For most small to medium size companies there are significant advantages of working with a distributor when looking to expand into export markets with their products. Of course, in order to profit from the benefits of working with a distributor it is necessary to select the right partner, however that is a topic for a later article.
What is an international distributor?
In order to understand the pros and cons of working with a distributor, it’s necessary to have a basic understanding of their role compared to other sales options.
Depending on the industry and the market which you are looking to enter, you might have the following options open to you:
- direct sales
- sales agent
- marketing agent
- industry specialist
- own daughter company
- strategic partner
- joint venture
- acquisition of local company
Some of these are direct options (you sell to retail or directly to consumers), whilst others are indirect, such as with a distributor. You might in certain circumstances also work with hybrid solutions.
Working with an international distributor means that that company will buy the products from you as the manufacturer or brand owner, import them into your target market and then resell to retailers and/or consumers in that market. So your customer (at least in legal terms), is the distributor.
I’d also add that many of the points mentioned below as being advantages of working with a distributor, are not “musts” – most of them are points to be negotiated into the agreement.
Make sure you have an international sales strategy
Your chosen route to market will depend on your sales strategy. Before you go on the search for a distribution partner for a market, you need to decide whether you will approach several markets in a region at once or just one? Will you enter with a wide portfolio of products or limit it like Apple does?
Whilst some of these factors (especially if you have an extremely wide portfolio) may be iterative in the process of negotiation then others are certainly your company decision which needs to be made up front. However a certain amount of research and segmentation will certainly be required.
What are the Advantages of Working with a Distributor in Export Markets?
It makes life easier
For most smaller or medium sized companies, one of the benefits of working with a distributor is that it can reduce the headaches in expanding to a new market for you the manufacturer.
That is partly because the partner takes over responsibility for selling the goods once they’ve left your premises, meaning that you don’t have to deal directly with many of the issues in the market. (I’ll come back to this point in more detail later.)
However, it also means that your sales process is considerably simplified as you are only selling to your one (in the case of an exclusive agreement) or perhaps few (in the case of a non-exclusive agreement) customers. That can make your internal administration much easier as you only have a limited number of partners to research, negotiate with, visit, keep updated, motivate, audit etc.
This relative simplicity can also mean that you can be faster in actually entering the market, which means that all the involved parties can start earning revenue earlier, which is always a plus.
Whilst you may not want to give exclusivity to an unproven partner at the beginning of a relationship, that doesn’t mean that you have to have multiple partners in a given market. (They will for sure spend more time competing with one another rather than concentrating on pushing out the competition). You can work with a sole partner without giving them the contractual exclusivity right away.
For an inexperienced exporter the whole question of dealing with the supply chain and logistics is often one of top two worries (after how to get paid) so it is well worth structuring your agreement so that the importer will take care of this.
That doesn’t just include the transport from your facilities into the target market, but also the import formalities and documentation. These can be complicated, especially in developing countries or if you have a complex or sensitive product with special requirements.
The logistics task isn’t over at the warehouse of the importer though, as he still has to ensure that the goods will be well distributed on the market. This is at the core of a distributor’s role: to guarantee to both the brand owner and the retail trade as well as consumers that the products will be transported safely to where they are required.
Different markets have different standards for delivery times. In many smaller countries, supermarkets expect to receive deliveries within a couple of days – that wouldn’t be practical if you had to transport the goods from your home central warehouse. On the other hand, direct to consumer online orders within metro areas of China would be expected within hours (maximum), whilst other markets are happy if the order is fulfilled within a week.
It is a huge advantage to have stocks in country. As I mentioned above under logistics, the expectations of clients in each market vary, not only from one market to the next, but also within the country. A client based in the capital city will have expectations of faster delivery than one who is somewhere in the mountains with difficult road access. Consequently, having a distributor who has certain stock levels available at all times means that you as a brand are able to fulfill expectations without having your cashflow tied up in overseas warehousing. Or without you taking each order from an agent and having to ship from your home market after receipt.
It’s important that you agree with your distributor what are the minimum levels of stock that he should be carrying as well as the standards of hygiene etc that need to be kept. This should be one of the KPIs in the annual distributor performance review. Warehousing and inventory control are a critical part of the supply chain that your distributor should execute on, but you need to keep a close eye on.
Many exporters invoice all of their customers in the home currency of the originating market. Distributors don’t always like this, but most are used to this, even though it means that they are accepting the associated currency risk.
Whilst this is a definite benefit for the exporting company if they don’t have to worry about this, it shouldn’t be totally ignored or taken for granted. If you want to have a mutually beneficial long term profitable relationship with your distributor then you should also be prepared to collaborate with him to solve issues if there are massive currency movements.
Should there be a large devaluation of either currency it is worthwhile working together with your partner to solve the issues in a fair way.
It’s one thing to allow the partner to carry the day to day risk, but not ok to leave a partner “in the lurch” if things should go massively wrong.
Reputation on the Market
If your brand is completely new to a market then it can be hard to gain traction in retail if you approach directly from home. However if you have the right distribution partner, who has a complementary range of products to yours, and who already has strong relationships with the right partners, you can leverage this reputation to gain faster listings. This kind of a partner will have a different negotiating weight with your potential end-customers or retailers.
In real terms, that means that you need to select a partner who is esteemed for selling ethically (not something you can take for granted) and according to your expectations. Of course, if they have a good reputation on the market, that also means that they are selling according to the expectations of the customers too.
You need to do as much research as possible up front of your final decision to make sure that they have:
- the sales team you need (do they have the competence, capability and the capacity to sell your products well?)
- are they product specialists? eg. OTC pharmaceuticals, skin care, French foods, pet…
- do they have an existing strong network of clients that can be used to sell your brand
Having an ideal distributor profile where your expectations are clearly defined will help with this task.
Understands the culture
This is really one of the key advantages of working with a distributor versus trying to do things directly yourself from your domestic location.
A local distribution partner will have an in-depth knowledge of the business culture of your target market be that in terms of attitudes to time, how to negotiate or which kind of after sales service is required. For many countries, customer service may be something that is a difficult balancing act to get right between the demands of the market (customer wants a fast reply to a question) and the demands of the product and any potential liability obligations (eg if you are selling safety critical items or food).
One of the benefits of working with a distributor is that they will be used to offering the typical payment terms for that country. So if it’s usual to offer extremely long payment terms eg with state health system products, then you as a producer don’t have to bank roll the whole process. Of course, as with the question of currency risk, if you want to work with that particular partner for the long term then you also at some point will probably need to discuss whether you need to also shoulder part of that risk, or support his cash flow in some way.
The main part of culture though is “simply” understanding how to work with the people in your target market and the value of that really shouldn’t be underestimated.
Contribution to the Marketing Spend
As mentioned in the beginning, the distributor buys the goods on his own account and consequently has a vested interest in building the brand. That means that often (not always, but again a matter of negotiation) a distributor will make a contribution to the marketing budget as well as carrying out activities.
Disadvantages of working with an international distributor
Of course, nothing in life is perfect so there are also disadvantages of working with distributors. Many of these can be mitigated to a large extent if you structure your agreement well, but there is no one size fits all answer.
Markets develop and evolve at different speeds and a partner who started out great may well tail off in their performance after a few years for whatever reasons. Consequently it’s good to do annual reviews and keeps your eyes open as to who else is out there on the market.
A Distributor isn’t your daughter company
At the end of the day, a distribution company is working for their own advantage and profit, so whilst this may align for a time with your aims, you need to closely observe any developments. Sometimes markets simply evolve away from the core competence of your original partner (eg which channels are the products sold in? If modern trade develops so that suddenly aspirins are mostly sold in the supermarket rather than a pharmacy, your existing partner might not be willing or able to make that change).
There could be a generational change or the company be sold off… Things change over time so you need to be aware that even with established and loyal partner it doesn’t pay to be complacent. This is where the distributor performance review comes in handy as you have a record of the development.
There may also come a time where you decide that an own subsidiary is the only way to scale further as a distributor isn’t able to give you the required level of focus. This is a step that shouldn’t be taken lightly though.
In order to finance their operation, you obviously have to give a distribution partner a discount for them to make a profit from your product. This is one of the key questions a distributor needs answered: how easy is it to make money with this brand or product? Whilst this discount is often seen as a disadvantage, you also should remember that founding a subsidiary just to sell your products is considerably MORE expensive, especially for SMEs.
If you were to carry out the operations yourself, you also have a cost of doing business, so as long as the distributor has a reasonable cost structure and profit margin then this shouldn’t be a problem. It is one of the questions from an ideal distributor profile that you need to decide for yourself: is it important to have a partner who will be transparent about such cost structures or are you happy to just give him a price and check the prices to the end consumer are competitive?
They usually want some kind of exclusivity
This is something that in most cases you probably don’t want to guarantee in the beginning. However it’s perfectly possible to agree that eg if conditions x, y & z are met you would be prepared to discuss this option after 2 years. You should tie the conditions to activities rather than to achieved sales numbers though as those can be artificially inflated if a contract is at stake.
Control of Marketing Activities and Pricing Policy
Many companies don’t want to lose control of especially these two aspects of the marketing mix. Again though, it depends how you manage your distributors as to whether this is an issue or not.
Of course a partner would rather have a completely free hand to do what he likes, rather than having you looking over his shoulder, however in the end it’s your brand so you need to decide.
Both of these aspects can be agreed and managed between you. You just need to be extremely clear about the guidelines right from the start.
The benefits of working with a distributor outweigh the disadvantages
There are great distribution partners out there who are truly a joy to work with (I’ve been lucky enough to have many of those) and there are some who will make your life miserable (there’s been a few of those too, although it was mostly nothing personal). Both require a lot of work in terms of ongoing support, regular visits, monitoring and discussions but having the RIGHT partner in a market is certainly better for your nerves.
Having partners who will share market intelligence, report openly and generally be reasonably transparent in their activities will allow you to deepen your market knowledge without having to make huge investments. One of the benefits of working with a distributor that I didn’t mention above is the fact that a good partner acts as a sounding board for ideas, helping you to grow faster. A distributor can help you gain rapid traction in a market by leveraging their existing connections and allowing their reputation to enhance your brand awareness in that country.
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If you are interested in working with distribution partners in your export markets, you might find these posts also interesting:
- Define Your Ideal Distributor Company Profile to Succeed Internationally
- Carrying out an Annual Distributor Performance Review
- Are you a great supplier?
- Factors to Consider when Deciding on Payment Terms
- Making the Best First Impression in International Business Meetings