---
title: "Three Trends in Future Channel Development"
description: "Channel innovation, like channel design, requires breaking conventions to generate creative ideas, but the boundaries of disruptive construction are hard to define, risking aimless speculation. This article discusses three trends in channel development: the debate between disintermediation and re-intermediation, the clearer division of labor between manufacturers and distributors with the rise of online channels, and the opportunities brought by strong platforms and channel flattening for value-added services, efficiency, and niche markets."
author: "黄润"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2014-11-27"
language: "en"
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---

# Three Trends in Future Channel Development

> Channel innovation, like channel design, requires breaking conventions to generate creative ideas, but the boundaries of disruptive construction are hard to define, risking aimless speculation. This article discusses three trends in channel development: the debate between disintermediation and re-intermediation, the clearer division of labor between manufacturers and distributors with the rise of online channels, and the opportunities brought by strong platforms and channel flattening for value-added services, efficiency, and niche markets.

Friendly reminder: **Click** **↑** **"FMCG Distributor Professional Consulting"** to learn more about marketing and distributor internal management.

Channel innovation, like channel design, requires breaking conventions to generate the most creative ideas, but because the boundaries of disruptive construction are difficult to grasp, it is easy to fall into boundless imagination. Just like in the current office environment, where the office areas of leaders and staff are clearly separated, this to some extent stifles staff creativity due to this invisible hierarchical boundary. However, if such undirected interruptions are allowed to spread unchecked, many of the leader's other tasks cannot be carried out.

The institutional design of channel innovation involves the company's culture and heritage, which we will not delve into here. When discussing channel innovation, we usually start from the current background of channel development. It is precisely because of the three backgrounds of channel innovation we mentioned that we are forced to face and confront the three trends in channel innovation.

**Trend 1: "Disintermediation" or "Re-intermediation"?**

Many companies, when hearing about channel innovation, first react by making physical adjustments to existing channels, often resulting in a redistribution of the existing pie. The most common approach is to remove intermediaries and switch to direct company operations to increase operating profit. This seemingly direct and simple approach can indeed improve the company's profitability in the shortest time, but it overlooks the fundamental reasons why distributors can exist in this market.

a. The relationship between distributors and downstream customers is, in principle, like a well-built highway. The settlement processes and trust levels between stops are relatively stable. Some under-the-table matters cannot be promised or handled by manufacturers. Let's call this "regional transaction relationships tend to stabilize."

b. Distributors have established networks over many years in the local area, including relationships with industry and commerce, taxation, quality inspection, etc. Many brands are essentially hitchhiking on these; starting from scratch requires both time and cost. This is also known as "diminishing marginal cost of hitchhiking."

c. The fact that distributors can make money does not mean manufacturers can. One important reason is that regional general managers rarely have the "owner's" mindset and perspective to view every matter in operations, especially regarding costs, ultimately leading to profitable things becoming unprofitable. We call this "the magic of the boss mentality."

A good example is that in early 2011, a large domestic electrical appliance group underwent organizational restructuring. It integrated all small appliance sales under a single platform, internally called the China Marketing Headquarters, responsible for domestic sales of all small appliances. Simultaneously, it abolished the dealership system nationwide and switched to a joint venture model (where its professional managers and distributors jointly formed local trading companies). Distributors were not to participate in daily management in principle, but became shareholders in investment-oriented companies, serving as nominal corporate legal representatives (i.e., as chairman or director), but without decision-making power over the appointment or removal of general managers. The group directly appointed professional managers as general managers of the joint ventures to handle daily operations. Each business division under the group produced and priced its own products, then sold them uniformly through the China Marketing Headquarters to the joint ventures. However, this grand restructuring lasted less than half a year. Due to rampant corruption from uncontrolled general manager positions, a sharp rise in overall operating costs, and the erosion of retail downstream profits, the group's channel inventory rose 78% year-on-year, accounts receivable rose 39%, and the sales division suffered a total loss of nearly 300 million yuan. The joint ventures became unsustainable, and the restructuring completely failed. After October 2011, the overall channel reverted to the dealership system, with factories again focusing on macro activities such as product production, brand promotion, and market maintenance, while handing sales functions back to distributors.

**Trend 2: With the rise of online shopping channels, the division of labor between manufacturers and distributors will become increasingly clear.**

Many people have a misconception that the rise of online shopping channels will greatly squeeze the living space of distributors, even believing that distributors are no longer necessary. In fact, the opposite is true: the rise of online shopping channels truly suppresses the survival space of terminals (i.e., whether retailers must invest heavily in leasing the best locations, using the best decoration materials, and building the best stores?), not the channel. The requirements for distributor delivery are not weakening but strengthening. In the context of the rise of online shopping channels, branding and delivery become the two most critical factors affecting sales. From the manufacturer's perspective, their work mainly falls into three categories:

a. Provide products with better cost-performance;
b. Operate and package brands;
c. Establish and maintain orderly market rules.

From the merchant's perspective, their work becomes more professional and focused on the following three aspects, rather than the current game of interests with manufacturers:

a. Warehouse management capability becomes the key to a distributor's true survival. Two phrases clearly point out the importance of warehouse management: one is "warehouse is the source of all evil"; the other is "warehouse can sweep out gold."

b. Become a after-sales service center for multiple brands of similar products, rather than a single brand's after-sales service center. For products requiring professional skills in after-sales service, such as large home appliances and lighting fixtures, whoever can transform the cost nature of after-sales into a profit attribute truly controls the channel.

c. Improve delivery quality and radius, becoming a potential competitor to express and logistics companies in regional delivery. JD.com's forward integration in product delivery, with warehouses in Chengdu, Guangzhou, Shanghai, Beijing, etc., and self-delivery, has actually touched the tail of industry segmentation competition in the context of the rise of online shopping channels.

Comparing the refinement of manufacturer-distributor division, taking the lighting industry as an example, three channel problems cannot be avoided:

First, traditional channels have low transaction efficiency. In traditional physical stores, consumers repeatedly "try, look, and touch" to "see is believing." Compared to the technical content of large home appliances, lighting products' technical content is basically "kindergarten level." From a technical perspective, consumers' "try, look, and touch" of lighting products basically cannot reveal quality issues. When even large home appliances do not require "try, look, and touch" to verify, the "try, look, and touch" for lighting products is a formality and process, a self-comforting act. In other words, if the trust foundation is sufficient, this process and formality can be omitted, and channel transaction efficiency can be improved.

Second, the cumbersome and complex processes invisibly increase costs, not only for consumers but also for merchants. If the internet can achieve "what you see is what you get," why would consumers go to bustling, dirty building materials markets to go through unnecessary processes and formalities? Why would merchants spend large amounts on decoration in expensive markets to give products a "good appearance"? The biggest advantage of traditional channels has become their biggest disadvantage.

Third, consumer interests are not maximally protected. As ordinary consumers, we want to obtain products most conveniently under constant product quality; we do not want to pay costs with obvious differences; and we hope services are guaranteed. Under market economy conditions, fully competitive markets inevitably push mature products and industries to a state where consumer demand is the guide, requiring companies to provide high cost-performance products and build differentiated competitive advantages through services. Against the backdrop of increasingly updated technology, the traditional channel setup model itself does not possess this advantage.

Low sales efficiency, high sales costs, and the inability to maximize consumer interests (convenience, consumption cost, and services enjoyed) continuously catalyze the further refinement of the manufacturer-distributor division that is on the verge of emerging.

**Trend 3: The emergence of strong platforms and the flattening trend of channels bring opportunities for value-added services, efficiency improvement, and niche markets.**

Whether it is the "giants" of traditional stores like Gome and Suning, or the large online platforms like Tmall and JD.com, the most direct change they bring to the entire channel is the shortening of the path. Shortening the path cannot simply mean removing intermediate levels (as elaborated in the first trend), but must at least form new advantages in one of three aspects: channel value addition, cost reduction, or new experiences. Taking the formation of home appliance stores as an example: In the 1990s, consumers had to try large appliances before purchasing. After delivery personnel delivered goods like air conditioners, refrigerators, and TVs, consumers would only sign the receipt after running the air conditioner and refrigerator for dozens of minutes and tuning each channel on the TV. Today, delivery personnel from any major appliance store only need to deliver the goods to the consumer's home and immediately get a signature. This change in times is due to: first, the increasing maturity of the large appliance industry, where consumer familiarity with products is the basis of trust; second, the fierce service competition has forced most appliance stores to offer unconditional return or exchange policies for any quality issues within 7 days. The different consumer behaviors in the two eras are both based on the two questions: "Will I buy a product with quality issues?" and "If I buy a defective product, can it be resolved promptly?" Due to this change, after-sales service personnel who could only deliver to 10 households a day in the past can now deliver to 15 households a day due to simplified acceptance procedures, greatly improving delivery efficiency. Taking the sale of 10,000 refrigerators as an example: if the product defect rate is 1/10,000, and checking whether a refrigerator works normally takes 10 minutes, according to 1990s sales efficiency, completing this sales process would take nearly 70 days without rest. But with today's simplified process, we only need to provide after-sales service for 1 refrigerator to satisfy 10,000 consumers. The improvement in sales efficiency is the greatest saving in channel costs.

However, in traditional understanding, there are two misconceptions about logistics and e-commerce that need clarification:

1. Regarding logistics: In China's multi-level administrative system of provinces, cities, counties, townships, towns, and villages, except for Jiangsu, Zhejiang, Shanghai, and Guangdong, modern logistics and delivery capabilities begin to lose effectiveness below the county level. Therefore, channel flattening refers to the flattening of the province-city-county channel, while from county to village, there is still ample market space left for traditional distributors to operate.

2. Regarding e-commerce: Not all products can be 100% traded online. The characteristics of some products determine that online channels can only serve as auxiliary sales channels. For example, fast-moving consumer goods that are bought and used immediately, such as cola, and customized, personalized luxury goods, such as precious jewelry, are still difficult to achieve non-face-to-face transactions in the short term. On one hand, the people-oriented concept of products will not change; no matter how fast the express delivery, it cannot compare to stores for immediate purchase and use. On the other hand, for personalized products, the value-added services during the purchase process are part of what consumers pay for. Therefore, products such as fast-moving consumer goods and luxury goods will become niche markets after the emergence of large platforms.

With an understanding of the above channel development trends, discussing the methods and principles of channel innovation becomes natural.

Source: Fast Moving Consumer Goods Elite Club

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