Scan the QR code in the image to register -01- To understand China's market and channels, one must first understand China's geography. Looking at China through its administrative divisions reveals a scale that is hard to imagine. The administrative divisions of the People's Republic of China consist of provincial, prefectural, county, and township levels. Specifically: Provincial-level: 23 provinces, 5 autonomous regions, 4 municipalities, and 2 special administrative regions, totaling 34 provincial-level divisions. Prefectural-level: 293 prefecture-level cities, 7 prefectures, 30 autonomous prefectures, and 3 leagues, totaling 333 prefectural-level divisions. County-level: 971 municipal districts, 1,312 counties, 389 county-level cities, 117 autonomous counties, 49 banners, 3 autonomous banners, 1 special district, and 1 forestry district, totaling 2,844 county-level divisions. Township-level: 8,562 subdistricts, 20,988 towns, 8,102 townships, 966 ethnic townships, 153 sumu, 1 ethnic sumu, and 1 county district, totaling 38,773 township-level divisions. -02- With 1.4 billion Chinese people and 38,773 township-level divisions, below which are communities, administrative villages, and village groups, residents live in various residential complexes and village groups. China's retail outlets must cover such a vast number of residential units. Consequently, China has the largest number of retail outlets in the world. How many retail outlets does China have? In theory, industrial and commercial registration numbers are relatively accurate, but for well-known reasons, registration does not accurately reflect the number of outlets currently in operation. For example, closed stores may not have been deregistered. During the B2B boom, some used data from the tobacco system as a reference, roughly 6 million retail outlets. Data from a micro-mall system provider suggested about 10 million outlets, including retail and catering. Deep distribution aims to reach outlets. What is the personnel density for deep distribution? Jinmailang, known for its "four-in-one" model, has a "store manager" standard: for a population of 60,000 and 150 stores, 3 "store managers" are assigned. Each manager handles 50 stores, visits 10 stores daily, cycles every 5 days, and makes 6 visits per month. If a company were to cover all outlets, following the "four-in-one" standard, the number of channel personnel would be enormous. Brands fight a "money-sea tactic," while channels fight a "people-sea tactic"—that's absolutely correct. Reaching 10 million outlets, close to 1.4 billion users—that's what China's channels must accomplish. -03- The ultimate goal of channels is to reach users (C-end). If that's not possible, get as close to users as possible. Retail outlets are closest to users. Therefore, China's channel transformation has gone through two rounds: first, "market center sinking," i.e., channel flattening; second, deep distribution, i.e., reaching outlets. Everyone knows the benefits of channel flattening and deep distribution, but few analyze their costs. Because flattening has costs, only a limited number of manufacturers can truly reach outlets. The cost of channel flattening is the internal hierarchy of the manufacturer's sales force. For every level reduced in flattening, the manufacturer's internal hierarchy increases by one level. Let's look at the results of three rounds of channel flattening in China. 1. Channel structure before 1998: Sales Director → Regional Manager → Sales Rep → Provincial Tier-1 Distributor → City Tier-2 Distributor → County Tier-3 Distributor → Retail Store Channel structure: 3 levels within the manufacturer, 3 levels in the distributor channel. Total 6 levels. 2. Channel structure from 1998 to 2000: Sales Director → Regional Manager → Provincial Manager → Sales Rep → City Tier-1 Distributor → County Tier-2 Distributor → Retail Store Channel structure: 4 levels within the manufacturer, 2 levels in the distributor channel. Total 6 levels. 3. Main channel structure in northern regions after 2000 (1): Sales Director → Regional Manager → Provincial Manager → City Manager → Sales Rep → County Tier-1 Distributor → Retail Store Channel structure: 5 levels within the manufacturer, 1 level in the distributor channel. Total 6 levels. Main channel structure in southern regions after 2000 (2): Sales Director → Regional Manager → Sales Rep → Provincial Tier-1 Distributor → Provincial Distributor City Company → Provincial Distributor County Company → Retail Store Channel structure: 3 levels within the manufacturer, 3 levels within the distributor. Total 6 levels. Main channel structure in southern regions after 2000 (3): Sales Director → Regional Manager → Provincial Manager → Sales Rep → City Tier-1 Distributor → City Distributor County Company → Retail Store Channel structure: 4 levels within the manufacturer, 2 levels within the distributor. Total 6 levels. -04- From the evolution of channel structure during China's channel flattening, it is clear: No matter how you flatten, the sum of internal and external levels remains constant at 6. As companies grow and personnel increase, management levels inevitably increase. This is determined by the span of control theory, which classic management theory has long proven. I made this point about 20 years ago, but few paid attention. In reality, channel flattening is the process of external channel levels becoming internal levels within the brand. According to Nobel laureate Coase's theory, it's the process of external transactions becoming internal management. According to Coase's transaction cost theory, internal management costs must be lower than external transaction costs. In fact, only a few companies with exceptional channel management capabilities can truly achieve internal management costs lower than external transaction costs. Therefore, China's channel-driven approach is essentially management-driven. Managing a sales team with 4 levels is extremely difficult. Because frontline "sales reps" in China are largely "lone wolves," i.e., semi-controlled. Generally, companies have management penetration of only 2 levels, at most 3, and only the best Chinese companies can build a 4-level management team covering all of China. -05- 1.4 billion residents, 10 million retail stores, scattered across residential communities and village groups. This is the core element for understanding China's channels, and it determines that the total number of internal and external channel levels nationwide is 6. The large population and dispersed residence determine the dispersion of outlets, and regardless of how much urban KA (Key Accounts) expand, the number of small outlets has not significantly decreased. Some might say that when China sees large distributors like those in the U.S., channel levels will decrease. This is still a misunderstanding. As long as a large distributor covers a sufficiently large area, its internal levels will increase. The total internal and external levels between brand and distributor remain unchanged. Understanding this is crucial to understanding China's channel structure. Traditional channel transformation can be seen as disintermediation. The cost of flattening is the hierarchization of internal management. That's the truth about flattening. No matter how you flatten, the total levels do not decrease; they remain constant. -06- No matter how channels are flattened, the total management levels remain at 6. So, when the internet combines with channels, will the channel structure change? The channel structures created by the internet can be roughly divided into three types: First, true disintermediation in direct e-commerce F2C. The brand (F) goes directly to the user (C) via an app or micro-mall without any intermediate steps. From the current promotion of brand apps, the scale is generally small. Xiaomi's app may be a standout, but its share of Xiaomi's sales is declining. Brand micro-malls are generally unsuccessful. Brands can do direct e-commerce F2C, but they need to know that the ceiling is not high. Second, fake disintermediation, i.e., platform e-commerce. Third, digitalization of traditional channels. The full chain of FMCG traditional channels is F2B2b2C. From this, two types of new channels that reduce intermediation can evolve: F2B2C and F2b2C. These are also not mainstream. The real mainstream is F2B2b2C. The rest of this article focuses on the two mainstream channels in the internet environment. -07- People have always called platform e-commerce B2C and considered it disintermediated. This is a misunderstanding. In the past, people have come to see the truth about platform thinking and traffic thinking. Now we must also recognize the truth about platform e-commerce disintermediation. First, platform e-commerce is not truly disintermediated because the platform itself is an intermediary. The real business logic of platform e-commerce should be F2P2C. F stands for factory, P for platform, C for customer. Traditional channels involve person-to-person interaction, where intermediaries are people, so relationship building is necessary. Platform e-commerce seems to connect brands directly with users, bypassing the platform. In fact, the platform uses a software system that replaces people. This process, in digital terms, is called "marketing automation." Platforms can reach hundreds of millions of users, both due to their oligopolistic nature and the billions of SKUs from millions of merchants. Only with that many SKUs can the platform retain users. Second, the platform's hundreds of millions of users are not simultaneously reachable by each merchant. The platform attracts hundreds of millions of users, but the number of merchants is in the tens of millions. On average, each merchant has few users. Each merchant must compete with others for platform traffic, and the cost is traffic fees. Third, the key to reaching C-end users is in the platform's hands. A large platform with millions of merchants is absolutely unequal. The platform's anti-monopoly focus on "choose one of two" is because the platform holds the key to reaching users. At best, platform e-commerce reduces intermediation, but for manufacturers, it's disintermediation with the platform holding their "lifeline."
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For platform e-commerce, users are loyal to the platform, not to brands. That's exactly what the platform wants. If users were loyal to brands, brand apps would succeed. No matter how powerful a brand, it is insignificant compared to the category and hypermarket. This is the relationship between a subset and the whole set. Marketing digitalization precisely aims to establish direct contact between brands and users, i.e., online connection. We've already said that F2C, F2B2C, and F2b2C are insufficient for "great success," and F2P2C control is not in the brand's hands. So how can brands reach hundreds of millions of users? Note that I emphasize hundreds of millions of users. If you want to survive in a niche or small scale, any approach that makes sense is fine. But an FMCG giant must find a model to reach 10 million outlets and connect with hundreds of millions of users. We find that in the past, deep distribution required 6 levels to reach outlets, but in the digital environment, reaching users requires 7 levels. Digitalization has not only failed to disintermediate but has added a level. Because the endpoint of deep distribution is the outlet, while the endpoint of digitalization is the user. Channel digitalization has two major modules: First, full-chain digitalization F2B2b, with a total of 6 internal and external levels; second, full-scenario BC integration. Full-scenario reach has three super touchpoints: First, one product, one code; second, store managers, staff, and sales guides; third, store markers like freezers and signage. If the core of one product, one code is using the product as a connection point, then the other two super touchpoints are people. Deep distribution requires treating store personnel as work targets; digitalization requires treating store staff as "management" targets because they assist in user connection. -09- If we want to disintermediate, let's see which level can be removed under digitalization. Building a sales team covering 2,844 county-level distributors requires thousands of salespeople. Tens of millions of salespeople require at least a four-level management system: regional (multi-province) manager, provincial manager, city manager, and sales rep. County-level distributors cover an average of thousands or tens of thousands of outlets, requiring at least a one-level management system. Even so, many regions can only serve large outlets and second-tier distributors, leaving small stores to second-tier service. The 10 million outlets are important touchpoints for connecting users, and within the business circle radius, acquaintances are regular customers; the connection is not a system but a relationship. For small stores, the owner is the clerk; for large stores, there are clerks; for KA, there are sales guides. Each person is a super touchpoint. Without any of these levels, connecting with hundreds of millions of users is unimaginable. From the perspective of connecting users, digitalization cannot disintermediate. But once users are connected, there is no need to disintermediate information flow, business flow, logistics, or capital flow because information sharing has no cost. Once users are connected, can we disintermediate? Because once users are connected and online, intermediate links seem to lose value. When I talk about channel digitalization, some distributors and retail stores worry about this. Some will think this way, and some may try. But reality will teach those who do. China's channels and outlets are powerful because, in addition to transactions, there are relationships. China's three business elements: cognition, transaction, and relationship. Relationship is a key feature of Chinese business. It's the imprint of China's agricultural civilization on commerce. The person who helps you establish a connection can also help you sever it.