Click to read the original article for details. Why have American distributors evolved into supply chain companies, while Chinese distributors have become appendages of brand owners? The earliest seeds of the modern commercial distribution industry were sown after the First Industrial Revolution, when society transitioned from an agricultural to an industrial one, and inefficient manual production was gradually replaced by industrialized production powered by coal and steam engines. After the Second Industrial Revolution, mass production of goods and the rapid spread of highways and railways made cross-regional distribution possible. With social prosperity and demand driving production, the industry truly began to flourish on a large scale. However, the earliest distribution models in the commercial circulation industry all started with wholesale markets, then gradually transitioned to wholesalers, and finally evolved into commercial trading companies. This phase occurred in the United States roughly from 1900 to 1960, and in China from the late 1980s to around 2000. At that time, distributors in both countries shared a common characteristic: they were more wholesalers than distributors. Initially, many distributors started by wholesaling in wholesale markets. After growing larger, they established commercial companies specializing in wholesale, selling a wide variety of goods as long as there was profit. Moreover, during that period, brand owners' distribution systems were mostly incomplete. They typically found one or two wholesalers in a province or region to serve as provincial agents, who then distributed goods layer by layer down to cities, counties, villages, and towns. Although these agents were called distributors, their main business model was still wholesale, and they handled a relatively wide range of product categories. In the United States, from 1870 to 1913, GDP grew at a compound annual rate of 4%, and from 1910 to 1970, at about 6.1%. The external operating environment for distributors changed relatively mildly. After nearly half a century of development, some distributors, through the efforts of two or even three generations of a family, became regional leaders, achieving one-stop, full-product-line wholesale distribution to local retail stores. They developed some local scale advantages and began to evolve into specialized companies. They no longer merely supplied goods to small shops but also provided franchise services, financial services, operational guidance, and other one-stop supply chain services, eventually evolving into large supply chain companies that combined wholesale and retail. However, in East Asia—such as Japan, South Korea, and Taiwan, China—due to the small land area and the market economy dominated by large conglomerates and trading companies, it was easy to achieve integrated group operations among manufacturers, distributors, and stores. Examples include Itochu in Japan, Lotte and Samsung in South Korea, and Uni-President in Taiwan. However, these models are not directly applicable to mainland China, so we will not discuss them further here. Since the reform and opening-up, China's GDP has grown rapidly. The average annual growth rate from 1978 to 2016 was 9.7%, far exceeding that of other major economies during the same period. During the same period, the average GDP growth rate was 2.7% in the United States, 2.5% in Canada, 2.3% in the United Kingdom, 2.2% in Japan, 1.9% in France, 1.8% in Germany, and 1.4% in Italy. Although all achieved positive growth, their rates were much lower than China's. One year in China is equivalent to five years of development in other countries. The 30 years of rapid growth since the reform and opening-up essentially completed a century of development that developed countries experienced. This rapid growth brought a very serious problem: many industries could not keep up with the pace of social development, especially in terms of industry infrastructure. The divergence in commercial distribution models between China and the United States began with the introduction of the deep distribution theory system in China. The deep distribution model emphasizes a manufacturer-distributor alliance to form a benefit coalition, extending operational reach into small shops, and through sales personnel's intervention in stores, gaining a relative competitive advantage for our brand at the point of sale. However, this model places high demands on distributors. To obtain more resources and support from brand owners and ensure sufficient competitive advantage, distributors must cooperate fully with brand owners: adding personnel and vehicles, abandoning wholesale, directly supplying retail outlets, and focusing on selling and servicing that brand's products. As a result, a large number of high-quality wholesalers gradually transformed into large distributors specializing in a single brand. We commonly see this type with distributors for Yili, Mengniu, Tsingtao, Snow, Shuanghui, and Six Walnut, among others. Of course, you might say some distributors handle multiple brands, but such distributors have very typical characteristics: first, they rarely handle two competing brands simultaneously; second, the main brand accounts for 60-70% or even 100% of their distribution. To ensure sufficient distribution efficiency and dense channel coverage, the best approach for brand owners is to shorten distribution links, compress the territory of individual distributors, add personnel and vehicles, directly supply retail outlets, and intensively cultivate the market. This requires distributors to perform extremely complex tasks at the retail level, including providing working capital, warehousing and logistics, marketing, and in-store merchandising. Such specialized distributors find it difficult to grow as quickly as their American counterparts. Small shop procurement also differs from the American one-stop supply model, becoming a socialized supply model: multiple brand-specialized distributors plus nearby secondary wholesalers for mixed delivery. More critically, driven by brand owners' will, a large number of quality products are directly supplied by distributors, and secondary wholesalers are restricted by deep distribution and territorial protection, leaving them little opportunity to grow large. This has made it virtually impossible for China's FMCG market over the past two decades to nurture large-scale supply chain companies. Mr. Liu Chunxiong, during an exchange in New Distribution's B2B CEO group, raised a viewpoint: American marketing is 1P marketing: brand (product)-driven, winning through the backend, primarily relying on mass media. Channels are merely efficiency systems, easily outsourced to third parties. Chinese marketing has two major driving models: small enterprises are channel-driven, while large enterprises are channel-driven plus brand-driven; channel driving is indispensable. Whether channels serve as efficiency systems or driving forces is the difference between China and the United States. As an efficiency system, the main function is delivery. As a driving system, it must accomplish cognition and transactions. The reason Chinese channels become a driving force is mainly that the channel chain is a relationship chain. Because relationships exist, the threshold for cognition is lowered; because cognition exists, transactions are realized. In an efficiency system, channels are about the flow of goods. In a driving system, channels are about the flow of information, then the flow of goods. Essentially, it is an interaction chain. The value of distributors in the channel is to complete cognition (promotion) based on relationships and interaction, thereby generating transactions. Relationship → Cognition (promotion) → Transaction. This is the business logic of Chinese channels. The author strongly agrees with Mr. Liu's point about the relationship chain. It is an efficient distribution methodology born in China's unique market environment. Within this value chain, the distribution of benefits and resources is still dominated by brand owners. China currently has approximately 5.2 million mom-and-pop stores, while chain stores number fewer than 150,000. Small stores are too numerous and scattered, and crucially, they are very difficult to consolidate. Unless a strong operator emerges to integrate small stores into a chain model and achieve scale procurement, it is difficult to change the benefit pattern of this value chain in the short term. Looking further ahead, Mr. Chen Qinghong from Haiding once provided the author with a consensus forecast in the retail industry: before 2030, China's convenience store market capacity will be around 500,000 stores. There is an unwritten rule in the industry: for every chain store opened, about three mom-and-pop stores close. Based on this ratio, from now to 2030, about 1.5 million mom-and-pop stores will close in China, leaving about 3.7 million mom-and-pop stores in the market. However, from another dimension, these 1.5 million closures are mainly in first- and second-tier cities and some third-tier cities. In third- to sixth-tier cities, mom-and-pop stores will remain dominant. Therefore, we see that in first- and second-tier cities and some third-tier cities, as chain retail becomes more prevalent, the channel structure of brand owners and the business models of distributors will undergo fundamental changes. Many first-tier brands have brought distributor logistics in first-tier cities under their own unified management. Some distributors, due to cost pressures, have voluntarily outsourced warehousing and logistics to third-party city distribution companies, gradually transforming their main business from delivery to marketing, services, and capital provision. Looking at the 5-10 year development trend, the divestiture of distributor logistics in high-tier markets has become a relatively mainstream trend, and city distribution logistics will flourish in high-tier markets. For brand owners, the 3.7 million mom-and-pop stores in third- to sixth-tier markets still represent a huge traffic base. For brand owners who emphasize channel-driven or brand-plus-channel-driven strategies, low-tier markets remain the core driver of rapid growth in the coming years. Therefore, channel sinking, given brand owners' existing management models and operational inertia, will likely continue to be dominated by strong self-control and deep distribution. FMCG B2B emerged in 2013, and to this day, the most painful issue is that it has not penetrated the benefit alliance between brand owners and distributors. The control of this alliance is mainly reflected in two aspects: first, territorial protection, which prohibits cross-regional selling; second, price control, the core of which is to fully protect partners' interests. Because this alliance is bound by interests, if interests are broken, the alliance collapses. Therefore, brand owners place special emphasis on price control. However, the problems emerging in this industry force a reconstruction of this value chain:
1. The HBG model has failed, deep distribution is unsustainable, and large-scale distribution models can no longer meet existing consumer demands;
2. The cost of the entire society is rising, and brand owners and distributors can no longer afford to maintain a large number of professional terminal service personnel for dedicated terminal services; distributors' profits are declining day by day, while costs are rising day by day. So even if no external force breaks this benefit pattern, it is about to collapse from within the alliance;
3. New retail is coming on strong, with online-offline integrated distribution and digital marketing, all capabilities that traditional distributors lack. Therefore, the deep distribution value chain in the FMCG industry is bound to be reconstructed. To break the benefit pattern of this value chain, either brand owners proactively reconstruct their value chain, or strong B2B players cut off the relationship between distributors and small shops. But the biggest problem currently is: brand owners lack the will, and B2B lacks the motivation. Therefore, we believe that for a long time to come, the value chain of commercial circulation in China's FMCG industry will likely remain dominated by brand owners. Distributors in high-tier markets will gradually differentiate into marketers and service providers, while those in low-tier markets will continue to focus on deep terminal services. Data sources: China Daily—Comparison of China's 40 Years of Reform and Opening-Up Economic Development Achievements with Major World Economies U.S. Department of Commerce, Bureau of Economic Analysis