Where Are Distributors Headed in the Next Decade?

Click 'Read Original' for details. Distributors have had a tough time in the past two years. Many have asked me via WeChat or phone: Can the distribution business continue? Where is the future direction for distributors? To be honest, this question is not easy to answer because distributors vary in personal capability, industry, scale, city tier, and competitive environment. It's hard to give a one-size-fits-all answer for distributors under different combinations of factors. However, New Distribution has been observing and thinking over the past two years. Are there any signs of trends from the external macro environment, brand owners' distribution demands, and changes in the retail industry? The FMCG industry has changed more in the past 5 years than in the previous 20 years All practitioners should feel that the changes in the FMCG industry over the past five years have exceeded those of the previous 20 years. The deep-seated issues behind these changes are not caused by a single factor but are the combined result of information equalization brought by mobile internet penetration, user information overload, oversupply in the FMCG industry, rising operating costs, and consumer upgrading. If we avoid these complex factors and summarize the industry changes from a macro perspective, there are mainly three aspects: changes in consumers, changes in the retail environment, and changes in science and technology. But this change is not achieved overnight; it is a slow evolution, like boiling a frog in warm water. Many distributors feel that although the external environment has worsened, their business has not shrunk dramatically, with only slight annual declines, and over time they become numb. But this is no longer the era of earning for three years, losing for three years, and breaking even for three years. This evolution is one-way and irreversible. Once consumers develop new consumption habits, they never return. Consumers have started shopping on JD.com, Tmall, and community group buying, and buying things in their social circles. Supermarket owners, to please consumers, offer new products and have gradually started ordering from B2B platforms with more complete product ranges and lower prices. However, most distributors in the industry still squat at their own doorsteps, delivering to a few hundred small shops. Your salespeople are still running from store to store, covering only a dozen or so stores a day, while some companies' salespeople are already using CRM online to interact with thousands of small shops, doing customer relations and transactions. How long do you think this distribution business can last? Yes, this is exactly the three changes in the external environment mentioned earlier. When external changes occur, distributors should see that existing business should be armed with advanced technology, while future business should be planned ahead, making attempts and innovations without affecting the original business. High-tier and low-tier markets face different channel structure optimization challenges Today's topic is the future direction of distributors. As distributors, their core job is to serve brand owners, so let's start with brand owners.

In first- and second-tier and some third-tier cities, with the popularity of chain retail in the commercial circulation field, the channel structure of brand owners and the business models of distributors will undergo fundamental changes.

A large number of first-line brands have taken back the logistics of distributors in first-tier cities for unified management. Some distributors, due to cost pressures, have voluntarily handed over warehousing and logistics to third-party city distribution companies, gradually transforming their main business from delivery to marketing, services, and capital provision. This means that from a future development perspective, the functions of distributors in high-tier markets will be structured by brand owners in the optimization of channel structure. The so-called structuring means that distributors in high-tier markets have only two choices: either cooperate with brand owners' requirements, hand over logistics, focus on capital advance, and do localized marketing services as required; or, if capable, consider undertaking regional logistics services for brand owners. This is the situation in high-tier markets. Of course, the problems in low-tier markets are different. First, economic development is uneven across first- to sixth-tier markets; second, the retail formats in fourth- and fifth-tier markets differ from those in first- and second-tier markets. High-tier markets have developed large retail, convenience chains, and innovative retail scenarios. This trend of scale, fragmentation, and online-offline integration forces brand owners to centralize warehousing and achieve one-stop delivery through integrated city-wide three-network warehousing and distribution, improving distribution efficiency. Hence, as mentioned above, warehousing and distribution in high-tier markets will completely separate from marketing. But in low-tier markets, this will not happen in the short term, though it cannot be ruled out that in economically developed areas with high online penetration, such as the third- and fourth-tier markets in Jiangsu, Zhejiang, and Shanghai, brand owners may not carry out such structural optimization. So how will low-tier markets evolve? From the development trend of low-tier markets, the sinking of first-line brands is an inevitable trend in the short term. After all, the huge demographic dividend in low-tier markets still exists. The reasons for not sinking in the past decade were insufficient consumption power and high logistics costs in the FMCG industry. But today, the consumption power of small-town youth is fully capable of consuming first-line FMCG products, and logistics costs will further decrease with the popularity of retail outlets in low-tier markets and the improvement of transportation infrastructure. Although I do not agree with the sinking strategy of first-line brand owners, because once they go down, it is hard to come back, this trend is an industry consensus. What does this mean? It means brand owners will use various management tools, policies, and distribution channels to achieve brand and product sinking, which brings two problems: One is the structural adjustment of the existing distribution model, such as forcing some distributors to add staff and vehicles, bypassing township secondary wholesalers, and conducting further deep distribution. The other is that it will change the past management models, pricing strategies, and expense investment methods in low-tier markets. At the same time, this will add pressure on distributors in low-tier markets from two aspects: one from the market, the other from the brand side. If distributors cannot adapt to this high-pressure approach, they will either be eliminated by the brand's internal management or by market competition. Of course, you might say, I have already cooperated with brand owners in high-tier markets to complete functional division, restructured internally, and in low-tier markets, I have opened up channels and achieved first place in the market. What should I do next? Retail environment changes: online migration and category penetration Considering changes in the retail environment, there is a shift online and penetration into categories. For example, in the Beijing market, I previously contacted a major beer distributor who now does 90% of his business online, using B2B to complete distribution. Another major distributor in Hubei has transformed more than 95% of his business to B2C, focusing on e-commerce transformation. A major distributor in the northwest is trying to become a category player, controlling over 70% of the market share in some categories by "fighting while acquiring" peer distributors. From a short-term operational perspective, and looking at a longer cycle, China's commodity circulation industry has passed the budding stage and entered a rapid development period in terms of social division of labor, specialization, digitalization, networking, and supply chain integration. The characteristics of this stage are that the capital market will merge and integrate high-quality major distributors through financial means, and various innovative business models will emerge endlessly. The general direction is toward group development. However, as the industry is at the trough of the smile curve with extremely low profit margins, the only way to increase profits is through scale. But not all distributors have the ability to achieve scale. How should they develop? My suggestion is to evolve toward the two ends of the smile curve, toward high value-added links. Although China's past ultra-large single market characteristics created a number of first-line brands, the future development trend is fragmentation, consumption stratification, and a trend toward low-temperature, short-shelf-life, multi-SKU products. This means that some categories and operations that require manual work and cannot be internetized will still have certain added value. When designing their development strategy for the next decade, distributors must consider the industry development trends over the next 5-10 years, gain insights into consumers, return to the essence of business, find the links that remain unchanged in the industry for ten years, embrace technology, integrate all channels, and achieve true digital transformation. Here, I invite distributor friends to participate in a joint survey on distributor survival and transformation. We hope to see the current survival status of distributors nationwide through your feedback. Please scan the QR code above to participate. After the survey is compiled, New Distribution will publish the data at the "2019 China FMCG Conference" from August 20-23. Where is the future trend heading? How should innovation in products, channels, and marketing be done? As a distributor, how should you grasp this change and find your survival and development opportunities? At this FMCG conference, New Distribution has specially organized three forums for distributor friends on topics such as digital distribution, transformation, and city logistics. Distributor friends interested in transformation and future development should not miss it.