Ten Theoretical Foundations for Understanding the FMCG Industry and Its Channels

New Distribution has long been committed to producing in-depth interpretations of the channel domain within the fast-moving consumer goods (FMCG) industry. Behind these interpretations lies a set of cognitive models serving as theoretical guidance—models that also form the foundational material New Distribution uses to guide its internal editorial colleagues in understanding the industry. Today, we have organized this foundational framework knowledge into an article to share with all our readers.

A cognitive framework is the foundation for interpreting an industry.

-01-

Customer Delivered Value:

Customer delivered value refers to the actual value transferred by the enterprise and perceived by the customer. It is generally expressed as the difference between the customer’s total purchase value and the customer’s total purchase cost.

Customer delivered value was proposed by Philip Kotler in his book Marketing Management. He held that “customer delivered value” refers to the difference between Total Customer Value and Total Customer Cost.

Total customer cost refers to the time, mental effort, physical energy, and monetary funds a customer expends to purchase a given product. Accordingly, total customer cost includes monetary cost, time cost, mental cost, physical cost, and so on.

When purchasing products, customers always hope to minimize the relevant costs—money, time, mental effort, and physical energy—while at the same time hoping to gain greater actual benefit, so that their needs are satisfied to the greatest possible extent.

Therefore, when selecting products, customers tend to compare and analyze from two dimensions—value and cost—and choose as their preferred purchase the product with the highest value and lowest cost, that is, the one with the greatest “customer delivered value.”

Products suited to sale on e-commerce platforms: low time cost for consumers, low logistics cost, high unit price, low purchase frequency;

Products suited to purchase in retail stores: high time cost for consumers, high logistics cost, low unit price, high purchase frequency, and little decision-making required.

Recommended reading: Philip Kotler, Marketing Management

-02-

Consumer Behavior: Immediate, Planned, and Impulsive

Different consumer goods can be divided, in terms of consumption behavior, into three types: immediate, planned, and impulsive.

Immediate:

When consumers experience a physiological need—such as being thirsty, hungry, tired, sleepy, or unwell—their behavioral demands regarding time become relatively high, while their price sensitivity becomes relatively low.

We often see Coca-Cola requiring that its products be distributed to the point of being available everywhere. The core reason is the need for consumers to have the product within immediate reach the moment their first consumption need arises.

Planned:

For certain consumer categories—such as toothpaste, laundry detergent, facial cleanser, and toilet paper—users are not especially time-sensitive, so when making purchase decisions they tend to plan their consumption in advance.

For planned categories, users are relatively price-sensitive and will compare prices across options to find the product with the best value for money.

Impulsive:

The consumer has no prior plan, but upon entering a certain scenario is influenced in a way that sparks a consumption need and results in a transaction.

Such behavior generally involves relatively low price sensitivity, with emotional factors accounting for a large share of the purchase decision. Snack foods are a common example of this category.

-03-

The Three-Dimensional Space: Awareness, Transaction, and Relationship

Awareness:

Today, information overload among users has become a very serious problem. Consider this scenario: “You’re scrolling through Douyin, and if you come across a good piece of content, like it, and then scroll through two more posts, you will most likely have forgotten what the content you just liked was about.” This is a typical case of content shock brought on by massive information volume.

By contrast, in an extremely noisy environment, no matter how loud the surrounding sounds are, the moment someone calls a person’s name, that person will immediately take notice.

In an environment of information overload, people only pay attention to content that concerns them, and selectively ignore external information that is irrelevant to them.

In such an environment, enterprises must rethink the logic of communication. Leveraging user-generated content (UGC) and winning the support of media KOLs will become critically important means of persuading consumers.

Transaction:

The diversity of channels has made transactions extremely convenient for users, but it has also brought a major challenge: users’ transaction touchpoints are full of uncertainty. What is certain, however, is that the path between information and transaction is growing ever shorter, post-transaction user operations are becoming increasingly important, and the boundary between the marketing department and the sales department is becoming increasingly blurred.

From a transaction perspective, people’s behavioral trajectories have shifted from a linear radius to leapfrogging shopping patterns. Information may be obtained from offline physical stores, from community discussions, or from the internet—followed by attention, search, transaction, and sharing—and purchasing behavior has become unpredictable.

In the past, the core of channel building was efficiency; today, the core of an enterprise’s channel construction is user tolerance—that is, the coverage fan of target users’ transaction touchpoints across the three-dimensional space.

In the past, offline stores and online e-commerce were two separate departments. Today, centered on users’ life scenarios, the three-dimensional space of online, offline, and community must be reconnected. Transaction touchpoints must be rebuilt based on users’ behavioral logic and life scenarios.

These digital channels, built on new infrastructure, offer two things: on one hand, technology makes user behavior visible; on the other, users being online makes full-lifecycle management possible.

Who the user is, where they are, what their behavioral trajectory looks like—along with building deep, close relationships with users and engaging in communication and interaction—all of this can now be achieved. In the past, the transaction was the end point; now, the transaction is the starting point. In the past, the operating unit was the store; now, the operating unit is the person.

Relationship:

Over the past two years, traffic has become increasingly expensive, and many people have paid growing attention to private-domain traffic. In my view, however, if one looks at private-domain traffic solely from the perspective of traffic cost, its value is greatly underestimated.

Private domain is not contact—it is relationship! Why is the relationship between us and our users so important?

As choices proliferate, the satisfaction and happiness that material goods can bring people today has diminished considerably. Moreover, as mentioned earlier, information overload has made users’ attention increasingly fragmented. Whether I consume your product depends on what relationship I have with you.

If an enterprise cannot build with its users a closer relationship that transcends the material, it will be at an enormous disadvantage in future competition against brands that can build such relationships with consumers.

Faced with highly homogeneous products, it will be forever trapped in the red ocean of competition.

New Distribution believes that the highest state of building relationships with users is co-creation: co-creating products, co-creating scenarios, co-creating meaning—and then letting users spontaneously carry out secondary communication on behalf of the brand owner, completing the operational closed loop.

Recommended reading: Connection by Shi Wei

-04-

Three Retail Scenarios: Tree, Star, and Topological Networks

Today’s retail scenarios can be roughly divided into three categories.

The first: the traditional offline agency–retail system

Goods travel from tier-one agents to distributors, then to retail stores, and finally to consumers—a chain resembling a tree network. The transaction logic of a tree network is a composite transaction mechanism based on product brand, media communication, and channel convenience.

The second: online e-commerce platforms

The platform aggregates traffic from both the supply and demand sides, generating transactions on the platform in between. The transaction logic is based on the platform’s arbitration mechanisms: reviews, payment systems, transaction order volumes, platform recommendations, and so on.

The third: networks based on social platforms

This type of network is inherently decentralized, and its transaction logic is based on personal endorsement.

Recommended reading: “Six Network Topologies”

https://zhuanlan.zhihu.com/p/267710797

-05-

Four Kinds of Consumption Sovereignty: Factory, Brand, Channel, and Consumer

Factory sovereignty:

For a long period after China’s reform and opening up, people’s material living conditions were poor. Most Chinese households could not eat white flour every day until the late 1980s—to say nothing of other non-staple foods and consumer goods, most of which could only be purchased with ration coupons. The supply of goods was extremely scarce; people’s desire to improve their lives was intensely urgent, yet disposable income was very limited.

For a household, once it could eat its fill, the first goal in improving life was to purchase the essential “big-ticket items”: bicycles, television sets, washing machines, and other consumer goods.

The demands people expressed for goods centered on basic criteria: Is the quality durable? Is it sturdy? Is it practical? Is there a warranty? Is it expensive?

For an enterprise, whoever could mass-produce these daily necessities at low cost and high efficiency—so long as quality and functionality were not too poor—could become a leading enterprise of that era.

The famous story of Zhang Ruimin smashing refrigerators is an emblematic event of this era.

Brand sovereignty:

As the economy gradually developed, people’s disposable income slowly rose, and the market supply of goods gradually grew richer. Once households had acquired all the necessities, people’s demand for consumer goods progressively shifted from basic needs to functional needs.

Consumers moved from asking whether they could afford a product to asking whether it was a famous brand, whether it had better functions, what its features were, and what differentiated functions it offered—these became the main reasons determining whether consumers would buy.

Moreover, once the market’s basic supply was saturated, the ills of supply homogenization began to emerge. Many enterprises started to discover that even the emperor’s daughter now worried about finding a husband—that is, even good products struggled to sell.

Chinese-style marketing, in a certain sense, was born during this stage. Several professors from Renmin University—Shi Wei, Peng Jianfeng, Bao Zheng, and others—put forward a deep marketing theory with Chinese characteristics, formally ushering in three vigorous decades of great development in China’s consumer goods industry.

It was also at this time that HBG, deep distribution, positioning theory, 4P marketing, and other well-known Chinese and international theories began to be put into practice step by step within companies, taking deep root in people’s minds.

We saw many domestic brands—nationally renowned names like Master Kong, Uni-President, Yihai Kerry, Coca-Cola, Tsingtao Beer, and Snow Beer—all become national brands during this stage through centralized media communication, leveraging deep distribution networks and broad distribution.

This stage began in 1992 and lasted until 2013. Those two decades were the happiest twenty years for FMCG brand entrepreneurship: China’s economy was developing at breakneck speed, the market was growing at double-digit rates every year, and as long as your product wasn’t too bad and had a few selling points, you could achieve respectable growth.

The Third Era of Sovereignty: Channel Sovereignty

Channel sovereignty means that a given retail enterprise holds the right to allocate and sell traffic.

The earliest channel-sovereignty model to appear in China was the large supermarket, which emerged in 1998—what the industry commonly calls the KA channel.

The first hypermarket to enter China was France’s Carrefour. When they arrived in China, they brought with them advanced management concepts and a shopping environment that was refreshingly new to ordinary Chinese people. For the following decade and more, the hypermarket remained one of the must-visit commercial attractions where Chinese consumers took their families on weekends.

Leveraging their enormous shopping traffic, hypermarkets squeezed brand owners with almost no bottom line: entry fees, barcode fees, end-cap display fees, store anniversary fees……

Countless forms of exploitation, all serving a single purpose: to extract every last coin from suppliers’ pockets.

But for the sake of that considerable traffic, brand owners and distributors endured it, gingerly attending to the hypermarkets’ various procurement buyers. Yet compared with the e-commerce giants that came later, this exploitation was small potatoes.

E-commerce began to emerge in 2006, and the richness of merchandise brought by the infinite shelf was beyond anything any domestic KA hypermarket could match.

Take luosifen (river snail rice noodles), the hottest product of 2020: a casual search on Tmall turns up an astonishing 24,424 SKUs. Think about it—what consumer needs this many luosifen options across so many different brands and selling points? Who could possibly tell the good from the bad among so many brands?

There is a theory in psychology called decision paralysis: when a user faces a vast sea of products, it is very difficult for them to make an effective decision. So the platform must use rules and algorithms to filter out the products best suited to each consumer.

The platform’s rules work from the consumer’s perspective, using brand, sales volume, reviews, Zuanzhan display ads, Zhitongche paid search, and other curated recommendations to give consumers the shortest possible decision path.

This is the competitive logic of channel sovereignty: not giving users infinitely many choices, but using algorithms and clients’ advertising budgets to help users filter out the products they need.

The red-hot phenomenon of livestream selling follows the same logic. Viya and Li Jiaqi essentially stand on the consumer’s side, finding the best value-for-money option for users amid a vast ocean of products, bargaining down prices on their behalf, and then using massive traffic to force manufacturers to submit.

Now, a friend might say: my product quality is genuinely good and my brand is big—what if I skip Zhitongche and Zuanzhan, skip Viya and Li Jiaqi, and just sell on merit alone?

That’s possible too. Take luosifen again as an example: among those 24,424 SKUs, currently only the top 13 SKUs exceed 100,000 orders per month, and only 110 SKUs exceed 10,000 orders per month.

In other words, when the channel stands on the consumer’s side and controls the right to allocate traffic, it is not enough to have a brand and solid quality—you also need lower prices, better experience, better looks, and better word of mouth before you have any chance of being recommended by the algorithm.

The problems brand owners face in the era of channel sovereignty:

In the past, in hypermarkets, planned consumption dominated: users shopped with a purpose, going in to find specific products. What the hypermarket did was aggregate traffic and aggregate brands, and what it earned was a toll fee on traffic.

But the problem now is the infinite shelf and supply redundancy: every single product category has tens of thousands of SKUs, and users cannot possibly find the right product among so many. Hence the necessity of algorithmic recommendations, or KOL recommendations.

On the surface it looks like the platform recommends and the user chooses; in essence, it is the redistribution of traffic.

So what e-commerce earns is a traffic allocation fee. The platform will squeeze the last drop of profit out of suppliers: if your product doesn’t offer a low price, ample volume, good reviews, and a brand, the traffic simply will not come to you. This has nothing to do with the platform’s morals—the mechanics of the infinite shelf dictate that you must empty the last coin from your pocket.

To win the right to traffic allocation, brand owners must transform their marketing logic—from selling supply to selling scarcity. And so, the fourth era, that of consumer sovereignty, has arrived.

Selling scarcity does not mean the physical good is actually scarce; it means making the consumer feel it is exceptionally valuable and meaningful.

The transitions between the first three eras of sovereignty did not happen overnight; the boundaries between them were never that clear-cut. Moreover, in many industries, multiple forms of sovereignty coexist in a certain sense.

The logic behind this is, on one hand, that China is an ultra-large-scale market with pronounced income gaps and differing consumption structures; on the other hand, the internet has people living and entertaining themselves in tribal fashion within the same network structure. As a result, what we must confront is a supremely complex market environment.

The logic of the first three eras of sovereignty was based on structural change: from the buyer’s market created by supply shortage, to supply surplus and the arrival of television, when products began to become branded and differentiated, and then to the spread of the internet—especially the mobile internet—which further intensified the concentration of traffic. Each transition was a change along a different dimension.

But this complexity is not without a handle. The underlying handle is to view Maslow’s hierarchy of needs from the supply side.

Different people, with different levels of awareness and spending power, will most likely remain at their corresponding Maslow level; very few people can cross levels. Viewed through the lens of generational differences:

People born in the 1950s and 60s lived through famine. Their most typical consumption trait is thrift: they like bargains when shopping and habitually stockpile goods. At its core, this is a lack of a sense of security.

Among people born in the 1970s and 80s, some got rich first, but most spent their childhoods in an environment of material scarcity. The stark contrast between rich and poor shaped this generation’s typical consumption trait: a fondness for international luxury brands. At its core, this is a lack of social confidence.

People born after the 1990s—especially the post-95 generation—place particular emphasis on the self. At its core, this is a somewhat narcissistic disposition born of growing up in an environment of relative material abundance.

The Fourth Era of Sovereignty: Consumer Sovereignty

Today’s post-95 generation is the first cohort of consumers that has truly never experienced deprivation. Their material environment is exceedingly comfortable; they have lived in the internet world for as long as they can remember; the nation is thriving, incomes keep rising, life keeps improving, and national self-confidence keeps swelling.

This generation’s consumption logic is completely different from that of previous generations. First of all, material goods bring this generation less and less happiness. The material rewards that we believe are earned through hard work are, in their eyes, simply a given. What they consider happiness and value is entirely different from those born before 1990.

So those of us born before the 1990s must never measure their cognitive logic against our own value coordinates; rather, we should look at their consumption logic afresh, from their perspective.

Consumer sovereignty is not merely about giving them more choices, nor about choosing better products on their behalf—they need neither.

Recommended reading: Alvin Toffler, Powershift

-06-

The Infinite Shelf

The first person to propose the concept of the infinite shelf was Chris Anderson, editor-in-chief of the American magazine Wired, in his book The Long Tail. The concept of the long tail is familiar to many, but the core concept of the “infinite shelf” put forward in that book has received little attention.

The infinite shelf stands in contrast to traditional supermarket shelves. Constrained by a store’s physical space, a supermarket cannot stock every product without limit; shelf resources inside the store are finite, so only the hot-selling products at the head of the demand curve can be stocked.

But on e-commerce platforms, shelf display is not constrained by physical space, and the marginal cost of listing a product is nearly zero, so products can be listed without limit. This allows many niche products that previously had no chance to be shown to consumers to be displayed on the infinite shelf.

Looking at it again from the channel perspective: for an online marketplace like Taobao, the marginal cost of expanding its electronic shelves is nearly zero, so it can expand to countless products without any restriction. Consumer search is also extremely convenient—in just two or three steps, a shopper can find the product they want among hundreds of millions of SKUs.

This long tail of demand is the result of the emergence of the electronic shelf. The shelf is, in essence, a physical product catalog, and its core function is to let consumers conveniently browse products and make choices.

Following this logic, you will find that shelves do not exist only inside supermarkets. Anywhere information is exchanged with users, product search can take place. These virtual shelves bring an enormous advantage: they allow countless small and medium-sized enterprises to flexibly produce all kinds of personalized products in small batches and display them to consumers at extremely low cost.

Recommended reading: The Long Tail

-07-

Supply Surplus and the Scarcity of Meaning

Viewed from the logic of the consumption side, today’s market problem is the shift of power brought about by supply surplus—that is already an indisputable fact. But we must carefully unpack it: exactly what is in surplus, and how should we regard this surplus? From the generational gaps in the population, we can find the right attitude for facing supply surplus.

People of different generations still feel somewhat differently about material things. Those born before the 1990s carry memories of poverty from their oral stage of development, so this generation’s material needs are most typically characterized by quantitative satisfaction.

Given this, it is not hard to understand why the old lady shopping on Pinduoduo doesn’t ask for the goods to be good—she only asks that, for the same amount of money, the quantity be as large as possible. We can see that whether it’s Coca-Cola, Jiaduobao, or Six Walnuts, what they all actually sell is sugar water; the distinction is merely conceptual—you ward off internal heat, I nourish the brain.

But in essence, this is still satisfaction and differentiated marketing conducted at the very low, physiological level of Maslow’s hierarchy of needs. It also has a very important connection to the consumption logic of that generation of consumers.

But with China’s reform and opening up, its economic takeoff, and the abundance of goods, people born after the 1990s grew up in an environment of relative material plenty—especially the post-95s and post-00s.

This generation feels nothing for quantity-based consumption or low-level consumption. It’s not that they don’t believe drinking a Jiaduobao can ward off internal heat, or that drinking a Six Walnuts can nourish the brain—but they won’t buy unthinkingly on the strength of an advertising slogan.

They can soak goji berries in their beer, go to a beauty salon and apply the most expensive face masks, and have many more options for making up for some sense of lack within themselves. But it is not necessarily material.

What they need more is, on the spiritual level—within the higher tiers of Maslow’s hierarchy of needs—demand that delivers true differentiation.

Today’s so-called oversupply is, in essence, an oversupply for low-level consumption needs; the supply for Maslow’s higher-level needs is in fact still scarce.

A while back I saw an analytical report saying that for the post-90s and post-00s, the search keywords of 2019 were loneliness and solitude. As a post-80s myself, I found it hard to understand why young people who lack neither food nor drink, and who have entertainment and jobs, would be so melodramatic.

Later I figured it out: the more choices people have, the less satisfaction material things can bring them. What we call anticipation and hope is, in a sense, the reward the amygdala provides along the way to encourage you to achieve your goal.

But this generation’s material wants are satisfied too quickly; there is simply no chance for you to receive the amygdala’s gift of a dopamine reward during the process of waiting.

Take an example: the post-80s still wrote letters, and the anticipation of waiting for a reply was itself a reward that drove you to do something. But the post-00s were born straight into a networked society. From the ends of the earth, WeChat replies arrive in seconds; across a thousand miles, high-speed rail or a plane gets you there in half a day. Low latency brings a very serious problem: users don’t need to wait at all—everything comes with instant feedback. So this generation simply cannot obtain dopamine rewards from the waiting involved in pursuing a goal.

So nowadays, apart from the so-called sense of anticipation people still feel while waiting for a package delivery, most of the time all that may remain is loneliness and solitude.

When anything can be easily obtained, when any information comes back instantly, when users no longer need their own effort and waiting to earn a reward, the core problem facing this generation becomes: a scarcity of meaning.

What is my motivation for doing this? What is the outcome? And what is the meaning?

Recommended reading: The Brand Flip by Marty Neumeier

-08-

Industrial Civilization and Information Civilization

“Information civilization” refers to a new type of civilization that relies on technosciences such as computer technology, microelectronics, quantum information technology, communication technology, network technology, multimedia technology, and artificial intelligence; that is characterized by hyperlinks and even the interconnection of all things; that aims at a high degree of personalization and mutual interaction; that takes the possession, mining, and utilization of information as its resources; that trends toward digital and intelligent development; and that, though born within the era of industrial civilization, has in turn blown up the support systems, conceptual frameworks, and modes of thinking that once nurtured it.

The core elements of agricultural civilization are:

Farmers, villages, agriculture, farms, handicrafts, the acquaintance society, self-sufficiency, hierarchical structures, and so on. Worldwide, how early or late agricultural civilization emerged in different countries was determined entirely by geographic environment.

The core elements of industrial civilization are:

Workers, factories, capital, cities, the society of strangers, the market economy, hierarchical management, and so on. The progress of industrial civilization has been driven by science and technology.

The core elements of information civilization are:

Netizens, networks, information, data, flat management, social capitalism, digital sharism, the pursuit of well-rounded development and intelligent living, and so on. Viewed against the overall trend of human civilization’s evolution, the development of and transitions among these three forms of civilization were not planned out by humanity in advance; they evolved gradually over the long course of human practice, as the result of many interacting factors.

The essence of information civilization is: just as industrial civilization transformed agricultural structures and modes of agricultural production through industrialization, information civilization transforms industry’s production structures and modes of production through informatization, networking, digitalization, and intelligentization—and then transforms agricultural production structures and modes of production once again.

Information differs from matter and energy. The possession and consumption of matter and energy are not only exclusive but also depletive—the more they are used, the less remains—whereas information can be shared again and again, and in the sharing, its value appreciates.

Therefore, information civilization is destined to be a civilization of sharing.

This era keeps using the marketing vocabulary of the past, yet in the age when those theories were born, professional terms like the internet, smartphones, social networks, infinite shelves, and viral spread did not yet exist.

That is the surface; in essence it is the generational gap between industrial civilization and information civilization. This gap demands that we not merely rely on past theories to cope with today’s information and technological tools, but instead adopt an entirely new perspective for looking at today’s problems.

Information civilization’s greatest characteristic is connectivity: connections between people and people, people and information, and people and things are all growing exponentially.

This also means that the industrial era was built on a “finite” market environment, where all demand rested on consumer “scarcity”—scarcity of goods, scarcity of information. The most classic marketing example is P&G’s “HBG” theory: mass production, mass communication, mass distribution.

Today’s problem is that it has become an “infinite” market environment. When consumers no longer face scarcity, whether of products or of information, our past marketing theories have, in a sense, all ceased to work.

How is information civilization different?

1. Infinite supply brought by infinite shelves: With an infinite supply of information, users can obtain it more easily and so no longer remember it. With an infinite supply of goods, users derive less and less satisfaction from what those goods provide.

2. Intangibility: In the past, information was carried by books, newspapers, magazines, and concrete physical spaces; all of these have now turned entirely into intangible digital information.

The carrier of information has not merely changed; it has gone from container to pipeline—containers store information, pipelines let information flow.

It’s like the days before running water, when we all needed big vats to store water. That vat could be books or magazines, or it could be our brains—we needed to store this information. But today information is running water: turn the tap, and the supply is unlimited. As a result, because it is so easy to obtain, users have no need to remember it.

In What Technology Wants, Kevin Kelly points out that over the past six years, for every six dollars of goods exported, the average weight has fallen by one-sixth (inflation).

A long-term study of the S&P 500 shows that over the past 30 years, the share of intangible assets in companies’ monetary value has grown from 17% to 80%, with brands being the most important part of it.

The goods are still the same goods, but the intangible assets behind the goods will account for an ever larger share of their value.

-09-

The Division of Labor Between Distributors and Wholesalers

Distributors serve brand owners. For a distributor to successfully represent a product, it must at a minimum perform several functions: advancing capital, carrying inventory, marketing, logistics, and customer service.

In most of the FMCG industry, the off-season and peak season are very pronounced: in the off-season there is surplus capacity, and in the peak season capacity falls short.

Take Nongfu Spring as an example. At the end of every year, the sales reps all go do one thing: the factory first rolls out an aggressive trade program—20% or 30% in free goods on every order—getting distributors and second-tier wholesalers to frantically remit payments and stock up; yet when peak season arrives, there is no program at all. The logic behind this phenomenon is actually simple: the goal is to use distributors’ warehousing, inventory, and capital to balance the company’s off-season capacity across time and space.

From January to February, brand owners load inventory into distributors’ warehouses. From February to March, distributors load inventory into second-tier wholesalers’ warehouses. From March to April, inventory is loaded into small stores. From April to May, brand owners then carry out a series of consumer sell-through initiatives.

In essence, this is the brand owner physically moving goods across time and space—not only the forward transfer of inventory, but also the reverse transfer of capital. This is the value of the traditional distributor’s existence.

What are second-tier wholesalers? Where does their value lie?

New Distribution believes that second-tier wholesalers are, in essence, shared warehouses for small stores. Take Guangzhou as an example. Guangzhou is a century-old city with many urban villages; the roads are very narrow, the population density is high, and traffic is heavily congested—it is a famously “gridlocked” city. Yet Guangdong has a great many convenience stores. Because the economy is developed and rents are expensive, a small store cannot bring in too much merchandise or hold too much inventory that takes up floor space.

This creates a problem. Guangdong’s weather is quite changeable: if it rains in the morning, not a single bottle of beverage sells; if the afternoon turns sunny all day, the drinks in a small store may instantly sell out completely. When the store owner then calls the distributor and asks for 5 cases of water to be delivered, the distributor’s sales rep’s typical inner reaction is: “What? Are you out of your mind? 5 cases, and you expect delivery just like that?” Of course they can’t reply that way outright; they’ll usually say, “We can only deliver a minimum of twenty, thirty, or fifty cases.” Why? Distributors serve the brand; for a single SKU, delivering three or five cases is out of the question.

Where does the value of second-tier wholesalers lie? Ask their sales rep for goods—a case of Mizone, a case of Red Bull, a case of Coke, two cases of Nongfu—and the second-tier wholesaler steps on the gas and delivers it right over. The real value of second-tier wholesalers is shared warehousing for small stores; they do not serve brand owners.

-10-

Three Types of Future Development for Distributors: Brand Operators, Category Operators, and Channel Operators

Drawing on New Distribution’s past observations and reflections, we believe that within a regional market—owing to structural channel adjustments by upstream brand owners, whether proactive or reactive, the diversification of downstream retail scenarios, the evolution of consumer demand toward niche segments, and mobile internet technology becoming a foundational tool of marketing—the distributors of the future will be continually consolidated and optimized: fewer in number, higher in quality.

Overall, in the evolution of future distributors, this “improvement in quality” will revolve around the following three directions:

1. Brand operators:

The “brand operator” referred to here is not an OEM private-label distributor, but rather a distributor deeply bound to an upstream brand owner—more often one that reaches a strategic partnership with the brand owner in a regional market, becoming its designated and sole local operator or service provider.

2. Category operators:

An operator that runs deep operations around a single category and that, across all types of retail outlets, seeks either to capture the maximum shelf display for that category or to use that category to connect diverse retail scenarios.

3. Channel operators:

Conducting merchandise procurement and sales from the bottom up. The emphasis is on “procurement and sales” rather than agency distribution; the key is that procurement and sales center on the needs of small traditional-trade stores and small to mid-sized restaurant outlets, rather than on satisfying upstream manufacturers’ need to grow market share.

In general, brand distributors are found mostly in the beverage, alcohol, and dairy sectors; category distributors mostly in snack foods, condiments, personal and household care, and general merchandise; while channel distributors mostly operate through multi-category combinations spanning snack foods, condiments, personal and household care, and the like.

The above is the theoretical foundational framework that guides New Distribution’s content creation and its insight into the industry; we hope it can also bring a measure of inspiration and reflection to practitioners in the industry.