A few years ago, our team assisted Hengan International Group, China's largest manufacturer of household paper and maternal and child hygiene products, in developing and implementing a 'Sales Management Transformation Project.' One key component was reorganizing the secondary distributor channel. In this book (From Trends to Action: The New Business Ecosystem of the Next Decade), we share three key principles: Transform, Stop, and Manage.
Hengan Group's Three-Character Guide to Managing Secondary Distributors
- Transform. 'Transform' means converting a portion of eligible secondary distributors from an unmanaged state (no files, no oversight) into directly contracted distributors (referred to as 'distributors' in Hengan's channel system), or into 'legal' wholesalers under a tripartite agreement among Hengan, the distributor, and the secondary distributor.
Eligible secondary distributors include three types: (1) Itinerant secondary distributors—those already in Hengan's channel system with the capability to provide vehicle sales and a sales team for terminal visits; (2) Terminal-resource secondary distributors—those with controlled conventional or specialized terminal networks, including special channels like enterprise and institutional accounts, capable of penetrating communities, streets, and townships with a down-to-earth terminal network; (3) Entrepreneurial secondary distributors—those newly established with FMCG sales and channel resources.
Hengan also requires that before formal conversion, secondary distributors must report and lock in the regions they cover and the terminal customers they control, and respect the wishes of the distributor in their area. The local distributor must cover and control all types of terminal networks in the region within a specified time and quantity. If the distributor is unwilling or unable, the corresponding resources are allocated to the secondary distributor who reported the terminals.
Stop. 'Stop' means ceasing supply and cooperation with secondary distributors who do not meet the criteria for direct Hengan distributorship or tripartite agreements, as well as those who meet the criteria but are unwilling to sign. If violations are found, Hengan will treat the distributor supplying the secondary distributor and the business department or office managing that distributor as responsible for cross-region sales (channel conflict).
Manage. 'Manage' means bringing secondary distributors—who are unknown to Hengan's provincial offices and headquarters and are the main source of cross-region sales and price undercutting—into Hengan's channel system and standardized management, with dedicated sales personnel tracking them to ensure control and order.
To this end, Hengan categorizes secondary distributors into three types: exclusive secondary distributors who sell only Hengan products and no other brands; dedicated secondary distributors who sell only Hengan products in the household paper and maternal and child hygiene categories; and mixed secondary distributors who sell other products. For each type, Hengan's business departments and offices assign dedicated customer managers and sales representatives to provide full business support and management, integrating them into Hengan's sales target management, order management, terminal management, cross-region sales management, price management, monthly report management, kanban management (referring to the 'Hengan Distribution Work Kanban'), and information management systems.
Additionally, Hengan has established different rebate standards and policies for new product listing fees, display fees, and in-store image packaging costs to provide targeted management and incentives for secondary distributors.
'Second-Hand Passers' Face Transformation; Can 'Third-Hand Passers' Escape?
Hengan's case is a typical example of transforming secondary distributors into distributors and moving them down the channel.
This also illustrates that for companies like Hengan or Wahaha (mentioned earlier in the book) that are conscious and capable, they want to manage secondary distributors well and actively channel their disruptive potential toward their own benefit.
Manufacturers' demands and efforts will naturally drive some secondary distributors to transform into distributors. At the same time, because manufacturers seek high penetration in weak and remote markets and need to compensate for the lack of depth in their own sales teams and distributors' regional cultivation or channel refinement capabilities, they will welcome and support secondary distributors with fixed terminal networks and special channel customers who can focus on smaller, specific regions. This will maintain the value of the secondary distributor group and, with manufacturer support, help these secondary distributors grow better. Of course, this is essentially another process of transforming secondary distributors into distributors.
However, Li Zhengquan believes that beyond the content discussed earlier, the factors driving change in the secondary distributor group are far more numerous.
- 'Second-Hand Passers' Face Transformation; Can 'Third-Hand Passers' Escape? If distributors are the 'second-hand passers' in the manufacturer's channel system, then secondary distributors are the 'third-hand passers.' The question is: if distributors are worried that manufacturers can now use e-commerce and direct access to terminals and consumers to undermine their traditional value, how can secondary distributors, as 'third-hand passers,' be unaffected? We have already mentioned much of this earlier.
From another perspective, in the new environment, as more distributors transform and change, secondary distributors will face similar differentiation. Because secondary distributors are more influenced by manufacturers and peers, their business models and operational changes will benefit or be constrained more by the practices and experiences of upstream distributors.
Of course, this applies only to secondary distributors with vision and awareness. Those with outdated business thinking may see this as an opportunity to move from secondary to primary (distributor) status. But if they encounter a distributor who says, 'Truly excellent distributors do not allow secondary distributors to exist,' will these secondary distributors still have opportunities?
Internet technology turns long channel and marketing chains into short chains and a 'short world,' further diluting the traditional value of secondary distributors. The traditional marketing channel chain runs from manufacturer to distributor to secondary distributor to terminal to consumer. To pursue gross margins and allocate more expenses to consumer marketing, upstream manufacturers have always sought to shorten this chain. Now, an 'unprecedented' favorable factor has arrived: internet platforms, technologies, and tools. Both companies and distributors can gradually master and, by building terminal and consumer databases, directly communicate the benefits intended for secondary distributors to downstream customers or consumers via the internet. Combined with more mature e-commerce and logistics, the 'gap-filling' value of secondary distributors in covering and penetrating markets will be further eroded.
Channel push is increasingly giving way to the penetration of consumer marketing; 'push' channel players like secondary distributors have more associated service providers that can replace them. In the past, when discussing marketing, we often mentioned two terms: 'push'—providing distributors, secondary distributors, and terminal merchants with more gross margin and expense support, or giving their staff more incentives to actively promote products to downstream customers and consumers; and 'pull'—using advertising and consumer promotions to drive product awareness, acceptance, and choice in the consumer market.
Now, channel push is being irreversibly weakened. Because 'push' is built on 'information asymmetry'—downstream customers and consumers can only choose what you push to them. The evolving internet is making this a thing of the past: in the vast online data on PCs and mobile devices, we can find suppliers and merchants for almost any product. In other words, in the new internet environment with information symmetry, upstream manufacturers can reach terminal customers and consumers directly through online and offline marketing, while downstream terminal customers and consumers can, with the means, proactively discover more, better, and more cost-effective products.
In some ways, we have taken a revolutionary step forward from traditional marketing—from deep cultivation of regions and terminal outlets to direct consumer marketing. This step also means that the penetration of consumer marketing is, to some extent, weakening the influence of traditional channel players like secondary distributors and distributors on market and terminal channel operations.
Terminal merchants and consumers increasingly do not need upstream secondary distributors and distributors. However, compared to mature platforms like Taobao and JD.com, a distribution and delivery platform for terminal merchants, along with corresponding commercial support, is not yet as mature as the consumer internet.
But that day will come!
Editor's Note: That day has arrived! Mr. Li Zhengquan's book From Trends to Action: The New Business Ecosystem of the Next Decade was published in 2015, and its content was written over the previous two to three years. Now, 'distribution and delivery platforms for terminal merchants and corresponding commercial support' are emerging rapidly, such as JD.com's 'New Channel,' Alibaba's Retail Link, and hundreds of B2B e-commerce platforms like EAS, Zhanghe Tianxia, and Huoquanquan, which are beginning to sift the wheat from the chaff.
Source: Business Trends (WeChat ID: lizhengquan02). This article is excerpted from Mr. Li Zhengquan's book From Trends to Action: The New Business Ecosystem of the Next Decade + Enterprise Transformation and Change, published by CITIC Press.
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