---
title: "Why Regional Distributors Can Thrive While Regional Dealers Are Doomed?"
description: "Traditional regional dealers face enormous survival challenges due to stagnant market growth, rising costs, and channel disruption. The inevitable solution is to transform into regional digital platform operators (B2b), leveraging digital tools and operational efficiency to achieve profitable growth."
author: "常波"
publisher: "New Distribution"
email: "zhaobo258@gmail.com"
telephone: "+8615854817671"
published: "2023-03-13"
language: "en"
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# Why Regional Distributors Can Thrive While Regional Dealers Are Doomed?

> Traditional regional dealers face enormous survival challenges due to stagnant market growth, rising costs, and channel disruption. The inevitable solution is to transform into regional digital platform operators (B2b), leveraging digital tools and operational efficiency to achieve profitable growth.

**Traditional regional dealers**
**face enormous survival challenges**
China's FMCG dealers are a group of commercial individuals that have gradually grown with the development of China's market economy. Since 1984, when the state gradually liberalized cross-regional commodity circulation, the channel evolved from the earliest provincial capital wholesale markets to provincial, municipal, and county-level agencies, and then to grid distributors (e.g., Coca-Cola's 101 system), step by step from extensive to refined, requiring dealers to continuously deepen and cultivate local markets. This is the overall trajectory of the FMCG distribution channel.

This segmentation has a negative impact: because a dealer's total business volume cannot exceed the population and economic output of the region they cover, the area a dealer covers basically determines that their business scale will not be too large. However, in the context of the high-growth era, it was fine for manufacturers to segment and require dealers this way. In a highly competitive market, refined operations did bring growth to companies and dealers. When I was responsible for the region at PepsiCo, I strictly segmented areas according to the dealer's service capability to terminal customers, which indeed significantly drove rapid sales growth.

But starting from 10 years ago, i.e., 2013, growth in some mainstream FMCG categories basically peaked, corporate growth stagnated, and some even saw negative growth. At this point, the drawbacks of the manufacturers' intensive cultivation strategy began to surface on the dealer side.

First, dealers' operating costs did not decrease with declining sales; instead, they increased year by year, especially labor costs, which were not only high but also made hiring difficult, especially for excellent sales personnel.

Second, their ability to resist risks was insufficient. Due to restricted agency areas, dealers' total business volume was generally not large. In recent years, especially during the pandemic, most dealers' operating profits were dismal; those who managed to survive were considered the best in their regions.

Third, the rise of numerous new retail models has caused a huge impact on the price system of traditional distribution networks. The decline in dealers' service capability also led to a decline in channel control, while regional sales targets remained rigid (and were increasingly layered). To meet targets or keep their jobs, manufacturer sales managers forced dealers to subsidize costs or misappropriate channel funds for cross-regional dumping, which became a common phenomenon and exacerbated price chaos.

Recently, I exchanged views with a former regional manager at Coca-Cola, and it seems that within the brand, there is a tacit understanding of this situation: everything is target-oriented, and deep distribution has to some extent become a thing of the past.

Under these circumstances, the efficiency of salespeople is lower than it was ten years ago. It is increasingly rare to see diligent and hardworking salespeople in terminal stores. WeChat ordering has become the main communication tool between salespeople and customers.

Many dealers with terminal service capabilities in various regions are no longer willing to be regional dealers but prefer to be wholesalers, as their procurement costs are even lower than those of dealers. Some mainstream dairy brands are having trouble recruiting dealers in third- and fourth-tier markets, which was unimaginable in the past. The rapid development of the logistics industry has also created a favorable external environment for cross-regional dumping, exacerbating this situation.

Overall, on the surface, traditional dealers face numerous problems such as price chaos, rampant cross-regional dumping, high costs, and team disorganization. The underlying reason is that the total volume of FMCG consumption is declining, market competition is intensifying, and manufacturers find it difficult to provide effective solutions and products to improve dealers' gross margins. Facing fierce competition, dealers have to confront enormous survival challenges.

**Becoming a regional digital platform operator**
**is the inevitable choice for dealers to break through**
In 2012, a large number of B2b platform companies emerged in the FMCG field. Alibaba and JD.com entered successively in 2015, followed by the closure of some small and medium platforms. In recent years, due to the lack of effective profit models, several national platforms have also shown a contraction trend. At the same time, some local B2b platforms transformed by traditional dealers have achieved rapid growth.

These dealer-operated B2b platforms have two notable characteristics: first, they are transformed from traditional dealers, especially snack food dealers or large wholesalers who also do retail in the local market. They have experience in multi-category operations and strong operational capabilities in certain categories; second, they have a certain level of market coverage and control.

Some may question why traditional dealers rather than giants like JD.com and Alibaba can succeed.

**Cost structure:**
Let's analyze the cost structure. In commodity circulation, costs are roughly divided into several major parts: warehousing, logistics, personnel, and capital occupation. Ignoring capital costs, let's briefly look at the other parts. The B2b model does improve front-end order efficiency. Regardless of the platform, front-end personnel efficiency is basically 5-10 times that of traditional dealer operations, meaning that at the same scale, front-line labor costs are saved.

In warehousing and logistics, these costs increase rigidly with scale and can hardly be saved. Under this premise, the costs of large manufacturers are far higher than those of traditional dealers. According to different calculation methods, they are generally 3-5 percentage points higher than traditional dealers.

Anyone who has worked in FMCG knows that in good times, dealers' net profit is basically around 1-2 percentage points. This cost situation is fatal. Comparing the two, the front-end personnel savings of national B2b platforms can hardly cover the increase in back-end operating costs (compared to traditional dealers). Moreover, they have no price advantage in product procurement and sales, so there is no way to absorb the increased costs.

There is also technology R&D cost (large manufacturers generally calculate about 1 percentage point). Some small platforms with self-developed systems need to bear high system costs (it is understood that developing a B2b order system costs about 10 million yuan, with annual maintenance costs of several million). If the scale is small, the amortized cost is too high; if the scale is large, management costs become high.

Currently, successful regional B2b customers use products from software system providers, which greatly reduces initial system investment costs and enables rapid profitable scaling.

**Category structure:**
Looking at category structure, B2b platforms serve small and medium stores. Low-margin, high-turnover heavy goods such as water and low-end alcohol account for a high proportion. Large manufacturers basically do not operate these categories in pursuit of profit targets. The direct result is insufficient platform stickiness, and output has not formed a virtuous cycle.

The reality is that brands still side with traditional dealers, and B2b only exists as a supplement to traffic. It is understood that recently, many brand B2b business teams are in a state of contraction, layoffs, and transformation, and resource investment in platforms is also showing a shrinking trend. Without brand endorsement and investment, platforms cannot afford to burn cash on their own. Several national platforms are currently in an awkward position, struggling to be profitable and lacking transformation direction.

Some regional B2b platforms transformed by dealers have increased platform stickiness by broadening category width, achieving a virtuous cycle between front-end and back-end, rapidly improving front-end personnel efficiency and inventory turnover. Improved inventory turnover reduces warehousing costs, and increased front-end efficiency improves truck load rates. After an adjustment period, they quickly achieved high-quality profitability.

In recent years, the continuous promotion of B2b platforms has cultivated good usage habits among terminal customers. The penetration of smartphones is also very high, providing an excellent implementation environment for channel digitalization. This digital dividend will definitely belong to the new generation of dealers with foresight and capability.

**Why is it difficult for brand owners themselves**
**to promote channel digitalization successfully?**
In the past two years, many brand owners have tried to digitalize their channels by providing digital tools to dealers to connect data between dealers and manufacturers, and using mini-programs and online malls to solve the problem of online order transactions.

However, we see that almost all brand owners in China have failed in channel digitalization. Why?

I think there are inherent structural defects. First, there is a constant game between brand owners and dealers over channel control. Dealers and manufacturers cooperate in basically two types:

**One type is where the brand's salespeople directly control stores, and the dealer is responsible for delivery.** These dealers are basically the brand's local warehouses and delivery personnel, earning money from warehousing and delivery. The advantage is that it is relatively worry-free; the problem is that the business is single-category, has no say in terminals, and lacks the ability to push new products. The digital system provided by the manufacturer is for the brand's own service, and it is very awkward for small stores to use. Although the system is open to other brands, basically no other brands will join.

**The other type is where the manufacturer fully authorizes the dealer to serve terminals themselves.** For this type of dealer, terminal customer information and service capability are core assets. If the dealer adopts the digital system provided by the brand, they will gradually lose channel control and become a porter for the brand, which is unacceptable. Therefore, dealers will not use such systems well.

This is just at the dealer level. At the manufacturer level, there are also a bunch of problems.

Regarding the internal digital transformation of brand owners, it can be summarized in three levels:

**Top-level lacks effective mechanism design**
**Middle-level lacks interest-driven incentives**
**Bottom-level lacks motivation for promotion**

First, look at top-level design. According to the enterprise digital transformation report provided by iResearch, the core issue hindering digital transformation is the lack of digital talent. Senior executives lack basic awareness of digital scenarios, thinking that digitalization is just making a system software to solve problems. They lack deep thinking about organizational mechanisms and business processes. Even if they hire a few people who understand digitalization, due to the business being in its infancy and lacking effective attention and clear delegation, they are quickly marginalized.

A recent typical case is a food manufacturer in Hebei that set up a R&D team of several hundred people (comparable to front-line sales staff) to develop systems. The cost is high, and there are problems with system integration and adaptability. After a year, they are in a dilemma, having to find new story material while continuing to push forward reluctantly.

Then look at the middle level. Digitalization will make transaction data more transparent, real-time, and convenient, and will also make the planning and use of channel funds more transparent. For a long time, the flexible use of channel funds has been the norm in the industry, such as putting it into prices for cross-regional dumping. As the backbone of digital implementation, will they sincerely promote it?

At the salesperson level, the result of platformization will greatly reduce the number of front-line personnel. Will any savvy front-line salesperson be willing to smash their own rice bowl?

Another issue is that platform attributes require category inclusiveness, while single-brand category exclusivity creates inherent barriers to category richness. The stronger the brand, the stronger the exclusivity. It is hard to imagine that store owners would have a separate order entry for each brand on their phones; one-stop shopping is a common demand of terminal small stores.

Overall, in recent years, brand platforms that have built their own vertical systems have extremely low activity rates. Those still in use have basically become channels for display checks or fee distribution, and orders still follow the original path. Several major consumer goods manufacturers have proven with their own actions that this approach does not work.

**B2b business model**
**Why can dealers definitely succeed?**
Recently, I chatted with some friends who raised broad questions about the B2b business model, basically meaning that big manufacturers haven't done well, and the wave of small platform closures is vivid. Why can dealers succeed?

I think this is a failure to understand the logical relationship between business models and operating mechanisms. A new business model, if there are no successful cases, likely has inherent defects. If there are both successful and failed cases, then it is basically a problem of corporate mechanism design and operational capability.

In recent years, internet e-commerce has achieved predatory expansion through burning cash, rapidly growing big but usually not strong. Even JD.com's American teacher Amazon has not yet achieved profitability in its e-commerce segment. The reason is that its competitor Walmart has deep barriers in information management, supply chain construction, and operational management, allowing them to compete on equal footing, with each having strengths and weaknesses in different areas.

Domestic e-commerce companies that achieve healthy profitability are basically matchmaking companies. These companies are essentially professional advertising companies deeply embedded with brands, earning promotion and operation fees.

Sometimes, stories are easy to tell, but financial reports are more real. The hundreds of times price-to-earnings ratios of several major e-commerce companies basically indicate their current huge bottlenecks. When both profitability and financing capabilities decline, the objective environment for burning cash to build models is basically not allowed, and more employees of big companies may face layoffs.

Speaking of big companies' attention to operations, one of the corporate cultures of a certain big company is "look up to tell stories, bow down to do real work." Those who tell good stories are more likely to get promoted and receive attention than those who do solid work. The result is a PPT culture, where grand but empty talk prevails, and those who actually do things are not recognized or affirmed.

Anyone who has done physical operations knows that in the trading field, money is earned by bending down to pick up coins, relying on humanized management and refined operations. Refined operations have always been a shortcoming of big companies, and the cultivation of operational talent requires good corporate culture and organizational mechanisms to support, which requires strategic determination and time to accumulate. Currently, the time window seems to be a big problem.

Returning to the B2b model, why can traditional dealers succeed? **One reason is that they have made incremental gains on the basis of existing stock**, while the original platform companies have been at odds with traditional dealers from day one, and because they lack a stock base in the region, they have always been in a harsh competitive environment. This is quite different from the growth environment of C-end e-commerce.

Another reason is that **under the same model, their operational management level is indeed superior to that of big companies.** I was deeply impressed by Xi'an Jiayun City, where warehousing, sorting planning, logistics management, and on-site personnel management all crushed a certain big company that boasted high information levels. I also felt the huge energy contained in these traditional dealers.

In February, I visited nearly ten local B2b companies in Xi'an, Chongqing, Chengdu, and Changsha. They all achieved rapid growth despite the pandemic, fully demonstrating the assistance and empowerment of digital tool systems for management. To use an old saying, digital tools are not omnipotent, but without digital tools, it is absolutely impossible. The effective use of digital tools is fundamental.

**Why is B2b**
**so important for channel digitalization?**
Recently, I had the honor to read Mr. Liu Chunxiong's new book "New Marketing 3.0". Its core viewpoint is that bC integrated digital transformation will become the tipping point for future business model transformation, and will also bring corresponding changes in business models and organizational mechanisms. I deeply agree.

To briefly explain bC integrated digital transformation, b refers to various stores doing community business. bC integrated digitalization is about digital online operations around community stores, including online stores, community group buying, and other forms of private domain operations for C-end consumer groups, achieving dual online and offline circulation and positive interaction.

According to incomplete statistics, the volume of private domains in various forms, including WeChat business and community group buying, exceeds 3 trillion yuan. The main problem is that this traffic is extremely fragmented, and a stable supply chain system has always been an issue.

Channel digitalization will become a systematic solution to connect bC integration. The complete chain of channel digitalization is F2B2b2C. The B2b part is currently the biggest breakpoint in channel digitalization. At present, the GMV stock of 6 million small stores nationwide is over 6 trillion yuan, while the GMV in the B2b field is less than 100 billion yuan, leaving huge room for growth. If private domain traffic can be connected well and supply chain services for private domains are done well, there is even more room for imagination.

Overall, F2B is the trunk line of channel digitalization, B2b is the main line, and b2C is the branch line. Only with deep integration of the three can a complete and efficient closed loop be formed. At this stage, the task is to do the main line work well.

Looking ahead briefly, with the opening of the F2B2b2C link, some B2b companies may gradually evolve into regional platform operators, not just B2b supply chain service providers. B2b is a phased goal and means. Of course, healthy and organic growth is the premise for everything. In the future, the game in the trading field may not be between JD.com and Pinduoduo, but more likely between regional platform operators and centralized platform operators. If tool capabilities are equal, which model and system is more efficient is worth expecting and testing.

Future regional dealers must have digital management capabilities. Some will be transformed by the current young generation of dealers with learning ability, but more may be taken over and promoted by sales colleagues with management and digital capabilities. The pace of iteration may accelerate in the next few years, and there will be many opportunities.

Regarding the market landscape, my personal judgment is that the scale of regional platform operators will grow by orders of magnitude, while the number of regional dealers will decline by orders of magnitude. This has become an inevitable trend.

The future has arrived. Let us witness it together.


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