---
title: "Why Do Distributors Do Distribution?"
description: "A distributor explains why he continues to work with a brand despite lower margins and ROI, emphasizing the importance of comparing with similar businesses, products, regions, and channels, and the role of brand positioning in his overall portfolio."
author: "刘华明"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
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published: "2019-06-30"
language: "en"
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# Why Do Distributors Do Distribution?

> A distributor explains why he continues to work with a brand despite lower margins and ROI, emphasizing the importance of comparing with similar businesses, products, regions, and channels, and the role of brand positioning in his overall portfolio.

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"Why do distributors do distribution?" Since reading Teacher Wang's "Tan Yi Lu," you've started to like asking philosophical questions. So much so that the security guards' "three philosophical questions" always linger in your ears... But too many questions affect your sleep! Today you can't sleep again, so you decide to go to the distributor's office early. As soon as you enter, you see Lao Liu making tea. You think, "Lao Liu has been in this business for decades, why not ask him?"
You say, "Mr. Liu, why do you do distribution? How do you view this business?"
Lao Liu takes a sip of tea and says, "I've eaten a lot of salt recently, so let me tell you. Mainly because it makes money, and secondly, I'm familiar with it. If there were a more profitable business, I'd do that too. You see, over the years, I've dabbled in many businesses. I partnered with a few distributor friends to open a food factory, hoping to transform from channel to brand owner; thinking that with a direct source of goods, I could earn the middleman's margin myself, so I opened a supermarket; I also invested in building a trade city, wanting to transform into real estate. But after doing them, I realized each has its own difficulties, and in the end, none made money due to poor management. Take the food factory, for example: we had to develop formulas, do packaging, buy equipment, hire workers, manage production... With so many things, if you're not careful, product issues arise. After a few months with no improvement, we had to accept the loss and sell the factory. 'Different trades are as different as mountains,' I've now understood this saying. Before, I only saw others eating meat, not getting beaten. If I had succeeded in transformation, I wouldn't be an agent now. Look at Lao Guan, who runs a supermarket chain; it's said that Tencent is preparing to acquire it, transforming into new retail, and he's already transferred the distribution business to his brother-in-law. Lao Zhang is doing real estate development; I heard he's about to go public, and he's given the agency business to his brother, keeping only some shares... It seems this is my fate; I have to accept it!"
"Mr. Liu, since you're in it for money, why aren't you willing to expand our product sales? Our products are profitable!"
"Xiao Ge, it's not that I'm unwilling, but your way of looking at business is flawed! Look at this chart. Isn't this how you usually see the business? In your eyes, sales volume is contributed by all distributors like me, Lao Guan, Lao Zhang, and Lao Zhao. If we sell more, you sell more, and finally the target is met, right?"
"Isn't that so?" you ask, puzzled.
"Yes and no. In a distributor's eyes, the manufacturer is just one link, a means to make a profit. To make money, we have to think: where can we make money? What types of products, in what places, through what channels can we make money? How much can we earn? Then it's about which of the ABCD manufacturers can help me; you are one of the ABCD. We hope the most profitable brands have high sales, not that your company's sales are high. So making you bigger and stronger isn't necessarily my best choice."
"For example, if it were your business, with the following two brands, which would you prefer to grow, A or B?"
"If you grow Brand A, under the same circumstances, you'd earn 8,000 less. So you'd definitely prefer to grow B over A, because B has higher gross margin."
"Suppose the above data for these two brands are net profits. Let me tell you another number: Brand A requires an average investment of 400,000, while Brand B requires an average of 1,000,000. Which would you prefer to grow?"
"Then you'd choose A, because Brand A has faster capital turnover and higher return on investment."
Watching Lao Liu's calculations, you start to ponder your own brand and ask uneasily, "Since our product has low gross margin and low ROI, why do you continue to do it? It can't be out of sentiment, as that would violate your profit-making principle."
"There is always some sentiment. It's been decades; I've grown with your brand. Your president used to deliver goods with me on a tricycle. Back then..." Lao Liu starts to ramble, recounting his struggle history.
"Mr. Liu, since we're family, tell me honestly, why do you continue to do our brand?" you politely interrupt.
"Xiao Ge, to be honest, your brand also makes a good profit; it depends on who you compare with. Secondly, brand positioning differs; not all brands need high profits."
**【Compare with whom】**
■ Compare with similar industries: Financial investment can't be compared with FMCG. Buying Bitcoin might yield 300% annual ROI, or it could go to zero overnight. In private lending, monthly interest of 2-3% is easy, but many people disappear with the money. Although being an agent is nerve-wracking, in most cases I can see the money there; I won't get rich overnight, nor suffer huge losses.
■ Compare with similar products:
**1) Compare with similar products:** Although the overall ROI for FMCG is around 20%, different products have high or low returns. For example, if I represent a product with an annual ROI of about 80%, then as its distributor, profit expectations are high. In that case, even if your annual ROI is 30%, people might think it's low.
**2) Compare with similar brands:** Even within the same category, as brand business scale expands and market competition intensifies, ROI declines. When I first represented your product, the annual ROI was 50-60%; now it's only 15%. But brands of similar size in the market have similar ROIs.
■ Compare with similar regions: In first-tier cities and provincial capitals, there are more opportunities but fierce competition, often resulting in ROIs below 20%. In third-, fourth-, and fifth-tier cities, especially markets with inconvenient transportation, many distributors have annual ROIs of 70-80%, but their business scale can never match mine, and the money they actually pocket is less than mine.
■ Compare with similar channels: Compare with distributors with similar channel business proportions. Distributors with a high proportion of modern channel business often have lower ROIs, despite higher gross margins, due to high expenses and slow capital turnover. Distributors with a high proportion of traditional channel business often have better ROIs because of lower expenses and faster capital turnover.
Overall, a high ROI is good, but you also need to look at absolute value. If you invest 1 million with an annual ROI of 50%, you earn 500,000 a year; if you invest 10 million with an annual ROI of 20%, you earn 2 million a year. Which business would you choose?
Moreover, a business rarely sustains high returns. Marx said, "If there is 10% profit, it is guaranteed to be used everywhere; with 20% profit, it becomes active; with 50% profit, it takes risks; for 100% profit, it dares to trample all human laws; with 300% profit, it dares to commit any crime, even the danger of hanging." ROI ultimately returns to a reasonable range. I've been in this business long enough to see through it.
**【Brand positioning】**
In my business, different brands have different roles: some are volume contributors, some profit contributors, some image contributors, some channel breakers... Your brand now plays more of a volume contributor and channel breaker, sharing operating costs, expanding channel outlets, and supporting the business scale. As long as you don't lose money and earn no less than bank time deposits, I can accept it. Ultimately, I aim to maximize overall benefits.
At the same time, your brand has advantages others don't. For example, your products have fast turnover; although gross margin isn't high, the ROI is acceptable. Additionally, you continuously empower distributors with training, systems, and business support, helping distributors build a sustainable profit-making operation system. My sales team is also trained by you; my people even say they are your company's employees to outsiders. And you often come to analyze our business and provide guidance when problems arise, unlike other brands' salespeople who always say the same few lines: 'How much is the shortfall, why haven't you completed it, hurry up and pay...' They always control by phone. If it weren't for the manufacturer's face, I wouldn't bother with them."
"So, you need to switch to a merchant's mindset when communicating with distributors; otherwise, you'll never see eye to eye. Making me feel that you can think about business like a boss is a prerequisite for deep cooperation," Lao Liu says earnestly.
"Good morning, Mr. Liu..." At that moment, noise comes from outside the door. General Zhu pushes in and says, "Mr. Liu, the brothers are all here. Shall we start the morning meeting?"
"Xiao Ge, I've told you so much today; you should also train the brothers, or I'll be at a loss," Lao Liu says with a smile.
"Alright, I'll listen to Mr. Liu!" you agree readily.
Source: Wei Zhi


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