints faced by distributors in prefecture-level cities: 1. Limited market capacity – Constrained by local population and economic development, distributors face a clear ceiling. Typically, representing one or two brands and achieving tens of millions in revenue is already the limit. Further growth based on market population size becomes very difficult. 2. Limited management capability – In the past, relying on the rapid development dividends of brands, their organizations, teams, and capabilities grew with those brands. Personnel and organizational management often depended on the extension of the brand's organizational capabilities, with their own management limited to basic rules and simple processes. Additionally, because the business model was relatively simple and profitability limited, there was little need to develop systematic management capabilities. 3. Limited cognitive scope – Distributors have deep roots locally, with extensive networks and many social engagements, leaving little time or energy to explore outside. Their cognitive scope is generally limited to local trade and information provided by manufacturers. Online information is hard to verify. Of course, some distributors are willing to proactively seek external learning, but what they learn is often impractical, non-professional content like that from Liu Yimiao or Brain Bank. 4. Limited profitability – Especially with brands that have strong local channel power, they often control distributors tightly, transferring operational risks to them without granting much gross margin. This leads to high overall operating expense ratios. Moreover, KA (key accounts) often have severe payment delays, and distributors lacking operational and management skills often lose money in KA channels year after year. 5. Limited vision and capability – This often restricts their mindset and magnanimity, making them short-sighted and petty. Their relationships with employees and customers are confrontational, and their leadership and charisma do not match their wealth and social status. It can be said that most distributors in China are firmly locked into a market environment with limited living space, resources, capabilities, and endowments. They cannot develop, and they have no other opportunities to switch industries. Of course, I state these points to objectively present the facts and reflect on how distributors can break these constraints and find new development space. The five constraints above are determined by the distributors' business model. Most distributors operate on a model of earning product price differences. In an environment where supply is less than demand or the market is relatively scarce, simply relying on representing big brands, moving goods, and making money is fine. But today's market environment has shifted from relative oversupply to comprehensive oversupply, and the price of oversupply is involution. The business model of earning price differences through information asymmetry and supply-demand asymmetry is almost impossible to profit from in today's market. It's not because your brand isn't big enough or your channels aren't wide enough, but because the market is not short of goods; purchasing power is relatively scarce, traffic is overly fragmented, and distributors' delivery and fulfillment costs have become extremely high, making costs unsustainable. Some distributors say that the pandemic has caused losses, but once it's over, business will return. If not, manufacturers won't just watch us die. Stop fantasizing. Manufacturers will not give distributors higher profits or invest more in market development, because today's market cannot be built by throwing money and support at it. I can responsibly say that the era of making money by simply putting goods on shelves is over. New Distribution has always held the view that distributors are a group that constantly changes with market changes. There has never been a static, one-time solution business, nor a one-size-fits-all operational method. As times and markets change, distributors must iterate and evolve with the times. The question is: how to evolve? I believe there are many ways for distributors to evolve. From a macro perspective, FMCG distribution is still a very good business, especially during the pandemic. Although the FMCG industry has been impacted, it is still relatively less affected compared to other industries. The key is how to combine your own resources, capabilities, and endowments to complete your iteration and optimize a better business model. From a macro logic, I think distributors should focus on several definite directions: I summarize them into four keywords: digitalization, scale, omnichannel deep operations, and high efficiency. 1. Digitalization Don't think digitalization is only for manufacturers. Distributors' digitalization is a way to evolve and iterate. Whether in finance, warehousing and logistics, store transactions, or consumer communication and transactions, distributors without digital capabilities will soon be eliminated by the market within a few years. Because stores are already accustomed to ordering online, communicating via WeChat, transferring money via Alipay, and running promotions via mini-programs. If distributors lack even basic digital application capabilities, how can they interact with small stores? More importantly, behind digitalization is a shift in business model: from purely relying on product price differences, making money one store at a time, one order at a time, to a platform model with automated ordering through e-commerce, online communication and interaction, offline service and delivery, and omnichannel consumer connection. All of this is built on the foundation of full digitalization for distributors. So how can distributors digitalize? Here are a few approaches to consider:

  1. Iterate with manufacturers: actively embrace digital upgrades, and connect your processes, systems, management, transactions, and delivery systems digitally.
  2. Transform to a B2B model: B2B naturally pushes distributors toward digitalization and platformization.
  3. Use low-cost digital tools, apply them on a small scale, test and iterate quickly, and find a model that fits your resource endowments. 2. Scale New Distribution has previously analyzed that in the United States in the 1950s and 1960s, there was a wave of supply chain mergers and integrations. Why did this happen? Because after distributors develop to a certain space, to grow further, it is inevitable to use financial means for mergers and acquisitions, with the goal of quickly scaling up, then going public for financing, and further merging and integrating. Why achieve scale? Because when a country's market economy reaches a relatively mature stage, it is inevitable for distributors to become supply-chain-oriented and scaled. Only with sufficient scale and strong operational capabilities can they avoid being eliminated by competitors in fierce market competition. Moreover, in mature markets, upstream brand owners and downstream retailers will also scale. If intermediaries cannot scale, they won't even have the chance to cooperate with them. Distributors, please look at your regions: isn't the pace of chain convenience store openings accelerating in the past two years? This is the result of the wave of mergers and integration in the retail industry. Therefore, distributors should work hard on internal capabilities and quickly grow larger in this economically pressured environment. Only then will they have the opportunity to enter the next game. 3. Omnichannel deep operations Consumers are already consuming across all channels and scenarios. Traffic fragmentation is an irreversible trend. For distributors, merely completing offline shelf placement in regional markets will only narrow their path. Only by breaking free from physical space limitations and achieving omnichannel product placement in local markets, or becoming a leader in a national channel, can they break the existing survival dilemma. So it is an inevitable trend for distributors to move toward omnichannel. Moving toward omnichannel means different capability requirements. Different channels have different requirements for deep operations, requiring distributors to identify their strengths and achieve breakthroughs in operations. Some distributors may say, "I don't know how, and I don't understand. What should I do?" I think the approach of Li Yong, president of the Guangdong Distributors Innovation Alliance and Shenzhen Yataixuan, can serve as a good reference: find talents with relevant capabilities and talents, and through empowerment investment, jointly develop new businesses on Douyin, Tmall, and Taobao, then integrate online and offline inventory to achieve omnichannel deep operations. New Distribution has previously reported on this; interested friends can click the article at the end of this text. 4. High efficiency From a development perspective, China has entered a society with high labor costs. The old model of relying on a large workforce has no opportunities. Therefore, distributors must possess strong operational capabilities, maximize human initiative, and use good processes, refined management, and automated systems to raise operational efficiency to a very high level. Only then can distributors earn money that others cannot, and endure long-term low-margin competition in a fiercely competitive environment. These four directions offer many ways to evolve: B2B platform models, amoeba partner models, TP operation models, investment methods, and so on. But regardless of the model, the general direction must be digitalization, scale, deep operations, and high efficiency, using certain capabilities to counter the uncertain market environment. Only in this way can distributors break out of the vicious cycle of not making money from price differences, and through their own capabilities, provide more professional, systematic, and better value-added services to brand owners and retailers. Only such value-added services can be a company's core competitiveness, enabling long-term stable development and turning their trading companies into century-old brands. Extended reading: