According to the analysis in this article, China represents a “two-speed market.” In some product categories, sales are vast and rapid, continuing to expand with seemingly unlimited growth. But in other sectors, product sales are hindered and slowed by several hurdles, and one of the highest of these hurdles is the complicated, multilayered, outdated distribution system that gets products from manufacturers to retail stores.
Particularly for fast moving consumer goods (FMCG), the inefficient supply chain consists of many layers, each of which adds costs and increases the prices. A simple canned food product might leave the manufacturer’s warehouse on a distributor’s truck. That distributor then sells the items to regional wholesalers, who move the products throughout China’s vast landscape. The wholesalers in turn sell to several layers of subdistributors, and then those subdistributors farm the products out to local wholesalers. The local wholesalers—approximately 10,000 of them, by some counts—finally deliver the products to the retailers in their area. At each level of this intricate supply chain, each actor demands additional revenue for its efforts, so price markups ultimately can reach 20 percent more than the production costs, which is a remarkable amount for FMCG.
Not only does this complexity increase the price, but it also disguises relevant data. For example, once products have been spread across the tens of thousands of wholesalers, and then further to the small, independent stores, the brand manufacturer no longer has any idea of what is being sold, when, in what quantities, or to whom. In China, small distributors often lack substantial resources, and historically, if brands wanted to grow sales, they simply added more distributors, such that most FMCG companies have literally hundreds of distributors for their products. In addition, tiny “nanostores” in both rural and urban settings account for approximately 40 percent of sales in the FMCG market, so the lack of transparency is widespread.
This situation makes it nearly impossible for the distributors to compete successfully, such that churn in FMCG supply chains reaches as high as 15–30 percent. Distributors enter and leave the chain constantly. Brands in turn suffer from a lack of consistency in the methods they can rely on to get their products onto retailers’ shelves.
As the challenges have expanded to reach crisis proportions, some efforts have sought to enhance the use of digital routes to market. On online platforms, companies promise to link multiple brands with multiple retailers, with far fewer steps in between than are in a traditional supply chain. The benefits for both retailers and brands are evident: They could gain access to and sell their products far more efficiently, and the lower supply chain costs could help them lower their retail prices, which should spark additional sales.
However, such changes might be the death knell for vast numbers of wholesalers and distributors throughout the nation. Thus far, the electronic routes to market remain somewhat limited: Retailers keep waiting for brands to join, while the brands wait for enough retailers to sign up to make it worth their while. But their promise, combined with the terrible conditions in the current supply chain, suggest that it is only a matter of time before old-school distributors find themselves pushed out of the supply chain.
Discussion Questions:
- What is wrong with China’s distribution system?
- What is being done to improve the situation?
Source: James Root and Weiwei Xing, The Wall Street Journal, October 17, 2016