This article originally appeared on WSJ.com.

Consumer goods companies in China suffered a rude awakening in the past few years. Growth in fast-moving consumer goods (FMCG)—from beer and cigarettes to diapers and dish soap—plummeted to about 3.5% in 2015 from nearly 12% in 2012, according to the Bain-Kantar China Shopper Report.

The sharp drop is a result of the country’s slowing economy and shifting consumer behavior. China is now a two-speed market, with some categories continuing to prosper while others, such as instant noodles, are getting whacked with sales declines of more than 5%.

Lurking below the surface is another huge challenge: China’s antiquated, fragmented distribution system. It’s costly, inefficient and provides only a hazy line of sight to the consumer.

The critical flaw in the current system is the way it connects manufacturers to more than three million traditional stores that dot the Chinese landscape. We estimate that these tiny shops in urban neighborhoods and rural areas still account for at least 40% of FMCG sales in China.

To move, say, a can of tomato paste from a plant near Shanghai to a corner grocery in rural Gansu province might require several handoffs. The first is to the primary distributor, who takes goods from the factory and passes them to subdistributors or regional wholesalers. They in turn often rely on one or more layers of subdistributors. From there, the tomato paste would go to any of the more than 10,000 local wholesalers that deliver goods to traditional stores.

Slowing growth has exposed the weaknesses of this system. At each step, somebody takes a markup on the tomato paste, from about 0.5% for the primary distributor to 10% for the local wholesaler. By the time the can reaches the shelf, the markup is easily 15% to 20%. And because of all these layers, manufacturers don’t know how goods are selling in the shops.

Many of the primary distributors that manufacturers rely on are poorly capitalized and lack capabilities beyond order taking and basic logistics. In the past, manufacturers simply added more of these distributors to grow sales: Most brands have hundreds of primary distributors. As sales have slowed in recent years, manufacturers have pushed more goods to these distributors, who have turned around and jammed the channels below them, leaving a vast but unknown quantity of merchandise stranded.

With thin margins and no capital cushion, some subscale distributors have already exited the business. There is also constant churn among the subdistributors and regional wholesalers that move product into smaller cities and rural areas. For one company in the beverage sector, distributor churn exceeded 15% in one of its largest regions last year. A company in packaged food had more than 30% churn among its national distributors during a year of significant sales decline.

The woes of China’s distributors are approaching crisis proportions just when brands need them most. Today, only distributors can move products cost effectively to the smaller cities and rural areas where the best growth opportunities are found.

Until 2015, when growth moderated, retail sales in tier-three, tier-four and tier-five cities were rising by 8% a year, about four times the rate in tier-one and tier-two cities. Even as modern formats such as hypermarkets lose momentum—hypermarket traffic dropped by 4.6% in 2015—growth continues in smaller, modern-format grocery and convenience stores, which also rely on distributors.

All this suggests a long period of rebuilding for China’s retail distribution system. At the end of the process, many of today’s primary distributors won’t be around. Those that survive will have invested in the capabilities that brand owners value most: efficient distribution and sell-through support.

At the same time, new digital business platforms are taking root to address the inefficiencies of the current “many brands to many stores” route-to-market system. We count at least 50 such e-RTM businesses today, and they could help China leapfrog to a retail distribution system that is more efficient than what we see in some advanced economies.

These platforms, however, are stuck in a catch-22: Operators need enough traditional trade outlets to join their platforms so that brand owners will be willing to abandon the old model, while retailers want to see enough brands on a platform before they switch from distributors they have used for decades.

The new platforms promise enormous potential prizes for both retailers and brand owners. Traditional store owners could vastly simplify their lives with one-stop shopping rather than dealing with dozens of distributors or wholesalers. Brand owners could reduce their RTM costs and improve access to hard-to-reach outlets while gaining perfect visibility of their product during its distribution journey.

For distributors and wholesalers, however, the outlook isn’t encouraging. The $100 billion of markup that Bain estimates flows to them every year in the current model would come under threat. Worse, in some emerging e-RTM models, there is little role for the distributors at all.

This is all in the future. For the time being, FMCG manufacturers cannot count on distributors of any kind to help them win in a much more challenging Chinese consumer market.

Mr. Root is a director with Bain & Company, and Ms. Xing is a manager. Both are based in Hong Kong.