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Channel diversion is the most troublesome issue in the FMCG industry. It can ruin previously healthy markets, intensify conflicts between manufacturers and distributors, and even lead to splits. It can make or break marketing professionals' careers, becoming a tangled and persistent problem. Therefore, exploring the types of channel diversion and prevention methods is valuable for achieving harmony and win-win outcomes between manufacturers and distributors.

So, what exactly is channel diversion?

In my view, channel diversion refers to the disorderly flow of products from the same manufacturer across regions, markets, or channel levels, driven by the differing interests of various parties.

What are the types of channel diversion?

1. By dimension: horizontal and vertical diversion.

Horizontal diversion occurs between channel members at the same level (including distributors, sub-distributors, wholesalers, etc.). Vertical diversion occurs between different channel levels, such as a distributor bypassing a sub-distributor to sell directly to retailers, or a sub-distributor diverting the distributor's stock. For example, Gree Air Conditioning's early decision to form a sales company with its distributors was a response to severe horizontal diversion, where sub-distributors competed destructively. In another case, a sub-distributor of a well-known FMCG company, after gaining direct supply rights from the manufacturer, undercut the distributor by selling to its sub-distributors with discounted rebates—a classic vertical diversion.

2. By nature: benign and malignant diversion.

Benign diversion involves intentionally supplying products to weak or undeveloped markets to stimulate sales and market development. Malignant diversion is when channel members deliberately divert products for personal gain or to disrupt market order, often as retaliation against manufacturers or other channels. For instance, a small FMCG company failed to develop a new market directly but found that a neighboring distributor's regular diversion attracted customers from that market to seek dealerships—"planting flowers but not blooming, yet willows shade the path." This is benign. Conversely, a regional distributor aggressively invading neighboring markets to maximize rebates is malignant.

3. By region: intra-regional and inter-regional diversion.

Intra-regional diversion refers to horizontal or vertical diversion within the same market, while inter-regional diversion involves selling beyond one's designated sales area or scope.

These are the conventional classifications. Additionally, from a motivational perspective, there are genuine and fake diversions. Genuine diversion actually harms the market, while fake diversion uses the pretext of diversion to create momentum and expand markets indirectly. Diversion can also be classified by severity, such as small-scale versus large-scale.

Now that we understand the types, how can we effectively prevent channel diversion?

1. Address the root causes.

Severe diversion often stems from monotonous product lines, minimal product differentiation, and poor shipment tracking. To tackle this:

  • Provide a diverse product portfolio. Implement a strategy of "selling one generation, developing one, promoting one, and reserving one." A rich product range prevents diversion caused by over-reliance on a single product.
  • Enhance product labeling. Use both visible and covert marks. Visible marks include production dates and codes on packaging indicating the distributor's market. Covert marks are secret codes or anti-counterfeit features.
  • Establish detailed shipment records. Warehouse staff should log customer names, production dates, quantities, license plates, driver details, and addresses to deter diversion attempts.

2. Implement strict penalties for diversion.

Rules are essential for order. To prevent and manage diversion effectively, institutionalize penalties:

  • Create a deterrent penalty system for channel members. Enforce strict management with high-pressure measures, ensuring equality under the rules. Penalties should be severe enough to outweigh any benefits from diversion. For example, a famous foreign beer company imposes a one-time fine of 200,000 yuan for any confirmed diversion, regardless of quantity, with the slogan "Divert and go bankrupt." This has proven effective.
  • Establish joint liability for marketing personnel. Diversion often results from negligence or inaction by marketing staff. Hold supervisors and sales representatives accountable by linking their economic interests to diversion prevention, encouraging proactive management and support.

3. Rebuild the channel system.

Design a scientific and rational channel structure to prevent diversion:

  • Channel length: Shorten the channel chain, such as adopting direct distribution or flattening channels. Shorter chains make diversion control easier, while longer chains increase diversion risks and complicate detection.
  • Channel width: Decide on exclusive, selective, or intensive distribution based on market control capabilities and positioning. If management systems are robust, selective or intensive distribution is feasible; otherwise, opt for exclusive. For base markets with strong personnel support, selective or intensive distribution can work. For strategic markets, exclusive distribution minimizes diversion incentives.
  • Channel breadth: Diversify channel types (e.g., traditional, modern, internet) to increase sales opportunities, but ensure effective control to avoid diversion triggers. Choose channels based on your ability to manage them.

4. Implement deep distribution and collaborative sales.

From years of FMCG sales management experience, I've seen that diversion often occurs when marketing personnel are not close to channel members, lacking insight into product flow, speed, and volume. To mitigate this, set up offices, branches, or sales outlets for refined channel management. Through deep distribution and collaborative sales, strictly define sales territories and hierarchical management, and provide consultative selling to channel members, thereby minimizing diversion opportunities.

Channel diversion is a chronic issue for many FMCG companies, and its resolution can determine market success or failure. By understanding the types and prevention methods, and shifting from "rule by man" to "rule by law," companies can proactively prevent and control diversion, nipping it in the bud and curbing its spread.