---
title: "The Logic and Direction of Channel Transformation in FMCG"
description: "Understanding FMCG channel transformation through power, efficiency, and the division of roles."
author: "Zhao Bo (赵波)"
email: "zhaobo258@gmail.com"
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published: "2024-05-20"
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---

# The Logic and Direction of Channel Transformation in FMCG

> Understanding FMCG channel transformation through power, efficiency, and the division of roles.

**Author** | Zhao Bo

**Editor** | He Wen **Layout** | Wang Hai

_**Foreword:**_ _This article is the preface that Zhao Bo, founder of New Distribution, wrote at the invitation of Liu Zhao, founder of Qince (勤策), for the book "The Code to Channel Building: The Development and Practice of Digital Transformation in Consumer Goods Channels."_

To move a product from the factory into a consumer's hands, it has to pass through a number of stages along the way.

These stages are made up of two parts: one is called the "pathway" (通路), and the other is called the "channel" (渠道).

How should we understand the relationship between the two? We can think of the pathway as the pipeline used for storage and transport, while the channel is the place where transactions and delivery to the customer actually happen.

**The pathway is generally made up of multiple upstream and downstream roles linked together, completing the flow of goods through a chain of relay handoffs.**

**The channel, by contrast, is a combination of many types of retailer facing consumers at the same time, meeting consumption needs across a variety of formats according to consumers' different consumption scenarios.**

For a brand that wants to deliver goods quickly into consumers' hands in China, it must rely on the capability of the pathway to achieve coverage of the channel.

Over the forty years since China's reform and opening-up, roughly once a decade a new generation of retail model has emerged in China's retail channels. To date, China has gone through four generations of retail models:

> First-generation retail model (1989–): mom-and-pop stores, wholesale markets. Second-generation retail model (1998–): chain convenience stores, hypermarkets. Third-generation retail model (2007–): platform e-commerce, vertical e-commerce, private-domain e-commerce. Fourth-generation retail model (2016–): forward-warehouse e-commerce (community group buying + flash warehouses), discount/membership stores (bulk snack stores + hard discount + membership), interest-based e-commerce (category + KOL + content).

**There is a pattern to how China's retail market has evolved: it has gradually moved from a market with a relatively uniform retail type and a huge number of retail outlets, to a market where retail models keep growing more diverse and the sales volume of each individual retailer keeps getting bigger.** Behind these four retail models sit four corresponding pathway/supply-chain models:

> First-generation retail model: distributor → sub-distributor → wholesaler. Second-generation retail model: brand-owned direct operation, distributor. Third-generation retail model: brand-owned direct operation, TP (third-party platform operator), TP sub-distributor. Fourth-generation retail model: direct brand supply, super supply chain, TP, distributor.

Looking across the pathway combinations under these four retail models, we can see that, as time has passed, the complexity of the whole pathway-and-channel system has risen exponentially.

More and more players are joining the market, competition keeps intensifying, and everyone is increasingly caught in "involution"!

As technology matures and infrastructure improves, China's consumer-goods value chain keeps getting shorter — disintermediated, digitized, and routed with high efficiency. Digitization and visibility are today's most urgent needs for the pathway and the channel.

China's leading consumer-goods brands rose to prominence during a period when the market environment was relatively simple.

Facing an enormous market, brands had to build many factories across the country to produce the same product and lower production costs; then use centralized media to educate consumers and raise the efficiency of communication; and finally find large numbers of distribution partners across the country to take on the delivery of factory goods, hiring tens of thousands of sales reps to distribute products into millions of stores and complete delivery.

Behind this lies the HBG model of mass production, mass communication, and mass distribution. It is a distribution model built for a market environment with a single, super-large-scale demand and a relatively simple set of retail types.

Here we have to mention a distribution model that has had an enormous influence on the Chinese market: **deep distribution.**

Shi Wei, the scholar who was among the first in China to propose and put deep distribution into practice, describes it this way:

**Deep distribution emphasizes building an integrated manufacturer–distributor relationship, extending the brand's operational reach through the distribution stage all the way into the retail stage, and gaining competitive advantage by forming partnerships with distributors and retailers.**

Deep distribution is a solution devised for China's multi-tiered, multi-layered market spanning tier-1 through tier-6 cities, its vast network of mom-and-pop stores (6.8 million of them), the absence of any large-scale logistics and supply-chain system, the highly fragmented mom-and-pop retail model, and the real-world asymmetry in capability and information between manufacturers and distributors (with consumers' independent judgment being heavily shaped by channel behavior):

> 1. Fine-grained terminal deployment (distribution coverage, tiered management). 2. Terminal merchandising (deploying various point-of-sale materials and ensuring they're used to standard). 3. Terminal activation and interception (using in-store promoters and promotions to intercept shoppers). 4. Terminal incentives (sufficient profit margins to motivate channel partners to distribute). 5. Fast sell-through (high turnover to enable rapid capital recovery). 6. Empowering partners (giving partners professional skills training). 7. Proactive marketing outside the store (breaking through the physical limits of the retail space to run activities wherever the target foot traffic is dense).

**It's fair to say that deep distribution is one of the indispensable factors behind the success of China's FMCG industry!**

But we also have to recognize that traditional deep distribution is a distribution model born out of a specific time and historical context, built around the particular characteristics of China's channels.

It has its own inherent weaknesses, too:

> 1. High labor costs and extremely complex management. 2. Internal and external integration, top-to-bottom integration, an emphasis on execution, and insufficient ability to adapt to market change. 3. Overemphasis on the importance of the channel while neglecting the consumer and the core needs of the retail store. 4. Insufficient profit for distributors/wholesalers, which easily leads to involution. 5. Insufficient tolerance for disruptive new things. 6. Strong on push, weak on pull — emphasizing competition while neglecting demand.

**There's no doubt that, as the market keeps changing, deep distribution — despite its particular strengths — urgently needs to be upgraded through technology and new models so that it can quickly keep pace with today's market changes!**

Here are several directions for upgrading deep distribution in today's environment:

**1. Raise efficiency:** The first thing to be clear about is that whether personnel sit with the manufacturer or with the distributor isn't the core issue. The core issue is how to make people work more efficiently, and how to use digital tools to cut the time salespeople spend at the terminal and raise their operating efficiency.

**2. Cut costs:** On the cost side, one option is to evaluate shifting personnel — with manufacturer and distributor jointly managing staff, moving people from the brand to the distributor so the company's headcount costs fall somewhat, while the brand still absorbs part of the personnel cost so overall enterprise costs decline to some degree. Another approach is to activate the enthusiasm of sales reps through a self-employment, "small-boss" model, which also brings costs down to some extent.

**3. Standardize operations:** The application of digitalization and SFA (Sales Force Automation) greatly raises the standardization of salespeople's work. Operating in an assembly-line fashion reduces individual variation among salespeople at the terminal and lowers the difficulty of the job.

**4. Support with big data:** By analyzing the data collected through SFA and retail systems, companies can optimize salespeople's routes, workflows, and efficiency at the terminal.

**5. Automate transactions:** Use B2B platforms to automate transactions. Build B2B operations teams organized by province or region, run promotions online, and substantially increase the volume and frequency of online transactions, cutting the time salespeople spend in stores just to close orders.

**6. Widen the points of contact:** Through B-side store communities, mini-programs, and online POP materials distributed via Moments, and through community-network operations, expand how often and how long salespeople communicate with store owners even outside working hours.

**7. Extend the depth of transactions:** Use the store owner's C-side community to reach local community consumers through their social network, using coupons and promotions to acquire new users and drive repeat purchases.

We can summarize these seven aspects as "digitally refined distribution":

This is a shift away from a single-dimensional management system that relies on human organization to run product distribution, toward leveraging digital tools so that salespeople are freed from complex, non-standardized transaction steps, and can instead rely on tools to make distribution automated, online, digital, B2B2C-integrated, and precise.

In a sense, once digitalization takes hold, it's no longer simply a matter of using digital technology to raise efficiency — more importantly, digital technology and tools are used to redesign the whole logic and chain of distribution.

There are a few points of logic to watch for in digitally refined distribution:

1. The logic of sell-through has to be clear. So-called digital distribution **is, at its core, still about building an irresistible reason to buy within the transaction scenario.** That means the logic of distribution and the logic of sell-through have to be connected end to end, whether the shelf in question is online, inside a physical store, or inside Moments.

2. Execution, management, process, and the operating system all need to form closed loops within the digital system:

> a. Execution loop: outlets (attributes, SKU, inventory, product age), visits (regular visits, frequency, quality, number of stores, communication), display (competitive display), sell-through (consumer communication, in-store demonstration, scenario experience)
>
> b. Management loop: standards (actions, processes), authenticity (real data), audit (fast and efficient, timely correction), incentives (process incentives, target-achievement incentives)
>
> c. Process loop: orders (real, accurate), warehousing (standardized, accurate, tracked by age, first-in-first-out), accounting (timely, precise), delivery (efficient, timely)
>
> d. Operating loop: willingness (attitude), product (differentiation, margin, TPO — time, place, occasion), tools (relevant digital tools and supporting materials), method (an irresistible reason to buy)

3. On the logic of management: you need a method for achieving the existing performance target, then standards for managing and executing the process, then standards for incentives — only then can frontline execution, management audits, and feedback come together into management indicators, which finally roll up into performance goals.

4. This system has to guarantee four things: being systematic (people, standards, processes, incentives); being coordinated (online-offline interplay, internal and external forces pushing together, stores and communities interacting together); being consistent (goals, persistence); and being effective (methodology, the four closed loops).

The most prominent problems companies face today in transforming deep distribution are these:

First, organizational rigidity. The processes, systems, and standards built up over the past 20 years are extremely hard to untangle when confronted with new digital technology — it's like repairing the car while driving it, and worse, trying to turn a bicycle into a race car. You can imagine how hard that is.

Second, within regional markets, expenses, sales volumes, budgets, and other interests are deeply tied to the people involved. It's common for individuals to exploit organizational loopholes for corruption or to cash out expenses, and this has already hardened into vested-interest groups that are very hard to break up.

Third, the market still has growth and survival pressure isn't severe, so bosses don't fully appreciate the issue, lack the resolve, and are afraid to invest or to break existing interest relationships. The people below either have interests of their own at stake, or feel it's better to avoid trouble than to stir it up — so overall momentum for change is weak.

Fourth, there's a lack of overall planning and design. Companies often treat the symptom rather than the cause — fixing the head when the head hurts and the foot when the foot hurts — or center everything on IT systems, or on the boss's own opinion, rather than genuinely orienting reform around the real operating efficiency of frontline personnel. The result is a string of reforms with slogans but no real effect.

Historically speaking, channel marketing work can be summed up in two aspects: **distribution management and sell-through management.**

When doing offline pathway marketing, people like to talk about the channel and the terminal, and rarely mention the shelf. But if you think about it carefully, isn't it true that essentially all of our marketing activity revolves around the shelf?

Whether it's distribution management or sell-through management, both are, in fact, a series of marketing-management activities carried out on the shelf.

You have to drive sales reps to get products onto the shelves inside terminal stores, and, in line with the consumer's path through the store, complete lively, multi-point displays of our products.

Every marketer should be familiar with this kind of work, but have you ever thought about the fact that it's a marketing-management model built on the foundation of a single retail format that is relatively uniform in type but enormous in scale?

In other words, the number of channel terminal types this model can actually fit is, in truth, very small.

For a brand, planned-consumption categories only need to focus on modern channels. Immediate-consumption categories only need to do a good job of deep distribution in traditional channels (mom-and-pop stores plus food service).

**Today the logic of business has shifted from "goods stay put, people move" to "people stay put, goods move." The logic of the shelf has likewise shifted from being a physical-space concept to being a form defined by the transaction scenario.**

Viewed from the angle of the transaction scenario, the channel goes from two-dimensional to three-dimensional: whether you're at home, at school, in the office, or on a bus, it doesn't stop you from buying any product in the world; whether it's morning, afternoon, evening, or the middle of the night, it doesn't stop you from getting hold of whatever you need nearby; and whether you're in a supermarket, on Moments, or on an e-commerce app, you can buy any product you want.

**As delivery becomes simple, the transaction itself becomes increasingly important.**

The electronic shelf has changed the whole logic of business.

What the electronic shelf brings isn't just convenience in transactions — the entire delivery system (the supply chain) has also changed dramatically along with the change in the form of the transaction.

I've summed up this change into three points:

**One, the value chain has shortened dramatically. Two, the logic of transactions has changed. Three, the scenario has become the first principle of marketing.**

What do these three statements mean? Let me explain them one by one:

**1. The value chain has shortened dramatically:**

Today the electronic shelf can support massive one-to-many transactions, and logistics can deliver at low cost, so for the same volume of business, you simply don't need nearly as many distributors.

To give a simple example: pretty much any new consumer brand can sell over a billion yuan's worth of goods online without ever using a distributor.

The algorithms and rules of the platforms mean consumers no longer trust only the brand — they're increasingly willing to trust the algorithm instead.

As information becomes ever more transparent, it's increasingly hard to profit from information asymmetry, which means many former information brokers no longer have any way to make money off that gap. Whenever conditions allow, everyone tends to prefer direct transactions.

With central warehouses and logistics functions (trunk and branch warehousing, picking, and sorting) now well developed, and with drop-shipping and one-click direct-to-consumer logistics networks in place, goods no longer need to be handled and moved so many times.

After community group-buying and discount stores aggregate huge amounts of traffic, they turn around and demand lower prices from upstream. If that demand can't be met, they simply go straight to the brand to cooperate, bypassing the traditional distributor-plus-wholesaler system the brand built.

The underlying logic behind the shortening value chain is that a reduction in information entropy, together with the maturing of society's supply chain, is driving the whole value chain to gradually operate with higher efficiency.

**2. The logic of transactions has changed fundamentally:**

Community group-buying, influencer livestreaming, and Sam's Club are, at their core, all doing the same thing: helping consumers choose products.

They don't necessarily know who the consumer is, but by aggregating enormous traffic, they force the supply chain, in reverse, to provide them with better and cheaper goods.

This kind of shelf won't let you on just because you're a big brand — you get on only if they decide you're the right fit.

And that "fit" isn't just about low price. Low price is only one kind of consumption need; consumers also have many other needs — quality, symbolic meaning, emotional needs, and so on.

Let me talk about the second change. When you buy something on Douyin, is it really what you need — or is it what the algorithm thinks you need?

This phenomenon is called **"ceding the right to choose."** It means that, given today's information overload on the internet, people simply don't have the time or the ability to screen through products, nor the ability to judge the quality of products they've never seen before. People have no choice but to hand their right to choose over to the algorithm, letting the algorithm make the choice for them.

If Taobao and Tmall work by having you state a need and then helping you choose, Douyin's e-commerce works differently: regardless of whether you actually need something, as long as it thinks you need it, it will recommend it to you — and it might be good quality, cheap, and even make you happy. So, are you going to buy it or not?

Both of these changes are very distinctive features of fourth-generation retail. Because of this ceding of the right to choose, people are irreversibly moving into information cocoons, and different cocoons carry different consumption needs and different transaction logics.

**If we want to sell goods to consumers under the fourth-generation retail model, we can't just think about low prices — we need to re-understand the transaction logic of this fourth-generation retail model.**

**3. Scenario is becoming increasingly important**

In the first two generations of retail models, goods mostly sat in supermarkets, and consumers went to the supermarket to shop. The place and the time of shopping were, by and large, relatively fixed.

Starting with the third generation, retail acquired a very important new variable: every shelf has gone "online." Sales happen not just offline but simultaneously online, and some shelves don't even exist offline at all.

On Meituan food delivery, what consumers order most may not be beer and condoms — it could just as easily be mahjong tiles and dice, or a quilt and slippers.

In the past, these goods were all sold in hypermarkets or wholesale markets.

**Once shopping becomes convenient, people stop caring much about the exact time of purchase, and the need to stockpile drops sharply — the moment a consumer buys is, in all likelihood, also the moment the need arises.**

So today we need to re-understand the meaning of "scenario." What was once "goods stay put, people move" has become "people stay put, goods move." This is a revolutionary change, and many companies have seriously underestimated how important it is:

> a. In the past the transaction setting was fixed; now the transaction setting is not fixed. b. In the past the person transacting was, in most cases, the buyer; now the person transacting is, in most cases, the consumer. c. In the past marketing was brand-driven within a transaction scenario; now marketing is pain-point-driven within a consumption scenario. d. "People stay put, goods move" means a transaction can happen at any time, and the precondition for that is a need arising within a scenario — so scenario is channel, and channel is transaction. f. scenario ≈ channel.

**In the past, the "people-goods-place" triangle was two-dimensional, governed by the logic of time and space. Today, the people-goods-place triangle is three-dimensional: time + space + scenario.** The logic of the three-dimensional version is fundamentally different from the two-dimensional one: the two-dimensional version is centered on the transaction setting, while the three-dimensional version is centered on the consumption setting.

We have to look at today's shelf through a three-dimensional way of thinking about the channel.

So when you operate in a market, what you see are different types of channel, but from the consumer's point of view, what they see is that they can buy from anywhere.

And the consumer's reason for buying has shifted to the 4Cs: customer, cost, convenience, and communication.

At this point, the pricing logic and the channel playbook within the 4Ps are no longer things you get to dictate — they have to be set according to the consumer's needs within their scenario.

We need to design the sell-through model for every shelf (eOBPPC) based on user needs and behavior.

**Traditional deep distribution only has the logic of space and time — it is two-dimensional, and a two-dimensional deep-distribution model simply cannot handle a three-dimensional shelf.**

A three-dimensional city needs a three-dimensional distribution/sell-through model to solve for consumer coverage and reach. This is the moment that tests a company's theoretical grounding and strategic vision — its decision-makers have to use systems thinking to sort through and integrate every scenario, every value chain, and every channel, and come up with a city-level solution suited to their own product.

They have to consider the coordination between online and offline, the relationship between cost efficiency and experience, and, further, the balance of interests both inside and outside the organization.

City managers, too, must be able to fight a three-dimensional battle within a single city.

And the corporate organization must, when a city manager is fighting that three-dimensional battle, provide the corresponding support and coordinate resources for them.

**Final Thoughts**

Today, China's market is moving from a growth market to a mature market. Beyond intensifying competition, managing the pathway and the channel has become increasingly complex.

A company's transformation and upgrading can't simply improve channel problems from the angle of incremental fixes — it has to start from first principles, gain insight into needs, deduce the logic of consumption, and abstract marketing models, while also doing top-level design from a strategic point of view.

**Over the past twenty years, whoever did digitalization well was bound to lead in their field. Over the next twenty years, whoever fails to digitalize is bound to be eliminated by the market.**

Digitalization is one means of optimizing and upgrading deep distribution. As a company, it's not enough to work hard only on channel strength — product strength, brand strength, and channel strength all have to work together before the whole group can truly achieve a breakthrough in its transformation. But this always has to start by looking at the big picture while acting on the small details: standing at the level of brand, channel, and product, taking the high ground, and using digitalization to complete an overall upgrade and optimization. Only then can a company truly achieve digital transformation.

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