We are living in an era of absolute oversupply in most product categories. In a market that is mature—or even shrinking—where should new growth come from? This is a central concern for both brand owners and distributors.
There are essentially two paths.
The first comes from products: product innovation and the successful development of new offerings.
The second comes from supply-chain innovation.
Why can supply-chain innovation create incremental sales and profit? Because it improves cost and efficiency. Lower costs and higher efficiency strengthen competitiveness. Greater efficiency can support higher sales, while optimized costs can improve profit.
Supply-chain innovation, however, is not a slogan. It requires companies to reorganize their existing operating model into a new one.
Competition has become a rule of survival. The practical question is how a distributor can redesign its supply chain to lower cost and improve efficiency.
If someone else loses money selling at RMB 2 while you can sell at RMB 1.90 and still make RMB 0.20, that advantage comes from supply-chain transformation and innovation.
To examine these questions, New Distribution invited three industry practitioners into the discussion: Xu Chao, head of strategic co-development at Annto Supply Chain Technology; Tang Rui, marketing director of Sichuan Chuzhile Food; and Chu Jiali, operations director of Beijing Mandian Beverage.
Growth Path One: Build Stronger Supply-Chain Capabilities
Annto is a supply-chain technology company incubated by Midea Group.
It initially served Midea's core businesses, then developed three major services:
- production logistics;
- a unified-inventory model that integrates the product logistics of brand owners and distributors to reduce cost and improve efficiency;
- integrated delivery and installation, a service used primarily in home appliances.
These businesses make Annto a technology company built around logistics capabilities. How does that relate to FMCG distributors?
Xu Chao explained:
Before launching our broader new-growth initiative, we mainly handled traditional RTC services for brands, including regional warehouses and collaborative warehousing.
Many distributors may not know Annto well. But when products from the brands they represent are delivered to their own warehouse or to another distributor warehouse, they may see large numbers of Annto vehicles. As our work deepened, we found that capabilities serving small business customers also needed to be strengthened.
Consumers may trade down on price while continuing to trade up on quality. A third-party logistics technology company cannot redesign the brand owner's product, but it can help brands and channel partners reduce cost and digitize operations together.
Based on the characteristics of an industry, Annto can design unified warehousing, distribution, inventory, and channel-transfer systems. The goal is to reduce inventory, improve turnover, and ensure that every distributor receives the newest production batch.
Distributors face pressure on several fronts. Growth is difficult. Popular first-tier products often carry little margin, while second-tier brands are difficult to build. Many distributors also encounter obstacles in digital operations.
At the same time, they may lack the capabilities needed for fulfillment at scale.
Over more than two years, Annto therefore formed strategic partnerships with distributors and worked with them directly on commercial-flow systems, sales-management systems, warehouse-management systems, and delivery systems.
For distributors that had already invested significantly in logistics infrastructure, Annto helped co-develop an operating foundation. This enabled them to reduce cost and improve the efficiency of local fulfillment for other distributors as well.
The approach produced positive results. It also helped participating distributors attract strong brands, expand their channels, and create new growth.
Distributors suited to supply-chain upgrading generally share two characteristics:
- they already operate at substantial scale;
- they have the capacity to invest heavily in infrastructure.
How large is large enough?
Xu Chao offered estimated thresholds for FMCG distributors:
- above RMB 500 million in commercial-flow scale in China's largest cities;
- above RMB 200 million in first-tier cities;
- generally above RMB 100 million in prefecture-level cities;
- around RMB 50 million in a third- or fourth-tier city with roughly 500,000 residents, together with the ability to build its own logistics capability.
A distributor below the relevant threshold should wait rather than rush into a supply-chain upgrade.
A distributor that has reached the threshold should separate logistics from the trading business, establish an independent logistics company, and operate it on a compliant basis.
There are two important reasons for doing so.
First, settlement between an internal commercial-flow company and a trading company is a related-party transaction. Cost accounting should therefore be conducted objectively and independently.
Second, business qualifications, invoicing, and taxation must be fully compliant.
Once these foundations are in place, Annto can provide a complete set of rules and systems, including standards for warehouse operations and tasks, as well as systems training.
Would turning an internal logistics department into a separate company increase upfront investment?
Xu Chao said that the initial investment could be close to zero:
A distributor that becomes an Annto strategic partner and establishes a logistics company needs to cover only the company's formation costs. We provide the remaining systems training without charge.
Our goal is to help distributors transform and upgrade. Most distributors already have logistics capabilities. We want to help professionalize those capabilities, identify a group able to serve the broader market, and bring them into Annto's national business network.
By helping distributors establish regional and city-level logistics companies—or urban delivery companies—Annto also expands its own service network. The result is an ecosystem.
In an era of intense competition, a distributor can professionalize and separate its existing logistics capability, turn it into a logistics business, and open a second path for growth.
Growth Path Two: Innovate through Products
Product innovation offers distributors two broad approaches:
- choose the right emerging category and innovate within it;
- choose the right product and innovate within an established category.
Choose the Right Emerging Category
The greater the oversupply, the more valuable genuine product innovation becomes.
An innovative product can emerge within a mature category. A mature category already has stable market demand, but that does not mean every consumer need has been met. There is still room to innovate.
Innovation can also emerge in a new category. A new category creates a new market, often bringing a substantial early-stage growth dividend.
Sichuan Chuzhile Food was developing a series of products in such an emerging category. The company had entered prepared dishes the previous year, just as the segment became highly visible.
Many distributor owners come from traditional packaged foods. They recognize the pressure in their existing business and want to change, but they may have little experience with prepared dishes. Is it a good business? Is it the right category?
Tang Rui explained that public opinion around prepared dishes is highly divided, particularly on social media and among online consumers. Yet he argued that most people already consume them in some form:
We can say with confidence that 95 percent of people have long been regular users of prepared dishes. Many restaurants serve a dish within 25 minutes because some preparation has already been completed. Even when I cook a meal at home and reheat it in the office microwave the next day, that is also a prepared dish in a broad sense.
The traditional weakness of prepared dishes was the factory-line character of many products. But chain restaurants also depend heavily on prepared components because they require standardization and efficiency. Tang estimated that the share could reach 80 percent in many such operations.
Prepared dishes remain controversial, but they are already integrated into many parts of daily life. The distributor's task is to address consumer concerns.
Consumers generally worry about three things:
- Is the food safe?
- Does it taste fresh?
- Is the price reasonable?
Tang said product innovation should begin by removing additives and avoiding chemicals or raw materials that create health concerns. A zero-additive proposition can address part of the trust problem.
Taste is equally important. Consumers often associate prepared dishes with an artificial or plastic-like flavor. Recreating the taste of a freshly served meal is therefore a major objective for both brands and factories. Tang said his company's products were designed to reproduce approximately 95 percent of the intended dining-table flavor.
Finally, many consumers expect prepared dishes to cost less than ordering the same dish in a restaurant. Factories must therefore develop products that deliver both quality and value.
Innovate within a Mature Category
Chu Jiali used functional beverages to illustrate innovation inside a mature category.
She said China's beverage market was continuing to expand, from RMB 123.8 billion in 2021 toward RMB 182 billion in 2026, representing compound annual growth of 8 percent.
Measured by sales volume, China's per-capita consumption of functional beverages was 9.2 liters in 2021. That was only 9.9 percent of the United States level, 22.4 percent of Japan's, and 26.9 percent of the United Kingdom's. She argued that per-capita consumption still had substantial room to grow.
Functional beverages already represented a market of more than RMB 100 billion in China and were expanding relatively quickly. Yet Chinese consumption remained much lower than in Europe and North America.
Red Bull is the best-known brand in the category and holds a powerful market position. But leadership is not necessarily permanent. Wallace reshaped a fast-food market once dominated by KFC and McDonald's, while Luckin Coffee overtook Starbucks in important dimensions of China's coffee market.
Changing consumption occasions, new channels, and new products can also create alternatives to Red Bull.
Red Bull's business in China was close to RMB 20 billion, while rapidly rising public company Eastroc Beverage had reached roughly RMB 10 billion. Other less visible functional beverage brands had also built businesses worth several billion renminbi.
Mandian Beverage had been growing over the previous several years while the overall category expanded at around 8 percent annually.
The problem for distributors is that a benchmark product with high market share may still provide little channel profit. The distributor carries substantial working-capital requirements while much of the margin remains with the brand owner.
That is not unique to functional beverages. It is a wider challenge facing FMCG distributors.
Mandian proposed several responses:
- address younger consumers' preference for healthier and lighter products with a beverage designed specifically for them;
- use distinctive packaging to attract younger consumers, led by its Little Blue Bull vitamin functional drink;
- operate both online and offline, using short video and livestreaming to build the brand while distributors conduct local activation;
- leave more margin in the channel so distributors can make money.
Mandian also set requirements for prospective distribution partners: at least five years of local beverage-agency experience, with represented products holding no less than 60 percent share in their relevant local channels.
In practical terms, it wanted leading local distributors, especially those specializing in beverages. For those partners, Mandian positioned itself as a high-margin addition to the portfolio.
The offer combined innovative package design, a clear focus on younger consumers, and relatively attractive channel margins.
Two Sources of Distributor Growth
Distributor growth can therefore come from two directions.
The first is internal capability growth. A distributor professionalizes and separates its supply-chain capabilities, then turns them into a business that complements product distribution. Stronger logistics also increases the distributor's value and negotiating position with brand owners.
The second is product-led growth.
A distributor must select strong products. That begins with selecting the right category, then identifying genuinely innovative products within both emerging and mature categories.