With the world becoming smaller and customers being able to buy products direct from you, is the exclusive distribution business model still valid? This article outlines the pro and cons and tells you if it is the right decision for your business.
Before expanding into an international market you need to identify the goals you want to achieve. At StrikeEngine we believe the ultimate goal should be to offer customers in other countries the same pricing and service as the customers in your home market.
With this in mind exclusive distribution agreements are the only cards on the table.
If you want your customers to be able to go into a store to order your parts, if you want your customers to benefit from next day delivery, if you want your customers to have hassle free and low-cost returns should the worst happen, if your brand to be as visible in a foreign country as it is in the home country you need an exclusive distributor.
But there are many pitfalls when appointing an exclusive distributor, here are the main ones
- Price gouging
- Grey imports
- Burying of your brand
- After sales service below your standards
- Yours brands reputation in the hands of a company with a different vision
Taking each point in turn.
1. Price gouging
Your exclusive distributor abuses their position to charge excessively. This is a probably the biggest problem facing manufacturers looking to expand into new markets.
Price gouging damages your brand, it breeds a grey market, which can in turn affect after sales service.
How to control price gouging.
Set pricing. Manufacturers should agree the retail price in the foreign market. This small step cures all the problems listed above but it does have knock on effects.
If you are a manufacturer selling to retail businesses in your home country an exclusive distributor will be an extra layer between you and your customer which you do not currently deal with.
This extra level will mean smaller margins for all parties concerned, you as the manufacturer, the exclusive distributor may be working with a smaller margin than they are used to and retail outlets in turn will be profiting less than they might from selling brands with different strategies.
The goal here is to make the effect of the extra level as small as possible and this will ultimately mean retailers enjoying a “normal” discount level, the manufacturer enjoying close to their normal margin, the potential loser here is the exclusive distributor who is the filling in the sandwich.
To combat the squeeze on the exclusive distributor the manufacturer must behave in the same way as in the home country. This means the following.
The manufacturer bearing the brunt of the marketing costs in the foreign country.
In order for exclusive distributors to accept working on smaller than normal margins they need their job to be made as easy as possible.
The main responsibilities of the exclusive distributor are as follows
- Building brand awareness
- After sales service
- Logistics & distribution within their home country
Building brand awareness is done through the usual mass media channels. Exclusive distributors will be reluctant to invest heavily in this if their contract is not iron clad and an iron clad contract creates all kinds of moral hazard.
In short iron clad contracts should be avoided. By the manufacturer footing the mass media expenses there is no limit on the budget and there is no fear of losing the contract on behalf of the distributor and therefore not recouping their investment.
By footing the mass media marketing costs the traditional sales forces costs are easier for the exclusive distributor to swallow. The knock on effect of the mass media bills being covered by the manufacturer is that it directly increases the prestige of the distributor.
After sales service needs to be handled as much as humanly possible by the manufacturer and this includes being responsible fo return shipping costs.
Distribution with the foreign country must be left to the exclusive distributor.
2. Grey imports.
Grey imports can only occur when it is possible for dealers/consumers to get your products outside of the authorised channels for a lower price. With set pricing this can be eliminated.
3. Burying of your brand.
This is a pitfall that is most easily fallen into by smaller manufacturers. A distributor in a country can demand exclusive rights indefinitely by purchasing a large initial order. This can be very hard to resist especially if the manufacturer believes they have no sales in the said country.
Granting exclusive rights to a distributor for these reasons is short-sighted. Decisions based on these factors need to be weighed up carefully. StrikeEngine would recommend against such as actions but it obviously depends on the size of the market versus the size of the initial order.
One very important point to mention here is your exclusive distributor selling direct to the public. This should be avoided at all costs. When an exclusive distributor sells directly to the public the potential of growing a network of stores selling and stocking your products is severely restricted.
4. After sales service below your expectations.
One of the hardest aspects for a manufacturer to manage. Taking the returns process out of the hands of the distributor to the largest possible extent will help. Incorporating an after sales procedure which is transparent to the largest possible extent to all parties involved, including the end customer in essential. Customers in the foreign country should always have a method of contacting the manufacturer directly, preferably in their own language. This will make sure to the fullest extent possible that the after sales service is up to par.
5. Your brand in the hands of someone else.
Again, something very hard to manage. Ultimately the more involved the manufacturer is in the foreign country the more control the manufacture will have over the management of the brand.
The theme so far has been for the manufacturer to be as involved as possible in the sales in the foreign country and for the manufacturer to pay for the expenses that a distributor may not be willing to pay for if the specter of losing the contract is on the agenda ie because the contract is not iron clad.
So you may now be wondering why you as a manufacturer need a distributor in the foreign country at all if you are going to be doing at lot of the legwork.
Here are the main points you want your exclusive distributor to handle.
- Faster shipping times
- Sales team.
- Lower shipping costs to and from.
- Burden of local taxes and regs
- Face to face contact
- Local feel as opposed to being seen as a “foreign” company.
Stock holding means larger orders meaning less shipping, admin and packing costs per product. In short it increases profit margin on the same retail price.
2. Faster shipping
Faster shipping times makes your products much more attractive in the country. This obviously stems from the distributor holding stock.
3. Sales network
Ideally your exclusive distributor will already have a network of outlets in place. (See point above about exclusive distributor selling directly to the public).
Your mass media activities will make the work of the exclusive distributor much easier, not only for your brand but for all the brands they offer making contract negotiations much easier. You should also aim to list all of the dealers in the foreign country as authorised dealers of you products on the relevant promotional materials.
4. Lower shipping costs.
By having a point of contact in the country the shipping costs for the consumer are reduced massively. Again, making your brand much more appealing to consumers in the market.
The costs of compliance with local taxes and regulation should never be underestimated. Appointing an exclusive distributor takes all these admin fees from the manufacturer.
6. Face to face contact
Although the internet is becoming more and more pervasive, the possibility of the consumer having face to face contact with your representative should not be underestimated even if it is used rarely. Knowing that it is there has intangible benefits.
By appointing an exclusive distributor your company becomes associated with the country. Rather than being a “foreign” company your brand becomes more local, again something that brings intangible benefits.
Exclusive Distribution Agreements – Summary
In summary the exclusive distributor agreement is just as valid as it ever was but modern technology must be harnessed to ensure the model works in the modern world.
1. Pricing must be set for all parties. (distributor, retailer, consumer)
2. Mass marketing costs must be paid by the manufacturer
3. Exclusive distributor should not be selling directly to the public
4. Iron clad contracts should be avoided even if this means having to buyback stock should the agreement end.
5. There must be complete transparency for all parties. Customers and dealers in the foreign must be encouraged to contact the manufacturer with any feedback they have
6. Manufacturer needs to offset the issues of potentially lower than ideal profit margins in the distribution channel. This can be more than offset by advertising and the inclusion of all parties in the campaigns.
7. Primary goal of exclusive distributor is to gain access to a new market. In order to get the right distributor with the right terms, distributing your brand must be made as mutually beneficial as possible to offset the lower profit margins and looser contract terms.
StrikeEngine is a world leader in the promotion of performance automotive industry. We offer consultancy services to businesses looking to expand and streamline their operations.