The Overall Confusion of Distributors

Recently, I have visited many major distributors across various sectors and brands, primarily in FMCG. My conclusion can be summarized in eight characters: unexpected and unimaginable.

Why do I say this? I summarize the current confusion of distributors in three sentences:

The larger the scale, the less profit distributors make;

The stronger the brand, the less profit distributors make;

Corporate operations are less profitable than mom-and-pop shops.

Isn't this unimaginable? This seems to indicate that our past pursuits and the future blueprint we painted for distributors have all failed.

Two years ago, we advocated corporate operations; two years ago, we always wanted to work with big brands; even now, we still pursue sales growth. Is this the result we aimed for? It seems illogical. Where is the problem?

Why is there such a big contrast between the current situation of distributors and the outcome they pursued? I believe the main reason is a dramatic change in the overall market conditions. I summarize it into four aspects, which some call "besieged on all sides." I think "besieged on all sides" implies no way out; I only acknowledge these are four problems, but these four problems are all major trend-setting issues:

1. Industry Ceiling: Sales volumes in all industries are declining.**

2. Manufacturer Pressure: Manufacturers are increasing pressure on distributors. Sales decline, costs rise, and profits fall.**

3. Corporate Operation Dilemma: Traditional management models no longer suit the post-80s and post-90s generations.**

4. E-commerce Disruption: After Taobao and JD.com disrupted the C-end, the B-end is now disrupting again.**

These four issues are not just problems for individual distributors or specific industries. I believe they are common problems for the distributor community, so I call it "overall confusion." Industry Ceiling

Up to now, as a catching-up country, China's consumption popularization has basically been completed, manifested in the fact that consumption volume growth in traditional fields has peaked. If you don't believe it, look at the 2015 interim or annual reports of the FMCG industry. These are reports from listed companies and should stand up to scrutiny.

These are leading companies in the industry, including some multinational brands. Overall, sales (revenue) are declining. Some companies have increased profits, mainly due to better product structure adjustments.

Chinese companies, including distributors, have a growth dependency. As long as growth stagnates, problems will definitely arise. Distributors especially rely on growth to solve problems.

Sales growth leads to rising costs; further sales growth leads to further cost increases. Distributors have been in this cycle, and when sales stop growing while costs continue to rise, big problems are bound to occur.

Can profits still grow when sales decline? Perhaps the Chinese distributor community has never considered this question, but it may be exactly the problem that needs to be solved.

My conclusion is: distributors must face the reality of declining industry sales, treat it as normal rather than abnormal, and base future operations on these conditions. Manufacturer Pressure

Chinese distributors have never been fully autonomous; they are controlled by manufacturers, especially those of big brands. Hence, there is the concept of "managing distributors," which does not exist in the West. Distributors are customers, even "gods," to manufacturers, so how can they be "managed"?

The more difficult the manufacturer, the greater the pressure on distributors. Now, normal promotions are not enough; many manufacturers require dedicated personnel and vehicles. I don't think these can solve the problem, but increasing costs is inevitable. Distributors constrained by manufacturers cannot avoid doing it, but will doing it help? The Dilemma of Distributor Corporatization

More than 10 years ago, I tirelessly advocated for distributor corporatization, and mom-and-pop shops were criticized as the "target." Currently, successful distributors are indeed those who have implemented corporatization well. We must first admit that the original direction of corporatization was correct.

However, the situation has changed now.

First, the main workforce is now the post-80s and post-90s generations, who are very different from previous employees. I don't think this is a bad thing; we should embrace them.

Second, the employment situation has changed; there is a labor shortage.

Third, we are in an era of entrepreneurship, and traditional management models are no longer suitable for the "new generation." B2B E-commerce Disruption

The first wave of e-commerce was C-end e-commerce, with models like C2C and B2C. Although C-end e-commerce had a significant impact, it affected limited industries, mainly high-margin and high-unit-price industries. As far as I know, the FMCG industry was only affected by 1%-3%. In 2015, e-commerce accounted for only about 13% of total retail sales.

2016 is the year of B2B e-commerce fever; Alibaba 1688 and JD.com's New Route are both doing B2B. I call their B2B "centralized B2B."

What does centralized B2B do? It allows manufacturers' goods to bypass distributors and go directly to retail stores.

Isn't this directly robbing distributors? Indeed, so the distributor community has reacted strongly, discussing how to save themselves.

FMCG was previously not greatly affected by e-commerce, but B2B e-commerce affects distributors the most. Although I don't think it's a catastrophe, a ten-point decline would be unbearable. Abandon Illusions: Not "Collective Helplessness"

I once proposed that "all industries are worth redoing," which was aimed at manufacturers. For distributors, it's not collective helplessness either; there are definitely ways out, but not all distributors recognize or actively practice them.

Abandon illusions, especially the illusion of returning to the old path. Don't hope for industry recovery; don't hope for product growth; don't hope for old products; don't hope for traditional methods. Distributors should also be prepared to redo everything. A New Framework for Distributor Operations

Merely raising problems without solving them is not my style. When I raise problems, I usually already have solutions.

Since we must abandon old illusions, we need new ideas. I propose three ideas to solve the current difficulties:

First, mainstream shift and product upgrade.

Second, shift from corporatization to platformization.

Third, participate in the new integration of B2B e-commerce.

These three ideas can basically solve the four problems distributors face. New Consumer Groups: The New Troika

Why are original products no longer selling well? Because consumers have changed. According to research by Alibaba and McKinsey, China's consumption has seen a "new troika," meaning three new consumer classes.

Upper-middle-class and affluent consumers: 17% growth.

New-era consumers—post-80s and post-90s: 14% growth. The "previous generation" only has 7%.

Online shopping: 20% growth. Offline only 6%.

These are the three consumer groups with the highest future growth, also called the "new troika." If you fail to capture these three groups, declining sales and profits will be the norm. Mainstream Shift: Reshaping Strategic Big Products

How to respond to the consumption upgrade of the "new troika"? Mainly through consumption upgrade.

FMCG brands that were once thriving have recently encountered difficulties. Huanqiu.com once conducted an online survey: the brands consumers dislike the most are those they once liked the most. I believe the problem is not with the brand but with the product, because the brand's connotation is determined by its big products.

Whether it's Chinese tourists "buying like crazy" in Japan or cross-border e-commerce, it shows that Chinese consumers are no longer satisfied with domestic products and have higher consumption demands.

Mainstream shift mainly involves reshaping strategic big products. Therefore, distributors looking for niche products or specialty products cannot solve the problem. They must find strategic big products. Once discovered, seize them quickly without hesitation. Especially since these strategic big products differ from past products, generally being high-quality and high-priced, they are easily rejected by distributors.

Two industries have done relatively well in mainstream shift. One is dairy products, such as Moxilian, Ambrosial, and Chunzhen; the other is the beer industry.

Beer expert Fang Gang provided me with two sets of data: In 2014, China's beer production reached 49.219 million kiloliters, a year-on-year decrease of 0.96%, with a net production growth of -476,000 kiloliters. In 2014, the beer industry achieved sales revenue of 188.62 billion yuan, an increase of 5.10% year-on-year. In 2015, China's beer sales volume declined by -5.06%, while ultra-premium beer grew by 18% compared to last year, premium by 9%, mid-range by 3.8%, and regular and low-price beer saw negative growth of 10.8%.

In the beer industry, despite declining sales, profits rose, mainly due to good product upgrades. New Strategic Big Products

A new strategic big product must be the new greatest common denominator of society, accepted by the majority. For example, several big products in dairy. New strategic big products should have three characteristics:

Word-of-mouth type: Love at first taste—sincere admiration—try once, buy repeatedly—sincerely recommend to others.

Charm type: Love at first sight—from the bottom of the heart.

Value type: Ultra-high cost-performance—higher added value, higher gross margin.

The original sales team may no longer be suitable for promoting new strategic big products. Therefore, distributors need to rebuild their mid-to-high-end promotion capabilities. Product shift is easy, but solving promotion capability is difficult. Bosses must personally oversee new product promotion and rebuild the new product promotion team. From Corporatization to Platformization

The cost of distributor corporatization is: low efficiency (processes), high costs, and slow market response. This is a small business suffering from "big company disease," especially when there is a management layer.

One of the internet thinking concepts is the platform approach. Even companies like Haier are adopting platforms. Can distributors adopt platforms? Some distributors are already platformizing, turning the company into a platform for internal employee entrepreneurship, assigning many products to employees. This model is called "platform + individual."

The specific approach is: big brands are operated by the company itself, otherwise it wouldn't be a platform; ordinary products are handed over to employees, with the company providing funds, vehicles, etc., and sharing profits. This turns employees into "second bosses," internal entrepreneurs. As one boss put it, "the self from N years ago."

This approach brings several benefits: it releases employees' enthusiasm, changing management and control into release; it attracts more small brands to join, achieving centralization of small brands. Distributors Integrating into B2B E-commerce

Facing C-end and B-end e-commerce disruption, distributors should participate in B2B e-commerce and even become the leaders.

Distributed B2B e-commerce is originally based on distributors, so they should actively participate.

In B2B e-commerce, distributors have three roles: first, core shareholders, usually 3-5; second, participating shareholders, usually no more than 10; others are ordinary resident distributors, who ultimately pay traffic fees.

2014 was the exploration period for B2B e-commerce, 2015 was the enlightenment period, and 2016 is the dividend year for B2B e-commerce, with wider adoption. Therefore, whether you can profit from B2B e-commerce this year is crucial. Looking Beyond Agency for Development

Besides being agents, do distributors have other development paths? Most distributors have basically never considered this, but a few are thinking about it. There are roughly three development directions.

First, move upstream and become manufacturers. During the mainstream shift period, this is indeed an opportunity. But honestly, the probability of success for distributors moving upstream is not high. Although there are successful cases like Liby, they are rare.

Second, invest in platforms on a larger scale. For example, besides doing B2B e-commerce in your own region, can you invest in a larger scope to gain investment returns?

Third, invest in new entrepreneurs. In the new wave of entrepreneurship, the entrepreneurs are mainly post-80s and post-90s, but the investors are bosses who have completed capital accumulation. This is also a rare opportunity.

Of course, investing outside agency should be done with caution. After all, this is not the distributor's strength.