Liuhe Logistics, located in Fengqiu County under Xinxiang City, Henan Province, is a unified warehousing and distribution company jointly established by five local well-known distributors to integrate the local FMCG distribution market. Recently, New Distribution interviewed Ren Changgen, general manager of Liuhe Logistics, hoping his case of unified warehousing and distribution in a county market can offer insights to distributors.
Liuhe Logistics was founded in early 2017 by five local distributors who respectively represent first-tier brands such as Yili, Want Want, Yinlu, Alps, Yangshao, and Moutai Yingbin liquor. It covers more than 2,600 retail points with a coverage rate of over 90%, and the combined annual sales exceed 100 million yuan.
Ren Changgen recalled that before the establishment of Liuhe Logistics, the five distributors were already operating in one warehouse. Due to local government investment attraction, they had to collectively relocate the warehouse. It was at that time they noticed the unified warehousing and distribution model. Based on mutual trust, they jointly invested in land, built a warehouse, and introduced the Medline warehouse and distribution system for transformation.
Gradual guided investment attraction
Attracting investment is a major challenge for distributors leading unified warehousing and distribution.
Ren Changgen told New Distribution that before officially starting, because they were friends within the circle with other distributors, everyone was optimistic about the unified warehousing and distribution business and willing to join. However, after formal operation, some distributors worried about being intercepted in business or their operational data being seen by others, so they declined to enter.
To dispel distributors' concerns, Liuhe Logistics adopted a gradual guided approach to attract investment, and has so far recruited 17 distributors into the warehouse. Ren Changgen said that after early trial and error, they no longer require distributors to put all their goods into the warehouse at once. They let them try first, even for free, starting with one truckload, then half, and through half a year or even a year of cooperation and磨合, let distributors feel their service and see that costs are indeed lower than before.
In the county market, distributors still operate in a rough management style without refinement and do not calculate costs. Ren Changgen told New Distribution that besides gradual guidance, they also help them calculate accounts. For example, a local distributor had a large stock due to heavy pressure from the manufacturer to stock up. After discussion, they planned to place one truckload first, then two, then 30%... After half a year of磨合 and service, his warehousing costs dropped from 120,000 yuan per year (warehousing fee 60,000 yuan/year, personnel cost 2,500 yuan/month * 2 people * 12 months = 60,000 yuan/year) to only about 5,000 yuan per month, a direct reduction of 50%. In addition, previously the quantity in the warehouse was inaccurate and damage was unclear; now what goes in and out is recorded, and inventory is accurate.
Collaborating with JD to cultivate outlet habits
Besides the subjective difficulty of attracting investment, objectively Liuhe Logistics also faces the challenge of cultivating the habit of online ordering at terminal outlets.
Ren Changgen told New Distribution that in Fengqiu and surrounding county markets, the proportion of vehicle sales reaches 70-80%. Even distributors like Master Kong and Nongfu Spring all use vehicle sales. Terminal outlets have developed a habit of vehicle sales delivery for decades. Changing to visit sales and platform ordering is difficult for outlets and requires time for education.
Currently, platform orders account for about one-third of total orders at Liuhe Logistics. Although the five distributors represent first-tier brands, they still have to rely mainly on vehicle sales with platform ordering as a supplement.
Ren Changgen said, "In the past, we tried to cancel vehicle sales and promote the platform to guide terminal ordering, but after a period of trial, we found a more serious problem: sales of the products we represent dropped sharply. Facing the pressure of upstream manufacturers' sales tasks, we finally gave up the one-size-fits-all approach and gradually guided, step by step."
In addition to their own gradual guidance, Liuhe Logistics has also cooperated with JD New Channel, hoping to "heat up" the market through multiple platforms. Ren Changgen told New Distribution that changing outlets' ordering habits cannot be done by one person alone. By cooperating with JD New Channel, they hope to use the internet giant's promotional subsidies for outlets to open the door to online ordering.
Shuttle-style business promotion
Ren Changgen said that from the current perspective, it is unrealistic to expect terminal outlets to switch from vehicle sales to platform all at once. There needs to be a transition period. Liuhe plans to adopt shuttle-style visit sales for township outlets, gradually shifting from promoting products to promoting the platform.
Liuhe Logistics plans to have business personnel from 5-6 different brands share one vehicle to visit surrounding outlets in rural areas, guiding terminals to order online in the form of selling products. After terminals adapt to the platform, they will gradually divide into areas, with one business person responsible for one township, covering 30-40 outlets, doing customer relations, displays, and restocking.
Ren Changgen told New Distribution that although their hardware facilities can keep up, for such a local market, they dare not be too aggressive. Without affecting sales, they can only gradually introduce. At this stage, they are still exploring; transformation must be done according to one's ability.
Save where possible; profitability is most important
Liuhe Logistics covers an area of 40 mu (about 24,000 square meters). Ren Changgen told New Distribution that such a large warehouse area brings high operating cost pressure. Besides unified warehousing and distribution, they rent out space where possible and save where possible, and have already reached break-even.
More than a year of transformation experience has given Ren Changgen some insights. He told New Distribution two points:
First, do not invest a large amount of funds into warehousing and distribution facilities at the beginning. Act according to your ability. The supporting facilities for warehousing and distribution should be added gradually as more distributors enter the warehouse. Investing funds means costs.
Second, do not hire all positions at the beginning. It may seem nice, but distributor entry is a long process. In the early stage, you do not need so many people; personnel are the biggest cost in operation. In the early stage of operation, do not set positions for people; one person should handle multiple roles.
The above is the case of five distributors in Fengqiu County jointly transforming. In the view of New Distribution, some distributor transformations are suitable for small steps and fast iteration with trial and error, while others are more suitable for gradual guidance and acting according to ability. For distributors, there is no right or wrong in the pace and method of transformation; only what is suitable.
Final Thoughts
Recently, New Distribution visited dozens of distributors undergoing transformation. From their operational practice, New Distribution observed the following points for other distributors to consider.
- From the perspective of product categories, distributors of leisure food and general merchandise are more likely to succeed in transformation than beverage distributors.
Beverages, compared to other FMCG, are essential and high-frequency products with high brand concentration, and upstream manufacturers have stricter control over distributors. When distributors transform, because the business model changes fundamentally, sales inevitably decline. During this process, the intervention of local regional managers from manufacturers, constrained by annual tasks and sales rebates, makes the transformation pace less optimistic than expected.
Due to the capital requirements and management pressure from first-tier manufacturers, beverage distributors have a relatively limited number of brands they represent, which leads to weak stickiness with terminal outlets. In addition, beverage manufacturers and distributors have long set volume-based rewards for terminals, with different prices for different terminals, and even different prices for different customer relationships, further restricting the online listing of high-frequency products.
Leisure food and general merchandise, compared to beverages, are medium-to-low frequency products with lower brand concentration, and upstream manufacturers do not have as strong control over distributors as beverage manufacturers. Therefore, when transforming, these distributors do not face much upstream sales pressure.
It is worth noting that because leisure food and general merchandise are medium-to-low frequency products with limited market space, such distributors often represent multiple brands, even thousands of SKUs, to survive and develop. The more SKUs, the more frequent transactions with outlets, and the stronger the stickiness with outlets.
- From the perspective of the roles of distributors and secondary wholesalers, "large secondary wholesalers" are more likely to succeed in transformation than distributors.
Large secondary wholesalers have four advantages over distributors in transformation:
Large secondary wholesalers do not have distribution rights, no sales task pressure from upstream, no capital sink pressure, and higher flexibility in transformation without upstream burdens.
The reason they can become large secondary wholesalers is their core advantage in backend product organization, including the ability to select products based on terminal needs.
The number of SKUs and category span of large secondary wholesalers far exceed those of distributors, better meeting terminal ordering needs.
In terms of terminal customer relations, secondary wholesalers do not have any manufacturer support, no manufacturer salesperson visits, and most of the products they represent are non-first-tier brands. To establish themselves in the local market, secondary wholesalers pay more attention to terminal customer relationships.
In summary, secondary wholesalers are not constrained by upstream suppliers or products, have fewer complex factors to balance and consider, and with good terminal customer relations and multi-category product organization capabilities, they are more able to convince outlets to order online.
- When multiple distributors jointly do unified warehousing and distribution, the easiest thing to negotiate is equity distribution, and the hardest is daily management.
When multiple distributors jointly do unified warehousing and distribution, before cooperation, based on their respective operating strength and investment ratios, equity distribution is often the easiest to negotiate. However, after cooperation, past distributors were all bosses, and now they have to change roles to become executors and followers, which is very difficult. In the past, a company had one boss; now a company has multiple bosses, making daily management more difficult. Especially during transformation, constant exploration, trial and error, and iteration are needed, and the decision-making cycle is long. Coupled with trial and error in multiple directions, it often exhausts each other's energy. The cost of this trial and error comes not only from funds and time but also from the pressure of partners around.
The above are some observations and thoughts from New Distribution on distributor transformation practice. In the actual process of transformation, distributors may encounter various specific problems due to different local conditions. Friends are welcome to add the author's WeChat (yuandejian2607) to discuss and exchange.
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