This New Year has brought many challenges: the outbreak of the epidemic, mass quarantine, store closures, the surge of home delivery and group buying, some categories experiencing stockouts, and others oversupply. Amidst these pressures, sensational claims like 'New retail is here, the value of distributors has disappeared' have emerged. Distributors are left wondering why they still exist and where they are headed. There are many perspectives to answer these questions, but flashy new terms only cause anxiety. Sometimes, thinking through fundamental logic simplifies things. Below, we share a more basic line of reasoning: -01- Why do trading companies exist? Drawing on economist Coase's view in 'The Nature of the Firm,' market operations have costs, and when an organization can save some of these costs, firms emerge. Therefore, the value of trading companies lies in saving transaction costs. You might object: How can that be? Adding an intermediary to earn a margin actually saves transaction costs? The most cost-saving would be for the factory to sell directly to me, as factory outlets are cheaper than general stores. Let's not discuss the marketing concept of factory outlets or whether products are identical. Suppose your argument holds, but have you calculated whether it truly minimizes transaction costs? For example, a brand owner, Lao Liu, produces Lao Liu brand mineral water and sells it directly to consumers, with the most extreme case being selling at the factory gate. But the entire transaction involves many costs. Let's briefly reconstruct the transaction process for mineral water: 1. Factories are often far away, making purchase costs high Rarely is there a sellable mineral water source in city centers; otherwise, people wouldn't carry large bottles up mountains to fetch water. If you insist on Baotu Spring, you'd have to change its attribute from viewing to drinking—can you imagine how much you could drink? So factories are usually closer to core raw materials, meaning they are far from consumers. Additionally, production costs, including land prices, labor, and policies, often push factories to relatively remote locations. Many factories now seem near city centers, but that's due to urban expansion; most have since sold their land to developers. Recently, a daily chemical company sold its old factory land, earning nearly 2.6 billion yuan, equivalent to 78 years of net profit. Conversely, if that land cost were included in the product price, ordinary people couldn't afford it. Assume the factory is 100 km away, and water sells for 2 yuan at the factory gate. To buy one bottle, you'd spend at least 4 hours round trip. Excluding transportation and opportunity costs, just time cost: with a monthly salary of 10,000 yuan, 25 working days/month, 8 hours/day, your time is worth 50 yuan/hour. Four hours cost you at least 200 yuan, so the total cost of one bottle is 202 yuan. If everyone went to the factory, that would be a huge cost! You might argue you could buy in bulk, like a truckload. Even if the truck is free, what's the price per square meter of your house? Is it suitable for storing all that water? 2. Most products are single-category, making cost sharing difficult You might say, add some money and open a store at your doorstep? That's better than letting intermediaries earn a margin. You can open a store, but if it only sells your own products, the range is insufficient, and overhead costs are high. For simplicity, assume Lao Liu's brand has only one SKU of mineral water. A store's rent and utilities cost 20,000 yuan/month, and at least two staff members cost 10,000 yuan/month in salary and benefits, totaling 30,000 yuan in fixed costs. If you sell 10,000 bottles a month, the overhead per bottle is 3 yuan. Moreover, more problems arise. With low store density, consumers can't buy easily, not much better than going to the factory; with high density, foot traffic and sales are low, leading to higher overhead per unit. Additionally, as stores multiply, there are more assets, staff, and management teams, all adding costs, eventually making the water exorbitantly priced. This is why retailers exist: they operate multiple categories, can open more stores, and consumers can buy more, ultimately lowering transaction costs through sharing. 3. Lack of synergies makes cost sharing difficult You might think manufacturers could deliver directly to retailers, eliminating the trading company and reducing costs. In theory, this direct model is good. But in practice, most manufacturers only do direct operations for KA and e-commerce; 80% of business still relies on distributors. Why? Because without synergies, direct operations have higher transaction costs, for example: 1) Service synergy: To serve retailers well, Lao Liu would need a large team handling business communication, terminal services, financial reconciliation, etc., but each interaction only covers his own products. A trading company's team can negotiate for multiple brands, lowering service costs through sharing. 2) Logistics synergy: Similarly, for product delivery, Lao Liu can only deliver his own water each time, with low volume and difficulty filling trucks, but travel and queuing times are similar, so logistics costs per product are high. In contrast, trading companies or logistics providers can consolidate multiple products, improving truck fill rates and saving time, ultimately lowering logistics costs. 3) Seasonal synergy: Most products have peak and off-peak seasons. If resources are allocated for peak demand, half the time may be wasted; if for off-peak, service and delivery may be insufficient during peaks, losing business. If products complement each other seasonally, resources can be continuously allocated at peak levels, optimizing transaction costs. 4. Going against human nature increases management costs Beyond insufficient synergies, there's a bigger challenge: personnel. Direct operations mean relying on teams thousands of kilometers away. Despite information technology, every Lao Liu likely feels out of reach and uneasy. 1) Natural laziness: This is more evident at grassroots levels. Only those with strong intrinsic motivation don't need supervision, but such people are rare. Most, if given a choice, would prefer less work for more pay. Thus, the larger the grassroots team, the higher the associated management and information costs. Trading companies, with closer management distance and smaller radius, have higher team efficiency than direct operations or platform companies. 2) Human greed: This leads to agency problems. Without profit alignment, employees don't care much about company gains or losses, leading to leaks, carelessness, and higher costs for direct operations compared to distributors. Distributors work for themselves, keeping profits, so they naturally find ways to reduce unnecessary costs. -02- Where are trading companies headed? So why do trading companies still exist? Because low transaction costs benefit multiple parties. When a trading company's internal transaction costs exceed external ones, its existence ends! Based on this logic, ensuring the lowest transaction costs is the long-term pursuit of trading companies. As long as we have an advantage in transaction costs compared to direct operations, platform companies, B2C, etc., we can continue to exist. How to achieve this? Here are some suggestions: 1) Quantify operational data. Without quantification, management is difficult. To know transaction costs, you first need data, and nothing is unquantifiable. If you don't clearly know monthly sales, profits, expenses, and remaining amounts, you need to start there. Below is a distributor's desk, full of operational data, like stock trading. If data overwhelms you, consider whether you're suited for management. Or leverage other strengths—project evaluation, investment, direction-setting—and become an equity investor. 2) Benchmark against the industry. With operational data, you can know your position. Taking fixed expenses as an example, Smart Code surveyed over 3,000 distributors nationwide and found that 38% have fixed expense ratios within 1.5%, 32% between 2%-2.4%, and 30% above 2.8%. If your fixed expenses are within 1.5%, you're ahead of 62% of trading companies nationwide. Similarly, other expense ratios can be compared. If your expense ratio is low and business volume large, you needn't worry about being replaced. If not, you lack competitive advantage and need to improve management. For specific improvement methods, refer to our previous articles and the upcoming series 'Decoding Operations, Facing 2020'. 3) Increase synergies. Besides improving operational capabilities, innovate business models and rethink product and channel definitions. Are previous product and channel classifications still valid? Can you achieve complementary advantages between products and channels? Product and channel structures not only solve the usual volume-profit balance but also enhance risk resistance. This epidemic is the best test. If you operate only one category and sell through one channel, if lucky, you're hit by a pie and sell out; if unlucky, you're hit by an egg and face oversupply. For example, if you only sell beer and only through the catering channel, the result is predictable. But if you also sell ham sausages or grain and oil, and besides catering, you have traditional channels and home delivery services, you can still recover cash flow, sell synergistically, and resist risks. 4) Focus on core competencies. Why must we do everything across the supply chain? Why not provide only certain channel services but excel at them? Through analysis, if you find your company's strongest capability is channel development and maintenance, but logistics is weak and hasn't improved despite years of adjustments, while your neighbor Lao Wang excels in logistics but is weak in channel development, why not consider a different angle: maximize your strengths and outsource your weaknesses. You can cross-hold shares to form an optimal 'Transformers' organization. Or jointly establish a logistics company with Lao Wang, with him managing your logistics. You handle channel development and maintenance, Lao Wang handles product delivery, Lao Zhang handles C-end home delivery, etc. Like Taobao's ecosystem, everyone cooperates to form a large business chain where no one can do without the others. Taking 1% of 10 billion is the same as 100% of 100 million. The most important thing is to grow the pie and increase profits together. In the future, trading companies will only become more focused and professional, and their value will not diminish but increase. By committing to reducing transaction costs and earning channel profits through cost reduction, you will continue to exist.