---
title: "The Innovator's Dilemma in FMCG Channel Transformation: Insights from Cross-Regional Selling"
description: "This article examines the persistent issue of cross-regional selling (channel stuffing) in China's FMCG industry through three case studies, analyzing its root causes and the challenges established brands face in adapting to market changes. It argues that while current distribution models remain effective, brands must overcome the 'innovator's dilemma' to embrace new opportunities and avoid being disrupted."
author: "赵波"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2018-08-13"
language: "en"
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# The Innovator's Dilemma in FMCG Channel Transformation: Insights from Cross-Regional Selling

> This article examines the persistent issue of cross-regional selling (channel stuffing) in China's FMCG industry through three case studies, analyzing its root causes and the challenges established brands face in adapting to market changes. It argues that while current distribution models remain effective, brands must overcome the 'innovator's dilemma' to embrace new opportunities and avoid being disrupted.

Click 'Read Original' for details.

**I. Typical Cases of Cross-Regional Selling**

**Case 1:** Yesterday, I chatted with a senior executive from a well-known international FMCG brand and heard a shocking piece of news: the average gross margin for their distributors was only 5%. Given today's high distribution costs, with average warehousing costs around 4% and monthly capital costs around 1%, if inventory doesn't turn over at least once a month, distributors will lose money. I asked why margins were so low, and he said it was due to cross-regional selling. I then asked if there was still cross-regional selling at 5% margins. He said yes, and quite a lot. When I asked why, he said he was also puzzled why anyone would engage in cross-regional selling at such low margins.

**Case 2:** A few days ago, I talked with a friend in the automotive aftermarket. Although it's a durable goods industry, its distribution model is similar to FMCG and may lag behind by 5-10 years. Ten years ago, they imitated FMCG by adopting a distribution model of large distributors plus secondary wholesalers. This 'advanced' model helped them become one of the largest brands in the industry. However, they also encountered problems from imitating this 'advanced' FMCG model. When I asked what problems, he said stagnation. I said that couldn't be right, given China's rapidly growing car ownership and their status as the industry's top brand. He explained the reasons, which boiled down to two words: 'cross-regional selling'.

**Case 3:** A few months ago, Red Bull issued a notice prohibiting cooperation with B2B platforms. Similar notices have been issued by many companies. The main reason: B2B platforms engage in cross-regional selling, underpricing the market, causing price chaos in various regional markets.

**II. Why Does Cross-Regional Selling Occur?**

Both Case 1 and Case 2 use an exclusive authorized regional distributor model. Given this, I asked both friends a common question: Why does large-scale cross-regional selling occur under this model? Their summaries revolved around two core issues:

**First, uneven market investment by brand owners across regions.** In developing markets, there is greater policy support. Once a price depression forms, goods inevitably flow out.

**Second, cross-regional selling triggered by excessively high targets for large distributors.** In coastal areas with developed economies, distributors grow faster than those in the west, so their targets are much higher. The common sales rebate policy for large distributors becomes a double-edged sword. Large distributors with high sales volumes receive higher rebates, which leads them to do whatever it takes to meet targets, including selling across regions, as long as they can profit after factoring in rebates. Most of the goods that flow out are bestsellers. This often results in a phenomenon where, despite rapid market growth, the main products see both volume and price decline. The less distributors earn, the more they are willing to sell through wholesale channels, and the more they do so, the more severe cross-regional selling becomes.

The harm of cross-regional selling is well-known: it breaks down the price system, dampens distributor enthusiasm, and leads to rampant counterfeit goods.

Looking back at brands like P&G and Blue Moon, they have all faced such problems in recent years.

However, there is no doubt that while distributors, secondary wholesalers, and B2B platforms are the ones engaging in cross-regional selling, the underlying drivers are unreasonable market control and capped market capacity.

I asked them: Since cross-regional selling is so serious, why not stop investing in promotions and rebates? They asked me: What about sales volume?

So, under the current distribution model, is it really impossible to make a trade-off between market expenses and cross-regional selling?

Given China's vast market, the multi-tiered, extensive, and flat agency model remains one of the most effective distribution strategies. Undoubtedly, without strong channel-driving measures, it is difficult to achieve scale in sales in China.

The current distribution model is determined by the specific market environment. And it has been proven that most Chinese FMCG companies that have reached tens of billions in scale are driven by both brand and channel.

Market subsidies and sales rebates remain effective market control tools. As long as market-driving strategies do not change, the problem of cross-regional selling will likely persist for some time.

**III. Market Opportunities from Consumption Upgrades**

Chinese consumers have no reverence or loyalty to brands; they are fickle and love variety. The highly developed internet in China gives people more choices. To continuously win consumer favor, brands must innovate, diversify, and meet personalized, niche demands.

Fortunately, China's absolute population is huge. Every seemingly niche group actually has a very large absolute customer base. There is no need to worry about the target customer group being too small; as long as you match them precisely, consumer goods can be profitable.

China's large population, uneven economic development across regions, and income disparities mean that consumption upgrades will take a very long cycle. Therefore, in the consumer goods sector, new brands will continue to emerge over the next decade, like waves pushing forward.

We believe this process is also one of supply chain centralization between retailers and suppliers. These new brands lack the capability and will not, like the big brands of the past, build a complete distribution channel from scratch. They will try to cooperate with various large supply chains to solve their distribution problems. This is a mutually reinforcing, co-growth process.

**IV. The Innovator's Dilemma for Big Brands**

When talking with sales executives from many companies, I find they are not concerned about the arrival of the internet and what to do about it. They are more concerned about stagnation, cross-regional selling, and how to adjust distributor assessment and management mechanisms under the current management system. Moreover, most of these executives do not believe that emerging brands and niche products can disrupt them.

**On one hand, they are held hostage by distributors and sales volume, with no promotion meaning no sales; on the other hand, they have no time to attend to external environmental changes.**

This reminds me of a passage from Clayton Christensen's book "The Innovator's Dilemma": When new opportunities arise, mainstream companies often suffer from the "five incapacities": **they cannot see users, look down on needs, understand models, learn organizations, or keep up with the market.**

**Cannot see users:** Mainstream companies have their own accumulated customers, and "customer satisfaction" is their creed, but they may overlook the existence of "non-customers." Non-customers are those who were not customers before but could become customers in the future, even major ones.

**Look down on needs:** They feel that newly emerging small markets cannot solve the growth needs of large enterprises.

**Cannot understand models:** New business models based on disruptive technologies are often incomprehensible to mainstream companies.

**Cannot learn organizations:** Existing structures, inertia, and processes constrain their ability to adapt to new situations and adopt disruptive technologies.

**Cannot keep up with the market:** After missing the optimal timing for adopting disruptive technologies, they repeatedly miss opportunities because they fail to accumulate the capabilities needed for market transformation.

The reason mainstream companies face the "innovator's dilemma" is not that their traditional businesses have problems, but that their value network limits managers' thinking.

For existing mainstream companies, they tend to prefer sustaining technologies and make incremental innovations on existing businesses. To adopt new technologies, they must consider the impact on their value network and the constraints it imposes. The main reason they pursue sustaining innovation is that it protects the interests of stakeholders within their value network, while disruptive technologies often do the opposite. The existence of the value network constrains their enthusiasm and possibility to adopt disruptive technologies, making them more inclined to sustaining technologies. As the industry develops, they are eventually disrupted by new companies that adopt disruptive technologies.

**V. Channels Are Becoming Increasingly Multi-Dimensional**

Currently, sales growth for most Chinese FMCG companies is squeezed growth, such as in the beer and instant noodle industries, meaning your growth is based on competitors' decline. The problem is that consumers do have new needs, but they are repeatedly ignored due to the "five incapacities."

Any market problem is not just a surface issue; there are often deeper reasons behind it.

We believe that China's FMCG distribution model has gradually shifted from the past single offline long-chain multi-tier model to a multi-dimensional channel that combines online and offline, long and short chains, and single and multi-tier structures.

Your competitors have also shifted from a single dimension to multiple dimensions, from a single scenario to a three-dimensional scenario. Coca-Cola's competitors are no longer just Pepsi, but also various milk tea shops on the street; instant noodles' competitors are not just Master Kong, but also Ele.me and Meituan Waimai.

Consumer needs have been partially met by short-chain service providers that are more efficient and faster. However, they do not compete with you head-on. This means that if companies still serve customers within their own value network, rather than jumping to a higher dimension and meeting customer needs in a more three-dimensional way, they will 100% fail to see, look down on, understand, learn, or keep up with new opportunities.

The bigger problem is that the channel distribution model of big brands is difficult to change systematically in the short term.

In 2015-16, Mr. Liu Chunxiong proposed a concept called "changing the main dish," meaning companies should upgrade their mainstream products. During this process, distribution models and management systems inevitably need adjustments. Uni-President has been more aggressive in this regard, proposing in 2016 to have no tasks and no inventory pressure. However, the pain of declining sales is not something every leading brand can bear.

Huge inertia may require a very long cycle to change. This is inherently a matter without a standard answer. Different brands can only adjust based on their industry and actual situation.

But the question is: in this wave of industrial upgrading, **does your company really have the courage to jump out of its value network and break through the innovator's dilemma?**

-END-


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