I. 2018, Heavy Snow The first heavy snow of 2018 arrived unannounced. Southern cities entered winter earlier than usual this year, while some northern regions are already experiencing bone-chilling temperatures of minus 30 degrees Celsius. In Yulin, Shaanxi, Boss Ji will turn 60 on the 24th day of the 12th lunar month in 2018. This year, he made up his mind to hand over the entire business of his trading company to his son, Xiao Ji, who had been gaining experience elsewhere for several years. At year-end, the father and son were discussing next year's plans in a somewhat desolate office. The results weren't too bad: in 2018, revenue was flat year-on-year, but net profit had already slipped into a small loss. Old Ji accepted it. After all, it was the first year of the "second-generation businessman" taking over. Moreover, given the unfavorable timing and circumstances, Xiao Ji managed to take over smoothly without major mishaps, which gave Old Ji a glimmer of warmth in 2018. China's distributor community has weathered the institutional embarrassment of identity recognition in the early reform era, navigated the gray areas of speculation, favor-trading, and connections in the 1990s, endured the exploitation by hypermarkets and brand owners in the early 2000s, and even ran with tears through the bloody battles of e-commerce. But the winter of 2018 is different. Outside, the dry, cold north wind seems to tear at your skin. Some distributor bosses who haven't opened their doors for days simply hide under the covers and sleep: "This damn weather, it's the same whether I'm in the store or not!" The disappearance of real estate, demographic, and internet dividends, compounded by multiple complex factors, has made distributors in the 2018 winter wrap their thin winter coats tighter.
II. What Changes and What Doesn't for Distributors 2018 marks the 16th year in home appliance retail for Sister Lu from Shandong. For the first five years, she worked for someone else, rising from a salesperson to store manager. After the 2008 financial crisis, Lu's original boss decided to abandon the business and move to the provincial capital. Lu used all her savings to take over one of the stores at what seemed a reasonable price at the time. She thought that after the economic crisis, business would see a new round of growth. But there was only a brief revival before 2013; after that, business remained half-dead, constantly showing a grim face. In 2016, JD.com's exclusive stores began to expand offline. Lu, who had been frightened by e-commerce for years, finally decided to embrace internet transformation. Before that, she had tried opening stores on Tmall and Pinduoduo. But by then, Tmall's dividend was no longer tilted toward intermediaries like her; brand owners' own flagship stores on Tmall were amplifying the "Matthew effect." Small merchants like her could hardly find any "traffic depression." As for low-price platforms like Pinduoduo, besides selling low-value small appliances at a loss, for distributors trying to survive, not losing money was the highest ideal. From changing the storefront from a home appliance brand to a JD exclusive store, and from sourcing goods from brand companies to sourcing from JD's product pool, the prices of goods remained largely unchanged. To get truly low-priced products, one had to watch the clock and grab orders like online promotional "flash sales," often missing out. Young consumers who entered the store because of the new sign would use their phones to compare prices, and if they found the price higher than online, the order was immediately lost. The original intention of online-to-offline traffic became online competing with offline for orders. The so-called new retail didn't bring new traffic, or it brought consumers with low transaction values. What's more terrifying is that JD's offline price war, dragging distributors along, crushed the channel, becoming a true winner-take-all. From renovation to stocking samples, a single store costs at least 500,000 to 600,000 yuan upfront, which is not a small investment in a winter when investment intentions are tightening. Although she no longer received calls from salespeople pressing for month-end stock, her existing inventory and the monthly sales targets that arrived like clockwork became Sister Lu's new nightmare. Six consecutive months of failing to meet targets would lead to elimination, not only losing the 3-5% rebate but also losing all initial investments. Sister Lu still feels she entered too early. This kind of "survival of the fittest" channel expansion is better timed than early; only those who laugh last are the true winners. Today, Sister Lu feels like a donkey still blindfolded and turning the mill, but the whip on her back has changed from steel to titanium alloy. As offline distributors struggle, online platform e-commerce celebrates. The new-era distributors show stronger money-making abilities. Pinduoduo, founded only three years ago, was valued at $30 billion and listed on the US stock market in July this year. With advertising spending by merchants as its main revenue, Pinduoduo's online marketing revenue in the third quarter alone was 2.974 billion yuan, up more than 9 times year-on-year and 25% quarter-on-quarter. Commission revenue was 398 million yuan, up nearly 2 times year-on-year and 18% quarter-on-quarter. On November 2, Alibaba released its Q2 FY2019 earnings. In the second quarter, Alibaba's revenue was 85.1 billion yuan, up 54% year-on-year, with over 85% coming from e-commerce. Data showed core e-commerce revenue grew 56% year-on-year, still higher than its average growth. In mid-November, JD.com released its Q3 report. In the first nine months of the year, the company achieved operating revenue of 327.187 billion yuan, up 29.75% year-on-year, which is roughly the annual profit level of 650,000 medium-sized distributors. From offline to online, traditional distributors have lost badly in the price war. These new distributors, who mainly collect fees and commissions, seem more capable of ensuring steady income. The growth in e-commerce revenue is not only the "cost contribution" of brand merchants but also the tuition fees paid by millions of physical distributors seeking a way out, reflecting the fierce competition among platform merchants. From January to June 2018, online retail accounted for 17.4% of total retail sales in China, ranking first among global economies. Note: first among all global economies! It's worth mentioning that just five years ago, experts at home were still arguing over when online sales would break 5%. The ambition of new distributors is not limited to monopolizing online channels. The closed loop of online and offline consumption is the most perfect business model. In 2018, JD exclusive stores will add another 7,000, covering 100% of county-level cities; In 2018, rural Taobao stores will be fully upgraded to Tmall Youpin service stations, with physical store projects fully implemented; In 2018, Suning Xiaodian, which is mainly self-operated, set a target of 1,500 stores; ... This is what worries Sister Lu the most. If offline business becomes a bottleneck, she could just let go. But the new-era distributors have turned around and picked up the offline business of traditional distributors. Since they're doing it, do new distributors have new entry points, new traffic, new methods? If it's just a change of signboard, where will the new profits come from? Only cutting existing stock without developing increment, whose interests does the price war actually harm? Fortunately, Alibaba says it's time to fulfill the mission of "making it easy to do business anywhere."
III. The Inescapable Fate It's not just Sister Lu in Shandong who's having a hard time. Ouyang in Changsha, Hunan, as the Hunan general agent for several bee product brands, finally decided at the end of 2018 to close his trading company after nearly 23 years. In his early 30s, he left his hometown in Shaoguan and came to Changsha. Starting as a small trader buying and selling bulk honey, he braved wind and rain, relying on diligence and drive, and finally established a foothold in a foreign land. During these 23 years, there was a moment when his brief success made him mistakenly think he was a trendsetter, born at the right time, riding the wave. He survived the 1998 financial crisis, endured the 2008 subprime crisis, and even in 2013 when e-commerce was at its peak, with offline store business as cold as late autumn streets, Ouyang never thought of giving up. After all, besides all his assets being invested, there were also seven or eight younger siblings from his hometown who followed him out of trust. They are now approaching 40, have settled in Changsha, and have families to support. At the age of knowing fate, Boss Ouyang thinks less about making money and more about the responsibility that comes with trust. Upstream brand companies have turned to focus on online, opening flagship stores directly on Tmall and JD.com. The prices in their promotional activities have undercut the distributors' purchase prices. The retailers he had painstakingly developed over the years were secretly buying online while bargaining over his payments. Upstream brands are now burning bridges with less and less psychological burden, calling it new retail transformation. Besides breaking the price system they once forced distributors to defend at gunpoint, brand owners have also significantly cut offline investment over the past five years. Not only have activity fees and materials been greatly reduced, but the already small sales teams have basically been disbanded. Brand salespeople haven't visited Boss Ouyang for regular business calls in nearly two years. Thinking back to the days when salespeople came to drink tea and chat, although they were bossy about stocking and store openings, at least he could feel the "grace and favor" of the brand. Today, Boss Ouyang feels like a rag, a rag that is thrown away after use. In the early years, he did all the dirty, tiring work, dealing with industry and commerce, taxes, thugs, and hooligans. He never thought he'd die at the hands of his own people. Now, after using him, brand companies don't even want to wash him and keep him for next time. After paying his employees' last month's salary, Boss Ouyang is preparing to buy a sleeper ticket back to Shaoguan for January 2019. "I'll take the train! Slower is not necessarily a bad thing!?" This statement seems both to tell others and to remind himself. Distributors like Boss Ouyang who end their business can still be considered relatively dignified. In 2018, more distributors fled in panic, with "absconding" becoming a keyword.
During the 2018 World Cup, in the "France wins, Huadi refunds all" campaign, the boss of Huadi's Beijing-Tianjin company suddenly went missing, causing public outcry;
In June, the boss of Hangzhou Kunmeng Decoration, a Gree-authorized central air conditioning direct-sales store, absconded;
In July, the dealer of Shanghai Taihuan 4S store authorized by SAIC Volkswagen went missing;
In September, the dealer of Meijiahua sanitary ware in Zhumadian, Henan, suddenly closed, and the boss went missing;
In July, the couple who were dealers for Mengniu, Uni-President, and Yinlu in Woyang, Anhui, both absconded;
In early December, a dealer of Hefei Leria sanitary ware was reported bankrupt and closed;
... Most distributors take distribution as a lifelong career, with low education and zero career experience. They rely on "trust" in business, and one absconding basically cuts off their livelihood for the rest of their lives. An old dealer who absconded and then reappeared to take responsibility joked privately: "Actually, I wouldn't dare to run; at most, I'd dare to die!" Perhaps for these middle-aged people with elderly parents and young children, death is not something they dare to touch lightly. A distributor is a family. Trading companies that once provided tens of millions of jobs stand behind hundreds of millions of people. The historical hammer of "lagging behind means being beaten" has fallen heavily on them again. Manufacturers, the decisive force in this tug-of-war, are playing tai chi in the confrontation between old and new distributors. With short-sighted and opportunistic operations, they take on the responsibilities and risks originally borne by distributors to reduce costs. By defaulting and condoning the disappearance of distributors, they are also indirectly bearing all the trial-and-error costs and risks of business. When this risk and responsibility accumulate to an extreme tension, manufacturers are at best "child emperors" to monopolistic platforms. If you are a servant, what can you do? Manufacturers cutting their own flesh to feed the eagle—will it eventually raise a tiger to bring disaster? If the winter for distributors has come, is the winter for brand owners far behind? In the past two years, marketing experts have often discussed whether distributors will disappear. Actually, will distributors disappear? Internally, just count how many brands have succeeded with a direct-sales model in China? Externally, look at how many brand owners still have bargaining power in the face of monopolistic channels, and how many are silently being slaughtered? Is it really reliable to eliminate distributors? What I see is that those who vowed to eliminate distributors eventually became the new distributors, the only distributors.
IV. The Road of No Return In Shenzhen, Boss Xiao Qin, with the shortest tenure, is the distributor who feels the 2018 winter the least. These days, he's negotiating next year's rent with his landlord. The landlord's refusal to lower the rent has delayed Xiao Qin's plans to adjust his store's product categories. Ali, an employee who joined less than six months ago, just quit, saying she's going to Tibet with her boyfriend for a "budget trip." In the winter of 2018, Xiao Qin is actually busier. After all, the only staff left are Xiao Qin and his wife, bustling about. In 2012, attracted by the reputation of a leading domestic home furnishing brand, Xiao Qin took over a building materials store in Xiangmihu, Shenzhen. That year, he quit a decent job with a monthly salary of 25,000 yuan to become a dusty little boss. 2018 is Xiao Qin's zodiac year (benmingnian), and he's been comforting himself with the saying "bad luck year." "Maybe next year will be better!" he says, while nervously fiddling with his old iPhone 5. Xiao Qin is quick to accept new things. In 2018, he participated in at least five price-cutting, group-buying, and alliance activities organized by third-party planning companies, paying tens of thousands of yuan in management fees. But after each event, distributors do the work, brand companies get the volume, and third-party planning companies make the money. Distributors doing promotions have no profit; without promotions, they have no sales. Stuck in this dilemma, distributors are like a wound-up top: they can't stop if they want to; if they don't want to stop, they have to keep being whipped. What especially puzzles Xiao Qin is that he originally chose the brand for its reputation, hoping it would bring traffic to his offline store. But brand owners, to boost sales and popularity on their Tmall flagship stores, require distributors participating in "online orders, offline delivery" to place two fake orders online for every delivered order, or they'll cancel delivery profits. The advance payment for fake orders is only offset by the company as payment for goods after 60 days, or even 3 months, which invisibly occupies the distributor's capital. Looking at the flagship stores' records of tens of thousands of monthly sales, Xiao Qin feels a mix of emotions. As we parted, Xiao Qin told me that in October this year, he secretly went to several job interviews behind his wife's back. But on one hand, his career had been interrupted for 5-6 years, and the HR's picky remarks made him uncomfortable; on the other hand, the companies he applied to didn't seem optimistic, and the salaries offered weren't satisfactory. Now, trying to go back, Xiao Qin's retreat seems cut off. In 2018, while housing prices in major cities were effectively controlled and stabilized, commercial rents continued to rise "quietly." Data released by the China Index Academy and the China Real Estate Index System in July showed that in the first half of 2018, the rent price index for shops on 100 commercial streets rose 0.6% in Q2 compared to Q1, and the price index for first-floor shops in 100 shopping centers in major business districts still rose 0.25% quarter-on-quarter. When the times abandon you, they don't even say goodbye. This saying is cruel but also sobering. Capital doesn't sympathize with the weak; it only learns to flatter the strong. I wonder if real estate companies are having too hard a time. These days, a set of population data shared by Mao Daqing, former CEO and chairman of Vanke Beijing, is circulating on social media: the labor force population of the post-80s, post-90s, and post-00s is showing a cliff-like decline. The post-90s population is 44.2% less than the post-80s; the post-00s are 33.7% less than the post-90s. "The duck in spring water knows the warmth first." The pressure of labor reduction will first be transmitted not to real estate companies but to trading companies at the bottom of the labor resource chain. Can they still recruit people? Can they afford and retain people? From O2O to the sharing economy, from B2B to new retail, the concepts spawned by the internet are diverse, but after the noise, it's mostly a mess. In this great shift of economic volume, having lost the engine of social wealth creation, the channel change is just a mirror that reflects the true nature of life's ups and downs. In December this year, Yonghui Superstores announced it would divest its loss-making new retail segment, Yonghui Yunchuang. Data showed that in the first nine months of 2018, Yonghui Yunchuang accumulated losses of over 600 million yuan. The offline store opening rate for Yonghui Life was less than 20%, with over 10 stores closed in the same period; Super Species achieved a 31% rate, and the number of new stores in the second half of the year also declined. "Unexpectedly, the overall environment pressure this year is so great," said a Yonghui Superstores executive. Coincidentally, in October, JD.com, together with Walmart, JD Daojia, and Tencent, released the "Annual Report on Omni-channel Integration Development of Chinese Retailers and Supermarkets," which showed that in the statistics of consumer purchase channel share, only 5% of people completely understand and purchase products online, 16% only offline, and the remaining 79% combine online and offline. Among them, 48% tend to buy offline after considering both online and offline opinions. The distributor group is huge, but individuals are as tiny as dust, and their voices are often drowned in the clinking glasses of giants. But it is precisely this dispersion and flexibility that maintains the vitality of the bottom economy. The width and depth of the domestic market are incomparable to both developed Europe and America and backward third-world countries. The disappearance of the distributor group would be a major threat to the protection of future consumption choices for low- and middle-income people. As the old saying goes, without offline, where does online come from?
V. An Ending Without an End In 2018, the number of market entities in the commercial trade service industry reached 66.74 million, of which enterprises accounted for 11.8 million, or 17.6%, and individual businesses were 55.945 million, or 82.4%. The number of market entities in the entire domestic trade circulation industry accounted for 68% of the national total, more than two-thirds, ranking first among all industries. This is even in 2018, when the commercial circulation system faced difficulties under the economic policy of "from virtual to real." There is a rodent in North America called the ground squirrel. During the harsh winter, their heartbeat and breathing are almost undetectable, reaching as low as two or three beats per minute, or even stopping completely. Some weak ground squirrels, due to this physiological "fake death," fail to survive the severe winter and enter a state of true death. Some strong ground squirrels, during hibernation, enter a new round of muscle growth, with protein levels in new muscle tissue even higher than the summer peak. Perhaps, for distributors, the severe winter is also a ruler, measuring height and comparing quality. It can eliminate those who don't strive, and let the strong grow new claws and teeth. Xiao Ji from Yulin just graduated from a "Second-generation Businessman Succession Plan Training Camp" at a Beijing training company. He originally planned to attend a WeChat business course, but under Old Ji's influence, he changed to a course on local distributor operations. In Old Ji's words: All the world's business can be done by anyone; but the business at my doorstep, only I can do it best. This was the most confident statement Old Ji made during our two days together. Source: Huang's Yellow (ID: About-MrHuang) "Star" New Distribution Get FMCG industry insights first -END-