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I. Distributor Debt Protest Highlights Beer Terminal Channel Difficulties

On August 3, Yuan Lianfeng, chairman of Dalian Jinyi Group, one of AB InBev's first nine distributors, led people to block the office of AB InBev's Shanghai headquarters, hoping to recover 6.17 million yuan owed to the company. The dispute between AB InBev and its long-time distributor Dalian Jinyi Group has once again made the conflict between manufacturers and distributors a focus of industry attention. Beer expert Fang Gang told China Business Journal that AB InBev's cost handling methods and personnel changes are both related, and the reconciliation of accounts is also a point of contention; every beer manufacturer may have similar problems.

As the beer industry enters a downward trend, AB InBev's second fiscal quarter revenue fell 2.2% to $10.81 billion, with beer sales down 1.7%. "The dispute between AB InBev and its distributor reflects the deterioration of the beer industry's ecological environment, and the overall decline in beer market sales highlights the survival difficulties of distributors. In business, if there's no profit, there's no friendship between manufacturers and distributors; if there's profit, everything can be negotiated," said marketing expert Xiao Zhuqing. Regarding the dispute with distributors and declining sales, reporters sent an interview request to AB InBev but received no response before publication.

II. The Origin of the Dispute Between AB InBev and Distributors

On August 3, photos circulating online showed AB InBev's Shanghai headquarters being blocked by distributors demanding an explanation. Banners reading "Jixiang, we want to see you, solve the problem" and "AB InBev has defrauded Chinese distributors for 20 years" were displayed, with four men at the door facing the protesters.

On August 10, reporters learned from multiple distributor sources that the dispute between AB InBev and Jinyi Group dates back to 2009. To expand its influence in the Shenyang market, Dalian Jinyi Group, at AB InBev's request, bought out more than 100 outlets in Shenyang, including nightclubs, to exclusively sell AB InBev beer, advancing over 60 million yuan in cash. However, over the six years since 2010, Dalian Jinyi has recovered over 50 million yuan, but AB InBev has not paid the remaining over 6 million yuan.

Yuan Lianfeng was one of AB InBev's earliest distributors, becoming its Dalian distributor when AB InBev entered the Chinese market in 1995, but was removed from the distributor team in 2014. Yuan said that internal leadership changes at AB InBev led to the dispute, and Dalian Jinyi's investments were real money; over the years, the interest alone would be a significant sum.

Reporters learned that days after the incident, negotiations between AB InBev's Northeast business unit head and headquarters personnel with Yuan Lianfeng did not reach a solution. However, according to media reports, AB InBev hopes to re-establish cooperation with Dalian Jinyi, offering "compensation" in the form of discounts or rebates, and is willing to discuss with Jinyi how to technically handle and avoid similar problems in the future.

On August 9, the two sides negotiated again, but no result has been reached. Yuan Lianfeng did not oppose and expressed willingness to continue cooperation. Yuan said that having been an AB InBev distributor for over 20 years, she hopes to resolve the issue through coordination.

In the view of an FMCG industry observer, only Dalian Jinyi has had a dispute with AB InBev, while other distributors have not, largely due to communication problems between the distributor and the manufacturer. Previous leaders may have privately reached agreements with distributors in violation of regulations, or the distributor may not have communicated with headquarters, allowing marketing personnel to profit, or under frequent personnel changes, distributor payments were indefinitely delayed. Currently, neither side is willing to take responsibility for the outcome.

"AB InBev handles a large amount of cost verification through discounts and rebates. If not handled promptly or if regional managers are inactive, it harms distributors. Since there's no legal evidence, distributors, being the weaker party, have no choice but to fall out with AB InBev," Xiao Zhuqing said. He added that manufacturers and distributors should adhere to contractual spirit and verify costs according to Chinese law rather than using discounts and rebates.

III. Survival Difficulties of Beer Terminal Channels

"Previously, some FMCG companies also had employees privately reaching discount agreements with distributors, stemming from marketing personnel defrauding distributors," the FMCG industry observer told reporters.

A senior beer company executive believes that contradictions arising from advance payments for store buyouts are often disjointed. Regional markets may have private commitments made to distributors without authorization, leading to disputes when account reconciliation lags and department managers are transferred.

This contradiction also exposes the pain point in the relationship between beer manufacturers and distributors: they typically have a loose cooperation without a solid foundation. Manufacturers deliver products to distributors, who develop the local market themselves, while manufacturers only cooperate on products and services. This model emphasizes the distributor's marketing ability and requires strategic thinking to develop the market. In fact, AB InBev brought in Dalian Jinyi to introduce distributors with risk-taking capabilities. For the company, this not only transfers the investment risk of entering a market to distributors but also saves on building its own marketing team, allowing it to focus on product innovation and channel services.

"Beer consumption is mainly on-premise, and the beer industry has strong regional characteristics, with major beer companies occupying different territories nationwide," said marketing expert Jiang Jun. Since entering the Chinese market, AB InBev broke through from the nightclub channel to sell high-end beer. To consolidate its terminal advantage, AB InBev used the model of distributors advancing payments to buy out stores, also to prevent local beer companies from controlling terminal channels.

Jiang Jun believes that although buying out terminals is illegal under the Anti-Unfair Competition Law, the model of advancing payments to buy stores was prevalent in the beer industry in the past. Because of this, many beer companies have been penalized, and with intense competition, the practice still exists.

According to the senior beer executive, apart from manufacturers directly facing consumers through online layouts, 90% of beer companies use distributors for terminal channel layout. This is because if domestic beer companies set up terminals themselves, they face capital and labor cost risks, as well as the risk of poor product sales due to unfamiliarity with the market, which indirectly highlights the strong bargaining power of manufacturers.

In reality, distributors prioritize profits, while manufacturers prioritize expanding market share. Xiao Zhuqing believes that foreign beer giants have done poorly in adapting to local conditions. Domestic companies emphasize personal relationships in business, while foreign companies' contractual, tax-avoidance cost verification methods clash with the Chinese emotional business style.

IV. Distributors' "No Profit" May Intensify Conflicts

He Yong, deputy secretary-general of the China Alcoholic Drinks Association and secretary-general of the Beer Branch, told media that the beer industry's difficulties are caused by multiple factors, with channels being a visible factor. Currently, from manufacturer to consumer, beer prices are low, benefiting consumers, but profit margins in production and channel links are relatively low. Many distributors have already decided to stop doing beer business.

According to informed sources, AB InBev currently has only about 6% market share in the Dalian area, compared to 70% in earlier years. "The poor market performance in Dalian is due to internal system problems. The market is chaotic, there are too many distributors, regional divisions are unclear, and even product price cuts are unregulated. Currently, distributors in the area lack strength and haven't truly cultivated or developed the market."

Recently, AB InBev's second fiscal quarter revenue fell 2.2% to $10.81 billion due to a 1.7% decline in beer sales and exchange rate fluctuations. Earlier, AB InBev's global CEO Carlos Brito stated that the company's judgment for China's beer industry in 2016 is that sales will continue to face pressure, but AB InBev expects to outperform the industry this year, mainly due to the drive from high-end and super-premium beer brands.

"Although AB InBev cultivates consumer purchasing habits through terminals like nightclubs, amid declining sales, the biggest problem AB InBev faces now is not channel layout but maintaining price system stability, ensuring moderate profits, and keeping long-time distributors profitable," Jiang Jun believes.

Yuan Lianfeng also told reporters that AB InBev started from scratch in the Northeast, and over 20 years, Jinyi has shared ups and downs and doesn't want to see AB InBev's current situation in Dalian. She is willing to redo the market and mobilize market enthusiasm, but ultimately it depends on whether the two sides can reach an agreement.

However, the senior beer executive believes that from a channel construction perspective, AB InBev needs to review the importance of distributors in the system. If some old distributors' thinking and ideas lag behind, the manufacturer may need to select new distributors.

This article is reprinted from China Business Journal, Issue 2173, by Huang Rong

Xiaojia's Comments

Distributor groups represented by Jinyi Group face both internal and external troubles. Internally, there is no complete cost verification system or cost-effectiveness assessment mechanism; externally, they face pressure from large enterprises to stock up and financial account period pressures. Let's think from the distributor's perspective: why can't they manage their own business accounts well? Whose fault is it?

Problem:

In special channels like restaurants and bars in the beer industry, costs such as store buyout fees, entry fees, promotional item fees, promoter fees, and activity fees make accounts complex. Distributor bosses often decide promotional budgets by gut feeling rather than setting reasonable budgets based on return on investment (their mentality is often to annihilate competitors and then make big money alone), similar to the speculative psychology of wealthy stock manipulators.

To make matters worse, manufacturers blindly push inventory, leading distributors to "kill but not bury" (AB InBev is known in the industry as a finance-oriented company; once performance looks bad, the sales team will definitely pressure distributors). If distributors cannot establish a clear sales expense verification system, the outcome will be like drinking poison to quench thirst — "Can you outsmart AB InBev?" Expense verification is not just simple cashier statistics of contracts and IOUs (expense statistics); it should also, with clear expense accounts, track the effectiveness and output of expense investments in real time (cost-effectiveness ratio). Otherwise, distributors will have a hard time under pressure from upstream companies and poor downstream terminal sales.

Conclusion:

It is urgent for distributors to upgrade their business concepts and methods. If distributors do well in professional management capabilities, teams, tools, finance, and other supporting work in regional markets, and operate the market orderly, how dare companies "touch" the distributors? The problem is that the older generation of distributors guided by the "can handle it" mindset may have the will but not the ability, ultimately leading to a falling out between manufacturers and distributors. In the end, it's because distributors have shortcomings in their own operational capabilities that they reach this point. So, I advise all distributor bosses: Don't mess with anyone, especially not with money!

Comment: Sales A

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