Service providers for brands in China fall mainly into three categories: traditional distributors, supply-chain companies (often acting as inventory financiers), and TP or store-operations agencies. Their typical characteristics differ as follows.
Traditional distributors
- A. Buy-sell model with profit-and-loss responsibility
- B. Asset-heavy operations
- C. Substantial onshore and offshore funding
- D. Overseas entities and international payment capability
- E. Highly specialized teams
- F. Domestic and international supply-chain infrastructure
- G. WMS and ERP systems
- H. Extensive channel relationships
- I. Mature organizations built around the business
- J. Strong understanding of national policy and relevant regulations
- K. Digital media and advertising capabilities, among others
Best for: Brands across categories.
Channels: Omnichannel.
Supply-chain companies / inventory financiers
- A. Sales model underpinned by the platform
- B. Moderate asset intensity
- C. Substantial onshore and offshore funding
- D. Overseas entities and international payment capability
- E. Domestic and international supply-chain infrastructure
- F. WMS and ERP systems
- G. Extensive channel relationships, among others
Best for: Brands selling standardized products.
Channels: B2B2C channels such as Tmall Supermarket, TDI and JD Self-Operated.
TP / store-operations agencies
- A. Brand bears the commercial risk
- B. Asset-light operations
- C. Relatively specialized teams
- D. Digital media and advertising capabilities, among others
Best for: Usually large brands with annual sales of at least US$20 million and groups with a Chinese subsidiary, such as Fortune Global 500 companies.
Channels: Omnichannel.
Overall, traditional distribution carries greater risk, demands broader capabilities and produces a lower return on assets. For small and medium-sized brands, however, it is often the best option because it is more efficient and the distributor usually bears the risk. Most of China’s leading e-commerce service providers began as distributors. During the industry’s rapid expansion, the leading players benefited from that growth and completed public listings.
As the market has become saturated and competition has intensified, returns from traditional distribution have declined and losses have become more common. There are many reasons. Leading listed distributors are mostly based in major cities such as Beijing, Shanghai and Hangzhou, where labor and compliance costs are high. Employee turnover is also high, while productivity per person and per unit of capital tends to be low.
Many distributors have transformed into TP agencies in search of an asset-light model and higher gross margins, making that segment increasingly crowded. At the same time, fiercer competition has put pressure on many small and medium-sized brands. They have had to reduce the cost of their Chinese subsidiaries and redirect spending into marketing, which can increase their need for traditional distributors.
We do not believe the traditional distribution model will disappear; demand may even grow. A shakeout is inevitable. The central challenges will be improving operating efficiency, reducing costs and maintaining team stability. More distributors based in smaller cities may well emerge as industry leaders.