Why do distributors earn less as their business grows? Before discussing this issue, let's look at some data. In the "China FMCG Distributor Operating Conditions Survey Report" released by New Distribution, in 2019, over 50% of FMCG distributors saw a significant increase in revenue compared to the previous year, with both outlet coverage and business scale expanding. However, nearly 70% of distributors reported that their comprehensive cost ratio also increased significantly compared to the previous year.
Looking back at the distributor business, many distributors may have fallen into a misconception, thinking that low profits are due to insufficient scale. Then they invest capital, hire people, buy vehicles, expand warehouses, and add more agency brands. Sales indeed rise rapidly, but they find that after deducting expenses, profits remain low, while pressure increases. As a result, many distributors see their business grow but profits decline. Why does this problem occur? The essence of a distributor's business is to earn the price difference. To earn more, the key is to increase revenue and reduce costs. Below, I will share some personal views on both increasing revenue and reducing costs.
-01- Increasing Revenue: Adjust Price Structure, Expand Channels Increasing revenue means boosting sales. Many distributors have been in business for over a decade and have rich experience in increasing revenue. Here, I'll share a case that wasn't handled well as a lesson.
A distributor found he wasn't making money and first thought of raising prices to increase profit margins. He felt that a slight price increase wouldn't have much impact and could earn a bit more. It seemed reasonable, but the result was counterproductive. As soon as he raised prices at the terminal, the company incurred losses! Where exactly was the problem?
Let's look at how things unfolded: Lao Liu is a beverage distributor mainly operating in three sales channels: modern trade, traditional trade, and special channels. Last year, profits were unsatisfactory, so Lao Liu raised prices by 13% in the modern trade channel. However, after a period of operation, net profit fell by 12%. To remedy this, he lowered gross margins in the traditional channel by 16%. Below is a comparative analysis table of Lao Liu's two-year channel sales:
From a channel profit perspective, although the gross margin in modern trade increased by 13%, sales volume dropped by 23%; in traditional channels, gross margin fell by 16%, and although sales volume grew by 43%, the overall gross margin decreased by 0.4%. The increase in gross margin in modern trade led to a decline in sales, creating a large pit. To fill the gap in modern trade sales, he lowered the already low gross margin in traditional channels, with a larger reduction than the increase in modern trade. In the end, the distributor actually lost money.
Price adjustments must be preceded by sales forecasts. Lao Liu failed to forecast properly and lacked methods to fill the gap. When problems arose, he panicked and tried to compensate for lost sales by lowering prices in traditional channels. As a result, profits across all channels decreased, and overall gross margins fell further.
Breaking down the market segments, modern trade saw a decline across almost all products, with only Beverage B showing growth across all channels, which normally shouldn't happen. Here, Lao Liu made a fatal mistake by raising prices by 13% for all modern trade products. Different products have vastly different roles and target customers; not all categories are suitable for raising gross margins. A one-size-fits-all approach is too simplistic and results in a decline across all categories.
Therefore, increasing gross margins must be gradual, considering sales, market, and channel acceptance. Some prices should rise, some fall, to increase overall gross margin, rather than a one-size-fits-all approach. For example, if high-end A and high-end B show significant growth in traditional and special channels, it indicates high market acceptance, so prices can be appropriately raised. Meanwhile, children's A and the Xindao series are declining across all channels, so prices could be appropriately lowered.
From a channel perspective, special channels are growing significantly and still have room for expansion. For modern and traditional channels, many distributors have been operating for a long time, and growth potential is limited. For instance, if business drops by 7 million, filling the gap through modern and traditional channels would incur high expense ratios. But if filled through special or new channels, the expense ratio would be lower.
Especially with the development of new retail and intensified market competition, platforms like B2B, B2C, and community group buying are encroaching on distributors' market share. Distributors should actively expand these new channels to find incremental growth within existing volumes.
In summary, to increase revenue, distributors should focus on two key points: first, adjust price structures based on market conditions to stabilize volume and increase revenue; second, expand channels to maintain volume and increase growth.
-02- Reducing Costs: Rational Investment, Inventory Reduction Currently, for distributors, reducing costs is of utmost importance. Many distributors do well in increasing revenue, but they haven't paid attention to cost reduction, and expense control is poor. They only know that expenses are high, but it seems no single expense can be reduced. If cost reduction is done well, distributors will naturally make money. If expenses are not controlled, no matter how large the business scale, profits won't increase. The two key points for cost reduction are rational investment in expenses and reducing inventory waste.
1. Rational Investment in Expenses Distributors must know where their money goes and compare with peers. Below is the expense structure from Lao Liu's case.
Sales expenses are as high as 84%, far exceeding the industry average, indicating an unreasonable expense structure. Generally, when sales expenses exceed 50% of total expenses, there is a problem. Because all expenses have marginal contributions, when expense intensity increases, sales will improve to a certain extent, but sales won't grow indefinitely. This is a common problem for many distributors: they spend a lot on promotions, and the simplest form is channel promotions with discounts and price cuts. This approach has side effects: you don't know where the goods go, leading to a chaotic price system and serious cross-region selling.
Many distributors think that price system issues are due to external cross-region selling. But it might not be external; it could be internal. Heavy investment in channel promotions can lead to internal cross-region selling, and business won't grow naturally.
Analyze the correlation of expense investments to see which expenses are most effective in driving sales growth!
By correlating various expenses with shipment value, you can find that except for loading and unloading fees, other expenses have little correlation with sales, indicating that money is spent, but perhaps not in the right way. For example, display fees in modern trade and investments in salespeople are fixed and not adjusted in time; or the fixed salary portion for sales staff is high, and income is not closely tied to performance. If earnings decrease but investments don't, profits shrink.
Distributors should review all expenses from the previous month each month, analyze and compare the relationship between each expense and business volume, invest rationally, and solve problems in a targeted manner.
2. Reduce Large-Date Products, Lower Inventory Waste Every year, distributors are troubled by the handling of large-date products in warehouses. They try many measures, but seem to achieve little success! Besides slow sales, what other factors contribute to high levels of large-date products? Below is Lao Liu's ordering pattern:
It can be seen that most orders are concentrated in the last ten days of each month. There are two reasons: first, to complete factory tasks, they must meet targets by month-end; second, funds are tight at the beginning of the month, and only after collecting some receivables at month-end can they improve. Ordering in the last ten days creates a problem: products ordered earlier can be placed in the market for sales, but if all orders accumulate at the end of the month, terminals can't take that much, so products sit in the warehouse. Within days, the month changes, and the dates get older, leading to loss of product value and increased operational burden.
Further analysis reveals that Lao Liu has a large amount of accounts receivable outstanding, which constrains normal ordering rhythm. Distributors are busy and often don't pay enough attention to payment terms. When short on cash, they borrow from banks, but with large receivables outstanding, they bear both risk and interest costs, which is not cost-effective.
Accounts receivable mainly come from modern and special channels. Modern trade always has payment terms. Distributors can shorten the terms through promotions or resource exchanges. Another situation is that the reconciliation process in modern trade is complex. If the process isn't smooth and data doesn't match, finance will delay invoicing. A 60-day term could become 90 days if invoicing is delayed to the next month. Therefore, finance must bring data at a fixed time each month; if data isn't prepared in time, it should be considered a failure to meet standards.
This is the main issue in modern trade, but why do traditional channels also have large receivables? Normally, traditional channels should be cash on delivery. Problems in traditional channels often lie with the sales staff. When salespeople go to terminals to sell, shop owners say they have no money, and the salesperson returns with an IOU. There are two scenarios: first, too much stock is pushed at month-end, and terminals genuinely lack funds, plus salespeople face performance pressure, so they release goods first. Second, salespeople discover a loophole: receivables act as interest-free loans. They can use the money for investments, earn interest, and later repay the principal.
To address this, first, review all salesperson IOUs, understand the reasons, set a recovery deadline, and if not recovered by then, delay salary payments. Second, strictly enforce the IOU system: IOUs cannot be signed casually; before signing, the department supervisor must confirm, and only when both sign can it be handed to finance. Credit limits and IOUs should only be given with a guarantor.
As market competition intensifies, some distributors will inevitably exit in the future, while those remaining will grow stronger. Regardless of the situation, we must stand in the present, and while expanding the business, focus on increasing revenue and reducing costs to ensure we have the capital to continue!