In 2017, for the FMCG industry, the most discussed topics among distributors regarding transformation and upgrading were "warehouse logistics and convenience stores." Compared to previous years, distributors have become more rational this year, showing earnestness and a willingness to learn, rather than blindly following trends. The main reason is that distributors who entered the game in 2016, after a year of operation, have not seen significant improvements, so subsequent entrants are more thoughtful and pragmatic in their approach.

This is both good and bad. The good is that there is less herd mentality; they hope to enter only after fully understanding the situation, and rational choices can reduce the probability of failure. The bad is that any new thing needs time to grow from birth to maturity. In the early stages, results are not visible, but once it develops, it may be fatal to traditional industries. So not seeing success now does not mean the new thing cannot succeed in the future.

Since 2014, I have led distributors from dozens of cities across the country in transformation. Over three years, I have found that whether distributors transform into service providers or logistics providers, there are huge challenges. Like Tang Seng's journey to fetch scriptures, one must pass through one checkpoint after another to achieve true success.

From current data analysis, most distributors are still on the road to passing checkpoints, just at different stages—whether they have passed four or five checkpoints. Some take a long time to pass the first checkpoint, while others are battered and bruised after passing one, exhausted but having lost much of their vitality.

"Ideals are beautiful, but reality is cruel." This phrase aptly describes the current transformation and upgrading of distributors. Distributors must transform and upgrade; this is a foregone conclusion (reasons not detailed here). To help distributors preparing to enter this path avoid detours and increase their chances of success, I will share some of the pitfalls that distributors have encountered over the past three years for reference:

Whether becoming a logistics provider or a service provider, for distributors to achieve true transformation and upgrading, ultimately multiple distributors must join forces. But how to unite? Should they merge their companies and shares? Or establish a new platform company? I believe most distributors will choose to set up a new company, jointly invest, and then transfer a part of their traditional distribution business (such as warehousing logistics or products) to the new company, aiming to improve efficiency and reduce costs through collaboration.

As I mentioned above, theory is beautiful, but reality is cruel. The hardest thing to unite in China is people's hearts, especially the hearts of distributor bosses. Because only those with a certain personality and assertiveness can become distributor bosses, what happens when multiple assertive and charismatic bosses come together?

Many distributors unite because there is no better alternative. Each boss contributes hundreds of thousands or even millions, sets up a new tech company, and then negotiates their shareholding ratio and positions in the new company. This is usually settled internally. Investing money and uniting multiple distributors is just the first step of Tang Seng's journey; passing the checkpoint only solves the problem of finding partners and investing money.

At this point, problems begin to arise: who will lead this new enterprise? If any shareholder takes charge, then in his subsequent major actions and decisions, the other shareholders' first reaction is to ask what benefits it brings to themselves and to the leading shareholder's enterprise. They do not think about what is good for the new company, but first about what is good for their original trading companies.

A decision made by a new enterprise cannot be fair to both the new and original enterprises (examples below), but human inertia and nature will make each shareholder instinctively consider their own interests. Because emotionally, their own enterprise is dearer to them than the new company, shareholders will consider themselves first, and only then others; otherwise, they will resist.

For example: multiple distributors unite to become a logistics provider, saving logistics costs through unified distribution. This is common sense on the surface, but after delivery to the store, who will put the goods on the shelves? Should the distributor do it? Or the store staff? What are the shelving standards? Suppose five distributors partner up; originally, two only needed to deliver goods to the store, and store employees handled shelving; another required delivery personnel to shelve; and two needed dedicated door-to-door service teams (because different categories have different requirements for delivery time and store service). After establishing the new logistics company, services must be unified; it cannot be that services differ for different distributors, or the company cannot grow. If the new logistics provider stipulates that shelving services are not provided, then the distributor who previously delivered and shelved cannot reduce personnel costs and cannot ensure timely shelving, affecting his original trading business. He will be anxious because he thinks the new company has not considered his business.

If the new company arranges personnel to shelve, then with so many categories and different shelving rules, the service personnel need a certain level of professionalism (higher than current trading company service staff). In the short term, due to unfamiliarity with the business, it will definitely affect the business of companies whose products are not up to standard. The distributor boss of such products will be anxious and unable to sleep until you solve it; if not solved, he will intervene and solve it himself. Guess what happens then.

Another issue is returns. Returns are usually brought back by drivers. Some returns are simple, like full cases, while others are broken into pieces, with many loose items, making returns time-consuming. If drivers spend too much time on returns, it affects delivery speed; if not handled, the distributor boss of that batch will be anxious. If returns are left for distributors to handle themselves, their costs increase. Some say, let salespeople handle returns at the store first, then drivers pick them up. Theoretically feasible, but practically not. Different categories make unified logistics a big challenge. Whether the challenge succeeds depends on the store's evaluation of you.

Currently, the logistics providers we see doing well mostly have a narrow category span or incomplete categories, and there has not yet been a phenomenon where different categories cause different service effects at stores.

I always believe that whether a business model is good or not can only be judged by customers. If the customer experience is poor for a long time, then the business model is basically a false proposition.

The above is just one checkpoint to pass when becoming a logistics provider. After actually entering the game, there will be many difficulties in business.

How to break through? If multiple distributors unite to do logistics, the partnership mechanism must be sound. Most distributors who partner to form a new enterprise only have entry and exit mechanisms, lacking a process constraint mechanism. That is, how each distributor shareholder will go all out to support the new company. When supporting it, they are willing to sacrifice part of the interests of their original trading companies. Not everyone is willing to sacrifice their own interests. Only by establishing a "process constraint mechanism" can they be willing to cooperate when it is truly necessary to sacrifice partial interests. Otherwise, there will be procrastination, things will fizzle out, or they will find a thousand reasons to say it cannot be executed.

Some say, hire professional managers to operate the new company, give them some shares, and let them take full control. This theory is beautiful, but in reality, such a person is hard to find. Even if found, facing so many shareholders, decision-making on major issues will be slow or ineffective. Looking back, some of our big distributors have had experience hiring professional managers with high salaries, but how many professional managers have done well and lasted long?

If you must hire an outsider to run the new company, then delegate authority, delegate authority, delegate authority. Let him buy original shares and report only to one representative of the original shareholders. Only when he knows that if the company loses money, he will also have to pay out of his own pocket, will he work desperately. Generally, challenges without a fallback have a high success rate!

There is another hidden pitfall that distributors becoming logistics or service providers must pay special attention to: the completeness of the information system. Because from the industrial age to the internet age, many business models are explored while walking, and in the process, information system support is needed. But the information system required by logistics or service providers must be complete. If each link uses different software, for example, the warehouse uses Company A's WMS system, finance uses Company B's financial system, business uses Company C's mobile system for salespeople, and the platform uses Company D's platform system, and then data is connected through interfaces, theory is beautiful, but reality is cruel.

The vast majority of distributors are not proficient in software; they only know simple usage and do not understand the underlying data structure, so they lack experience in choosing software.

But you only need to understand one principle: if you take BMW's engine, Mercedes' chassis, and Audi's braking system and put them together, it is theoretically feasible, but let a repairman try to assemble them? At best, you get a vintage car that runs slowly and requires daily maintenance, rather than serving you.

Hearing this, some distributors may feel that this transformation is deep water. Indeed, it is not shallow, but a small number will still succeed.

In the next two years, distributors still have three opportunities: The first is "strengthen the body," that is, do not transform but upgrade. Upgrade your trading company's operations, reduce waste, increase business capabilities, outrun your regional competitors, and let them fall first. When they fall, they will instantly release their original market share for you to eat. This amount should not be underestimated. In 2016, several of my clients tasted this sweetness, so practicing internal skills and letting others fall first is also a strategy.

The second is "persist and wait," maintain your business and wait for a reliable new organization to acquire you. Of course, the premise for acquisition is that you have value, providing segmented services to the new organization and becoming their right-hand man.

The third is "challenge new opportunities," transform into a platform-based enterprise, becoming a service provider or logistics provider. Once successful, you will become the largest FMCG service enterprise locally, and through capital, you can quickly replicate nationwide, and then, omitted here.

Due to limited space, if this article is well-received, I will continue to fill in the pitfalls next time.

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