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1、Opportunities for Action in Consumer Markets,Wholesale Distribution Changesfor a Winning China Strategy,Wholesale Distribution Changes,for a Winning China Strategy,Hypermarkets,supermarkets,and convenience stores,are blanketing Chinaor so it seems.Global players,Carrefour and Wal-Mart are opening ne
2、w stores at an,aggressive pace.Local retailer Lianhua has amassed,some 2,000 new outlets in 16 provinces.And regional,chain Hongqi has more than 200 supermarkets in,Sichuan province alone.During the past few years,sales in the new retail formats have grown more than,50 percent a year.Nevertheless,th
3、is modern trade,accounts for less than 30 percent of retail sales in,China,and it serves only one-quarter of the 500 mil-,lion consumers who live in or near Chinas more than,3,000 cities and 20,000 towns.These consumers,who,are reaching threshold spending levels for many,products,represent a market
4、with huge growth poten-,tial.And because most of them still shop at mom-and-,pop markets and small,local department stores,tradi-,tional trade channels will remain a significant part of,the economy for at least the next decade.,Yet only a small fraction of Western consumer-goods,companies in China h
5、ave fully explored traditional,trade beyond the largest cities.Despite the great,potential for profits,most global players have been,discouraged by the difficulty of controlling distribu-,tion in those channels.Companies that are able to,clear this hurdle will find that traditional trade offers,an i
6、mportant source of growth,with superior eco-,nomics and decisive competitive advantage.Of the,various methods for dealing with the distribution,challenge,active management of the wholesale chan-,nelan approach that has been underleveraged by,global consumer-goods companiespresents an,opportunity wel
7、l worth considering.,Approaches to Sales and Distribution,in China,Most Western consumer-goods companies have em-,braced Chinas modern-trade channel,and theyve,brought to it management experience with key ac-,counts in other countries.But outside the largest,cities,Chinas vast,heterogeneous markets
8、make the,sales and distribution of consumer goods problemat-,ic.The expense and resources required for retaining,firm control of selling and promotional activities,across a broad geographic area with a fragmented,retail structure force most companies to choose either,focus or breadth.,For a few prem
9、ium categories,such as cosmetics and,imported wines,the tradeoff is easy since demand is,concentrated in major cities among affluent con-,sumers.But for most consumer productssnacks and,ready-to-drink beverages,home-care and personal-,care products,and durables,such as television sets,and microwave
10、ovensat least half of the demand,comes from the highly fragmented traditional chan-,nels.(See Exhibit 1.)Yet even in those categories,most global companies in China give up broad cover-,age and penetration in favor of control.Usually,they,choose between two types of sales and distribution,models:the
11、 direct model and the distributor model.,Sometimes they combine the two.,The direct model focuses on managing key accounts,and provides the most assurance to manufacturers,since they remain in full control of the sales force and,selling activities.Depending on the category and size,of the business,h
12、owever,the direct model is only cost-,effective for targeting modern trade in the top cities,in China.Western companies in small categories or,Exhibit 1.Most of the Demand in China,Comes from Traditional Trade,Percentage of sales Percentage of sales,through modern,through traditional,Category,Exampl
13、e,trade channels,trade channels,Personal care,Shampoo,50,50,products,Durables,TV sets,30 to 35,65 to 70,microwave ovens,Home care,Laundry,30,70,products,detergent,Ready-to-drink Carbonated,25,75,beverages,soft drinks,Snacks,Rice crackers,15,85,SOURCE:BCG analysis.,with more modest ambitions in China
14、 tend to choose,this model.,Larger global companies in China often deploy the,distributor model to serve traditional trade.Although,this model has been quite effective in Western,markets,it has not yielded the same results in China.,In most developed markets,distributors are profes-,sional-services
15、companies that assume selling and,other value-added activities on behalf of the manufac-,turer.In China,however,most distributors are passive,and have little experience in sales or service.(See,Exhibit 2.),For this reason,many manufacturers have invested,considerable time and money in upgrading the,
16、capabilities of their Chinese distributorsproviding,them with training(classes and trips),tools(trucks,and personal computers),and sales resources(subsi-,Exhibit 2.How Chinese Distributors Compare,with Their Western Counterparts,Chinese distributors,Western distributors,Are less focused on sales,Pro
17、vide value-added,and service,activities,Have skills limited to,Have strong selling and,order taking,stock keeping,promotion capabilities,and physical delivery,Are not interested in,Are interested in long-term,exclusive relationships,relationships,Have relatively small,Have large-scale,businesses$1 m
18、illion,businesses$5 million to,to$2 millionwith limited,$10 millionwith broad,working capital and product,product portfolios,range,Have few IT capabilities:,Have IT capabilities,such as,poor data make it difficult,electronic data interchange,to measure distributor,to provide up-to-date,performance,i
19、nformation,SOURCE:BCG analysis.,dized sales reps,merchandisers,and promoters).But,since most distributors refuse to work exclusively with,one company,some of the training and resources,given to them also benefits the competition.Other,manufacturers use their own sales teams and promo-,tions to gener
20、ate downstream demand.Yet that has,the effect of reducing Chinese distributors to“box,movers.”,Whats more,it is extremely difficult to piece together,a distributor network for covering smaller citieslet,alone towns.As a result,the distributor model in,China turns out to be less effective and more ex
21、pen-,sive than manufacturers anticipated.Not surprisingly,some companies that have chosen the distributor,model are now rethinking their decision,whereas oth-,250,ers are struggling to find a way to make the current,model work.,The Advantages and Challenges,of the Wholesale Channel,The wholesale cha
22、nnel,which has been largely,ignored by global companies,is a far-reaching multi-,layered structure built up over decades of central,state planning.The wholesale structure replicates the,hierarchy of cities in China,with products flowing,from first-tier wholesalers located in provincial capi-,tals an
23、d large prefecture cities,to second-tier whole-,salers supplying small prefecture cities and county-,level cities,to third-tier wholesalers in towns,most of,which also supply nearby villages.During the past ten,years,the state planning apparatus has evolved to the,point where many of todays more suc
24、cessful whole-,salers are private enterprises.(See Exhibit 3.),Exhibit 3.The Wholesale Channel Structure,Replicates Chinas Hierarchy of Cities and Towns,Approximate,numberin 2002,Manufacturer,Keyaccounts,Provincial capitals,31,First-tier,Large prefecture,30 to 50,wholesalers,cities,Small prefecturec
25、ities,Second-tier wholesalers,County-level cities,3,000,Towns,20,000,Third-tier wholesalers,Villages,Unknown,Rural consumers,SOURCE:BCG analysis.,Exhibit 4.A Pilot Program Ensures Effective Implementation,Pilot:Getting it right,Rollout:Getting on with it,Design sales anddistribution model1.Create mo
26、del for regionsand customer segments,Prepare rollout1.Determine sequencing andtiming2.Plan resource allocation3.Document lessons andprocedures from pilot,Roll it out,Observe keyfactors1.Monitor salesturnover2.Watch coverage andpenetration3.Check price stability4.Scrutinize margins5.Examine sales tea
27、m,Execute pilot,Designoperations1.Map the process2.Set trade terms and targets3.Monitor the systems,rules,and penalties4.Align the organization with performance indicators and incentives5.Plan logistics and administrative support,performance1.Develop clear pilot objectives2.Select representative cit
28、ies and regions3.Determine pilot duration and resource allocation4.Plan reporting process to ensure high project visibilitySOURCE:BCG analysis.,The wholesale channel offers several unique advan-,tages:,It is,arguably,the only channel that can deliver,high penetration into traditional retail outlets,
29、across almost all of China.,It is the only economically viable way to serve,Chinas many cities and towns(and,depending on,the product,even some rural villages).,It is by far the lowest-cost channel.There is as,much as a 20 to 30 percent difference in costs,between the wholesale-channel and distribut
30、or,approaches.The savings are driven by lower sales,and marketing costs(fewer sales reps and promot-,ers,lower trade spending)and higher price realiza-,tion(fewer discounts and returns).,Consider the example of Want Want,a leading snack-,foods player in China with revenues reaching,$450 million in 2
31、003.It has leveraged the wholesale,channel and achieved operating margins of 22 per-,cent.Today this channel contributes more than 70,percent of the companys total business,with distribu-,tion and selling costs accounting for approximately,25 percent of its overall cost structure.,Given these benefi
32、ts,why havent more global compa-,nies taken advantage of the wholesale channel?We,believe it has been neglected because of misconcep-,tions Western managers might harbor about whole-,sale in China.Weve encountered arguments like the,following:,The majority of wholesalers have sales turnovers of,less
33、 than$100,000 per month and serve a relatively,limited geographic area.How can we manage hun-,dreds of wholesalers when we cant even manage a,few dozen distributors?,We have absolutely no control over product flow.,Once we sell our products to the first-tier whole-,saler,we have no way of telling wh
34、ether they actual-,ly flow to the county and town levels as intended or,whether they are simply sold off at a low price with-,in the large cities.,Wholesalers dont care about marginsthey just,want fast product turns.We tried to motivate them,with higher margins,but rather than keep the,extra profits
35、,they pass them on to the next tier of,wholesalers.That completely destroys our pricing,structure.,The more we sell into the wholesale channel,the,more likely we are to encounter problems with fake,products.Modern trade retailers would never,jeopardize their relationship with us by carrying,fake pro
36、ducts.,Our sales reps have never dealt directly with whole-,salers before.Were not sure they can do it.,Although these perceptions and doubts are not com-,pletely unfounded,the challenges of managing the,wholesale channel can still be overcome.,The Managed Wholesale Approach,From many years of exper
37、ience helping companies,with sales and distribution of consumer products in,China,we have identified five critical factors for suc-,ceeding in the wholesale channel.Although any,approach will vary according to product category,the,general principles we outline are universal and have,been tried and t
38、ested.,Map the process.Mapping consists of identifying a,network of the best wholesalers and putting them,together to provide maximum coverage for a particu-,lar region.The map details how products flow from,first-tier wholesalers at the provincial-capital and pre-,fecture levels to second-and third
39、-tier wholesalers in,counties and towns,and from wholesalers to retailers.,One big advantage of mapping is that it identifies,relationships in which trust has been established,among wholesalers across the different tiers.Mapping,also helps you avoid signing up more wholesalers,than can be accounted
40、for.In fact,it is preferable to,work with only one or two wholesalers in each territo-,ryeven if it means occasionally bypassing a low-,value-added first-tier wholesaler and selling directly to,the second tier.Otherwise,competition among whole-,salers could lead to a price war.,For the inexperienced
41、,however,mapping can be an,extremely daunting undertaking.One food manufac-,turer took three months and six sales reps to compile,several thick binders profiling all the wholesalers in,just one province.(Data included number of sales per,month,sales to the top 25 retail customers,and sales,to the to
42、p 10 cities and towns.)A key factor in suc-,cessful mapping is to collect the right level of infor-,mation and avoid wasting time and resources.For,managers unfamiliar with the mapping process,we,recommend first testing and refining the mapping,approach in a few selected locations.,Set trade terms a
43、nd targets.Setting trade terms is one,of the trickiest elements in wholesale.Your goal,should be to maintain a consistent market price and,not to use higher margins or volume incentives to try,to motivate wholesalers.Prices in the wholesale mar-,kets are highly transparent,and they are sensitive to,
44、even the slightest movements.Therefore,unless you,play an active role in monitoring and controlling,wholesale prices,wholesalers margins can be compet-,ed away.Volume-based incentives can be particularly,damaging because wholesalers are often willing to sell,at a loss in order to achieve their month
45、ly or quarter-,ly targets and earn rebates.Some manufacturers,compound the problem by following the common,Western practice of setting stretch targets.In China,this often has the unintended consequence of,encouraging wholesalers to cut prices rather than,increase their selling efforts to reach their
46、 targets.,Monitor the systems,rules,and penalties.You need to,ensure that wholesalers comply with their designated,territories and prescribed pricing structure.That,requires systems to monitor for infractions and strict,rules and penalties(at the extreme,termination of,the contract)to punish frequen
47、t offenders.PepsiCo,for example,has sales reps whose sole responsibility is,to monitor the movement of prices in wholesale mar-,kets and track down wholesalers who undercut the,agreed prices.Other companies use markings or,stamps to trace products flowing out of their pre-,scribed territory.Unilever
48、 even has a SWAT team,whose role is to investigate and report counterfeiting,activities.,Align the organization with performance indicators and,incentives.A company must have the right capabilities,to make a successful transition to the wholesale,model.We have found that with the proper training,and
49、 tools,it is possible for most sales representatives,to work well with wholesalers.The key is to determine,early on whether reps are capable of adapting to the,new system and to replace the ones who cannot.,Fortunately,there are plenty of reps in China who are,experienced and skilled in dealing with
50、 wholesalers.,Most work for local Chinese companies.For them to,succeed in a global company,you must provide orien-,tation and training programs.,Plan logistics and administrative support.Many com-,panies dont do the kind of thorough preparation,that can mitigate implementation risks.Given the vast,
