Like traditional mom-and-pop retail stores, the vast number of secondary distributors currently serve as the 'capillaries' and 'ant armies' accelerating the circulation of FMCG products in China.
Guide
Why is it said that 'serving small retail stores comes at a heavy price'?
Why do wholesale markets still exist today?
What value do secondary distributors and wholesale markets bring to the FMCG market circulation?
On March 11, Jingxing Company and the FMCG B2B platform Pidao held a grand circulation project launch meeting in Zhongshan, Guangdong. Jingxing's sanitary napkin brand Free series will be fully integrated into the Pidao platform. This means that Free series sanitary products will officially flow through the Pidao platform to wholesale markets nationwide, rather than directly to retail stores as most B2B platforms do.
You might not be familiar with Jingxing or Free, but when it comes to another brand under Jingxing, ABC, it's a household name. Free is a sibling brand of ABC.
So, how can Pidao connect to tens of thousands of wholesalers across the country? While almost all B2B platforms focus their attention on traditional small retail stores, why does Pidao go against the grain and focus on the 'secondary distributors that are destined to be eliminated'?
'Serving small retail stores comes at a heavy price!'
'B2B serving small retail stores comes at a heavy price!' Pidao founder Chang Junjie told New Distribution. 'Since its inception, B2B has been promoting the elimination of wholesalers, but after years of development, there are still so many wholesale markets across the country. This shows that wholesalers and wholesale markets still have value and significance in the current stage of FMCG circulation.'
Chang Junjie's assertion about B2B is not unfounded. His experience at Procter & Gamble and Baidu gave him not only a deep understanding of FMCG circulation but also a perspective on 'Internet+' in traditional industries that differs from most people.
Take JD New通路 and Alibaba Retail通 as examples. These two internet giants each completed coverage of over 1 million stores in 2018, becoming the FMCG B2B platforms with the widest coverage and the most stores. However, even so, based on the national total of 5 million stores (assuming no overlap between JD New通路 and Alibaba Retail通), this means there are still over 2 million small stores not covered by B2B platforms.
These 2 million uncovered stores are not because B2B doesn't want to cover them, but because current B2B lacks the capability.
'China's lower-tier market includes about 360 cities, over 2,800 counties, 40,000 townships, and 600,000 villages, covering more than 800 million people. To achieve coverage of these users, it would require building tens of thousands of warehouses nationwide, deploying hundreds of thousands of delivery vehicles, and correspondingly millions of support staff. Moreover, self-operated platforms need to invest heavily in product procurement. Currently, no single B2B platform can support this,' Chang Junjie believes.
Indeed, huge capital investment and long payback periods have become the last straw for countless B2B enterprises during the capital winter. According to incomplete statistics from New Distribution, as many as 69 B2B platforms shut down in 2018 alone, including notable companies like Zhanghe Tianxia and Dianshang Hulian. JD New通路 and Alibaba Retail通 have respectively launched joint warehousing and distribution systems and three-tier warehousing and distribution systems, aiming to transfer costs by cooperating with distributors and wholesalers...
On one hand, this reveals the shortcomings of B2B in transforming traditional distribution channels; on the other hand, it makes more industry practitioners recognize the irreplaceability of distributors and secondary distributors in lower-tier markets.
But for brand owners, the pain points of traditional FMCG distribution layers are very obvious. After goods circulate to the distributor level, if they are to be distributed to small stores, they will likely go through wholesalers, and the wholesale market business is a huge data 'black hole.' 'When a brand sells products to the Beijing-Tianjin-Hebei region, goods flow from there to the whole country, and the brand never knows where its products end up.' Moreover, in wholesale markets, consumers frequently encounter counterfeit or shoddy products.
'I believe technological development will improve this situation. Technology and big data can accelerate FMCG circulation, truly eliminate counterfeits at the distribution level, and enable consumers to purchase genuine products,' Chang Junjie said.
Based on this, Chang Junjie officially established Pidao, a matchmaking-type FMCG B2B platform, in 2017. Pidao's business logic is to serve only wholesalers and distributors scattered across the country, providing information matchmaking services, while platform transactions solve trust issues between buyers and sellers to a certain extent. By the end of 2018, with a team of fewer than 20 people, Pidao had already achieved profitability of several million yuan.
The 'Uneliminable' Secondary Distributors
As a B2B platform serving secondary distributors, let's return to the main players of Pidao's transactions and examine why wholesalers exist.
- Vast territory, uneven development between regions, and huge differences in consumption capacity
Chart: New Distribution
China has a vast territory, and development between different regions is severely unbalanced. Most brand owners, to maximize returns, have to invest a large amount of manpower and resources in first- and second-tier markets. The coverage of modern channels like KA and e-commerce is also concentrated there, but coverage of third- and fourth-tier markets is extremely limited.
Moreover, for categories such as daily chemicals, personal care, general merchandise, and baijiu, upstream brand concentration is relatively dispersed, and prices are not transparent. This leads to layers of price increases at each distribution level, leaving significant room for price premiums, providing natural soil for the existence and development of wholesalers.
- Channel pressure leads modern channels and e-commerce to dump goods into wholesale markets
Currently, brand owners' main distribution channels can be divided into three categories: modern channels represented by KA hypermarkets/supermarkets/CVS, traditional retail channels, and e-commerce channels.
In the traditional FMCG distribution pathway, wholesalers naturally exist.
Although modern channels and e-commerce platforms can initially sell products directly to consumers, as brands mature, both modern channels and e-commerce gradually face traffic bottlenecks. Sales growth in modern and e-commerce channels begins to decline, but they face greater business pressure from brand owners. To gain stronger bargaining power and better pricing policies, both modern channels and e-commerce platforms will dump goods into wholesale markets to varying degrees.
Take a certain daily chemical brand A as an example. In its early stages, A experienced rapid growth in both traditional and modern channels. However, as coverage expanded, regional traffic in modern channels and online traffic on e-commerce platforms began to hit bottlenecks, and A's sales growth started to decline.
At this point, brand owners, to pursue sustained sales growth, continuously pressure distributors, KA hypermarkets, and e-commerce platforms to stock up, tightening their capital reserves. In this situation, to obtain better pricing policies and better cash flow, channel players often sell goods at low prices to wholesalers by giving up profits. The imbalance between supply and demand forces KA supermarkets and e-commerce platforms to dump goods into wholesale markets, and the goods eventually flow through wholesale markets to even lower-tier markets nationwide.
Currently, due to rising personnel salaries, recruitment costs, and shrinking profit margins, the number of secondary distributors has significantly decreased compared to before, but there are still a large number of wholesalers in categories such as daily chemicals, personal care, general merchandise, and leisure food and baijiu.
What is the value of secondary distributors?
So, what is the value and significance of wholesalers? New Distribution believes the main points are as follows:
- Helping brands complete deep distribution
From the above, we can see that the emergence and development of secondary distributors are closely related to brand owners' pressure to stock up, which also means that since their inception, secondary distributors have undertaken the historical mission of helping brands achieve deep distribution. In addition, because secondary distributors do not specialize in a single brand and do not pursue profit maximization for a single brand, but rather focus on the overall profit of a single delivery transaction, this also promotes brand penetration in lower-tier markets.
- Accelerating capital recovery for brands and distributors
In the process of cooperating with brand owners, distributors often stock up heavily to meet sales targets, resulting in large capital gaps. Relying solely on distributors' capabilities cannot meet the manufacturers' capital requirements. At this time, advance payments from secondary distributors can alleviate distributors' capital pressure to a certain extent.
- Close to stores, fast delivery speed
Secondary distributors' delivery is often within a small area centered on their own stores. If a store needs something, it can usually be delivered within half an hour. This convenience is a hard requirement and pain point for small stores in higher-tier markets, which distributors find hard to achieve. This function is even more prominent for township secondary distributors. Under the premise of not particularly smooth roads, it is very difficult and costly for distributors to achieve full coverage of township stores.
Objectively speaking, current wholesale markets and wholesalers still have their unique value and mission. Whether it's brand owners or B2B, there is still a long way to go to completely eliminate wholesalers.
Final Thoughts
From a longer-term perspective, the digitalization of FMCG distribution channels is an irreversible trend. With the acceleration of urbanization and the increase in costs of manpower, materials, and warehousing and distribution, both distributors and wholesalers will inevitably face increasing survival pressure. In this situation, it is essential for every industry practitioner to go with the flow, arm themselves with technology, and find a suitable development path.
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