Why Aren't Big Personal-Care Companies' Distributors Working as Hard Anymore? | From Tier-One to Tier-Five Cities, What Happened (Conclusion)

Over the past two months or so we interviewed 11 people who work in this industry, from the big personal-care companies and from every role along the distribution channel. This series runs to three articles, all trying to answer one question: why did the traditional distribution systems of the big personal-care companies collapse? This is the last of them.

Previously: The big personal-care companies no longer control everything the way they once did. They have begun making concessions to all sorts of business partners, and will even change a product's launch plan at the last minute. For companies that prize standards and rigorous process, that is hard to imagine.

The core problem behind it is that the big companies' traditional sales-channel systems have collapsed. That sales network, spread across the globe like capillaries, is their lifeblood. Procter & Gamble and Unilever were once almost mythical presences in the Chinese market, and they owed that to a stable, powerful distribution system.

E-commerce was the first thing to break that stability. In the first article, published the day before yesterday, we looked at how the internet destroyed the big companies' confidence. In the second, published yesterday, we explained why companies like P&G keep losing to local brands in smaller places. In this last one we turn to distributors — the crucial link between the big companies and retail stores — and to why they have started pounding the table at the companies they work for.

The ones carrying products from big personal-care companies like P&G and Unilever into China's tier-three, tier-four and tier-five cities, and even into rural markets, are no longer international hypermarket chains like Walmart. They are the companies' distributors.

From its first store, opened in Shenzhen in 1996, to today, Walmart has 393 hypermarkets in China, more than a third of them in tier-one and tier-two cities. Thousands upon thousands of other retailers — non-chain supermarkets, personal-care specialty stores, mom-and-pop grocery shops — cover the more scattered, more varied demand of the lower-tier markets. Consider that Chando alone is stocked in 13,000 personal-care specialty stores across China, and you can picture the scale involved.

What connects this motley collection of retail stores to the big companies is the distributors. They are a crucial part of a big company's traditional channel system, and the companies sort them into tiers according to their scale and their capabilities. P&G, for instance, now has more than 80 distributors in China — and that is after cutting back; at its peak the number topped 300. Unilever still has more than 200, and plans to drop some of the lower-tier ones so the rest are easier to manage directly.

How well distributors are doing feeds straight into the big companies' financial statements. And because their own customers are the retail stores that deal with consumers face to face, distributors are often the first to feel the market move — when sales at the stores are weak, inventory piles up in the distributor's warehouse, and whatever is selling best shows up at once on the retailers' order lists.

For a long time, the grip the big companies held on their distribution systems had a great deal to do with how strictly they managed their distributors. They could manage that strictly because international brands such as Pantene and Rejoice had enormous pull with the market at the time.

For more than a decade starting in the 1990s, Chinese consumers did not have many brands to choose from, and the label "foreign" was by itself an attraction. When an ordinary person earned only about a hundred yuan a month, being able to afford an 18-yuan bottle of Head & Shoulders was something to be proud of. So was being able to distribute Head & Shoulders — and a few sharp operators saw the opening first.

The story goes that in the early days plenty of people pulled strings and called in favors just to get a piece of the business with multinationals like P&G and Unilever. Plenty of rags-to-riches stories followed: on the strength of their partnerships with the big companies, distributors grew their own firms and became rich, first worth a million yuan, then ten million, and in some cases more than 100 million. The big companies, meanwhile, used their ever-widening distribution networks to push their products further and further out.

The turning point came in 1999. That year P&G cleaned out its distributor roster, cutting the original 300 distributor teams down to 100, to fix the inefficiency that came from having too many of them. Similar rounds of pruning came again around 2005 and 2010.

But the markets covered by the distributors who "disappeared" were quickly folded into the hands of stronger ones. The strong got stronger.

The advantage of pruning is that a big company can raise the efficiency of its channel while spending less to maintain it. But the drawbacks have begun to show as well. "[After the consolidation] some distributors are very aggressive — they will even pound the table at the manufacturer. It's not like before, when the distributors could keep each other in check. Business is bad right now, so distributors push the manufacturer to give up some of our margin, and manufacturers generally don't like doing that," Li Leihan, who works at Unilever, told QDaily.

Ma Ruchao, president of Mondelez China, said at an industry forum in Shanghai this April that "different retail environments need the right price points" — but he also admitted that the big companies are not that flexible about it. He came to China in 1990 and has worked at multinationals including P&G, Colgate and Cadbury, opening up their China business.

Held to their shareholders' demand for high returns, foreign-invested listed companies usually will not give up any of their own margin. As we showed in the previous article, local brands sell to distributors at 35% of the retail price, while foreign brands typically offer only 70%. When the volume is big enough, though, that gap can be made up, and a distributor can still earn a good deal.

When the big companies' distributors can no longer grow the way they used to, by expanding into new territory fast, the other way to solve the problem is to sell more products through the same channel — especially high-margin ones.

That runs into resistance too.

"What sells well in tier-one cities just can't get in there [tier-four and tier-five cities]. The company wants to push the high end because the margins are higher, but people there simply won't take it," Li Leihan said. "Regional differences are very obvious too. In Gansu, for instance, Comfort fabric softener sells well because the climate is dry — but only the low-end version. The high-end one still won't sell." Sometimes, visiting stores with the sales reps, he comes away discouraged.

When he sees retail stores covered with pillar wraps for Liby and Diao, he thinks his own company ought to be spending more in the stores too — and in fact the distributors have asked for exactly that. "We see the opportunity as well, but we're a top-down system, so we're unwilling to spend money on things like that."

Consumption is in fact moving upmarket in tier-three and tier-four cities as well. "The demand is definitely there — there are certainly better-off people who want better products. But if a big company positions a high-end product for an urban audience, it will always put tier-one city channels first. It isn't going to go to great trouble building a channel for a small number of people," a brand manager at a Unilever brand told QDaily.

The big companies prize scale and efficiency, and they believe in the 80/20 rule above all. P&G's slimming-down plan, which cut the brands with annual sales below $1 billion, follows the same logic. Even while they offer consumers different choices, they cannot let those choices disturb the efficiency of their standardized production lines.

Distributors may not know these principles by name, but when business turns bad they start challenging them.

"I think the hardest part of dealing with them is that their backgrounds are complicated, their methods are pretty wild, and what they care about is extremely down-to-earth," said Dong Rina, who used to work in Unilever's sales department and handled the company's distributors in South China.

Distributors keep up their partnerships with the big companies on one side while building up distribution business for other brands on the other. Which means the resources they once put into P&G or Unilever are spread thinner, and they are not working as hard on the "job" P&G and Unilever hired them for.

"On paper we forbid our distributors to represent any brand that competes with us, but in practice it isn't enforced that strictly," a Unilever sales employee who asked not to be named told us. "Companies like Unilever and P&G are definitely not the only ones a distributor works with. Mine carry Blue Moon and various minor brands besides us."

In the end this has become something close to an unspoken bargain between the big companies and their distributors: push our products to the retail stores first, and you are free to carry other brands for the margin. But whether the distributors really do put them first is no longer in the big companies' hands.

A second-tier Blue Moon distributor in Hebei province told QDaily that he once wanted to work with P&G and Unilever too. At first he couldn't get near them; later he stopped wanting to. "International brands and local brands sell the same way now, and both have already been through their high-margin years. If you put money in and can't get it back in a year or two, why bother." "And market share still counts for a lot. Around here it's still the local brands that are strong."

This is what Ma Ruchao meant when he said: "Chinese companies have their own particular advantages. They're good at managing relationships with distributors, especially first- and second-tier wholesalers, which foreign companies find hard to reach."

Distributors chasing profit and letting their loyalties wander is one side of it. On the other, they have quickly found a new grievance with the big companies: sales staff at those companies are turning over faster, and that has made the distributors' own business less stable.

Take P&G and Unilever. They post a resident sales manager at every first-tier distributor, and that manager handles inventory, maintains the relationships downstream and works on the distributor's return on investment — with the ultimate aim, of course, of hitting the sales targets set by headquarters and selling as much of the company's product as possible. The distributor may own his own firm, but much of the credit for keeping the business running belongs to the sales manager the big company sent.

The Unilever employee who asked not to be named said the sales staff who manage distributors are usually senior people with fairly low turnover, but she admitted: "It might have been fine before. Compared with before, it's a little bit higher now. It might have something to do with the industry as a whole."

As noted above, before the big companies started paying attention to consumption moving upmarket in tier-three and tier-four cities, some people were already in that business. Zheng Yun, from Guangzhou, is one of them. He founded a trading company in 2009 and is now an agent for imported Japanese and Korean personal-care products, including "2080" toothpaste. His job is to pick competitive brands and products out of overseas markets, bring them into China and distribute them to distributors around the country.

"The distribution systems for foreign and local brands were already fairly mature by then, and it was hard for newcomers like us to get in," he told QDaily. "Imported products were what they overlooked, so the barrier was lower for people new to the industry like us." As he sees it, demand in this market has grown a great deal. "At first it took distributors a long time to accept and trust the brands we represented, and our success rate in signing them wasn't high. From 2013, 2014 on, the success rate these past few years has been very high — they come around quickly."

He is not optimistic about what comes next, though. "There are too many imported brands being brought in now. A distributor's range of choices is already very wide, and more and more agents are turning up to work with him," Zheng Yun said. "The industry as a whole is still growing, but the pie isn't growing as fast as the number of people cutting into it."

More of those people come from newly formed agents and distributors — and you could even count the individuals on Taobao doing daigou, reselling imported products bought overseas.

The Blue Moon distributor mentioned above brought up the impact of the internet, which is what worries him most about the future. "The big wholesalers open wholesale stores directly on Alibaba, ship straight from the manufacturer and save on warehousing and logistics. We're under a lot of pressure."

What you may not know is that even the official P&G and Unilever flagship stores on Tmall are run by those two companies' distributors. The distributor's job is to take products from the manufacturer, keep them in his own warehouse and, as orders come in, ship them wherever the consumer says. As offline, the big company still keeps the right to set promotional policy, but the ones carrying out that policy and policing it have shifted from the company's sales department to its e-commerce department.

And given how much weight the big companies now put on the internet, their grip on distributors there is not as tight as it was offline — after all, in this new channel they don't necessarily have much more experience than the distributors do.

"Inside Unilever, the e-commerce business unit and the traditional-channel business unit are bound to be at odds. There's a lot of friction. Online has definitely eaten a large absolute chunk of the offline business," said Gao Tian, who works in Unilever's sales department. That goes some way toward explaining why the big companies hesitated in their early years of e-commerce: for a long time it was the offline distributors and retailers who generated their profit downstream, and the companies were neither willing nor bold enough to move that share around lightly.

But quite a few distributors are now looking for new growth online themselves. The Blue Moon distributor mentioned above opened a Taobao store a year ago. He isn't familiar with doing business online, but watching his peers "run several stores at once and do tens of thousands of yuan a day," he can't help being a little envious. Since last year, quarterly sales at the company he runs have fallen from a peak of 9 million yuan to 3 million. "But most of my energy has gone back into logistics now — logistics is doing far better than personal care these days." Besides his personal-care distribution business, he also runs a logistics company.

Most distributors won't leave these big companies, though. Doing business with P&G and Unilever pays a thin margin, but it improves a firm's reputation and brings in more partnerships with other brands. "If you drop a big brand, the small brands may leave you too, and it affects your dealings with the stores downstream. They feel that a big brand vouching for you makes you more reliable," said the Unilever sales employee quoted earlier, who asked not to be named.

But the nature of the relationship has changed. The big companies' say has weakened, and the distributors aren't working as hard.

So there it is. Let's sum up. The collapse of the big personal-care companies' traditional distribution systems is what happens when several problems go off at once: the shock of e-commerce; the conflict between consumers moving upmarket and the big companies' mass-market products; niche brands nibbling away at the big companies' market share; tier-three, tier-four and tier-five cities that don't fit the old rules of the game; the rise of local brands; and distributors who stop trying as the value of the brands they carry falls.

Asked what he regretted about his more than 20 years as a professional manager for a foreign company in China, Ma Ruchao answered:

"Headquarters doesn't give us enough support. We tell them this is the spec China needs, and global manufacturing doesn't listen to us. And then there's the failure to communicate effectively, even though we're all speaking English. Even now they still want to control the pace of e-commerce in China, but they don't really understand what the opportunities and the challenges are."

Many companies and products have a life cycle of their own. With industry leaders, perhaps we should be a little forgiving about the problems they are showing now, before they find their future — but business has always been ruthless. Probably none of us wants to see the next Nokia.

Good luck to them.

(This concludes the series. Li Leihan, Zhou Tian, Dong Rina and Zheng Yun are pseudonyms.)

Cover image from marlinequity.com and Pixabay