Understanding in-market channels
Once a market-entry strategy has been chosen to get your products into your foreign target markets, we indicated that the next challenge you will face will be distributing the product to the end user within these foreign markets which we referred to as in-market (or foreign market) distribution. Distribution systems vary significantly among nations whose economic, social and cultural environments differ from one another. Consequently, every product and country will present a unique distribution problem, the solution of which will require careful research (which you will have done as part of the export research you undertook in step 7). At the same time, your market-entry strategy will affect the in-market channel(s) you decide to use. For example, if you are selling through an import agent, once your product(s) reach the importer, the in-market factors come into play. These including answering questions such as: How the importer will get the goods to the end user? What transport will be used? Who is the eventual consumer? How long is the distribution channel? How many other intermediaries are there? Are the products being sold in other countries? What mark-ups are being applied and what costs come into play?
Similarly, if you plan to use your own sales representatives or to sell directly to the end consumer or if you plan to franchise your goods abroad or license a foreign manufacturer to produce and sell your goods, whichever option you choose will translate into different in-market activities. Therefore, before you can begin to consider any in-market activities, you need to know which market-entry option you plan to use. The one, clearly, impacts upon the other. Don’t forget that we metnioned that your in-market distribution channel will often go beyond just the physical movement of goods and may impact on other marketing decisions such as promotion and pricing (as your in-market partners or intermediaries make their own marketing and distributing decisions).
What in-market factors are likely to come into consideration
Assuming you have decided on a particular market-entry channel, there are many factors you will need to consider when looking at your in-market distribution alternatives. These include the following:
- The number of intermediaries that make up the in-market channel
- The mark-ups applied by these intermediaries
- The services these intermediairies provide (promotion, sales, distribution, etc.)
- The power and control of these intermediaries
Channel design should be based on the evaluation of a number of market characteristics. These include:
- The number, geographical location, purchasing patterns and purchasing preferences of customers
- The bulk, weight, perishability, unit value and servicing requirements of each export product
- The extent of the activities of existing intermediaries, e.g. In respect of physical distribution, storage, advertising, customer credit, selling, etc.
- Whether competitors’ channels can be used or whether they should be avoided, the degree of exclusivity offered to competitors by various intermediaries, etc.
- Whether the government imposes any legal restrictions on the operations of channel members
- The company’s size, financial resources, product mix, previous channel experience and overall marketing strategy.
In the course of your research (see step 7), problem areas will be identified. For example, channels adopted in other markets may be non-existent in the target market in question, few intermediaries may be available in many developing markets and those who are available, may be operating exclusively on behalf of competitors.
When barriers to normal in-market distribution are present, you may consider:
- Taking over local distributors
- ‘Buying’ distribution by offering financial incentives, e.g. high commissions on sales
- Establishing your own distribution outlets
- Developing a totally new channel, such as that developed by Tupperware, i.e. holding tea parties in the consumer’s home at which the product is sold
- The Internet, which is rapidly changing the various marketing channels exporters use
The final choice of foreign market channel, whether of the traditional type or an innovation, will depend on the anticipated distribution costs, the degree of control that can be exercised over the channel, market coverage and the likely continuity of the distribution service over the longer term.
Anticipated distribution costs
These comprise the cost of the initial capital required for the development of a channel and the cost of maintaining the channel, e.g. agents’ commissions, distributors’ mark-ups, the cost of a company’s own sales force, etc.
Degree of control over the channel
The degree of control that you will be able to exercise over the in-market channel will depend largely on your choice of channel and on your financial resources. Heavy advertising, for example, generates consumer demand and automatically draws products through the distribution chain. However, less affluent manufacturers should nevertheless endeavour to influence the intermediary’s market coverage, prices, services, etc.
This may be on an intensive basis, i.e. the product is made available in as many outlets as possible, or on a selective basis, i.e. the product is made available in only a selected number of outlets often under an exclusivity agreement. the exporter may have difficulty in finding an intermediary who is prepared to handle all the products in the range – often intermediaries reject the less lucrative products.
The selection of effective channel members in the foreign market is often a problem. Low sales volumes hamper many channel members or are under-financed and some simply cannot be trusted. Smaller distributors may close down when partners retire. Others may switch loyalties when a particular product line fails to give them lucrative margins because of adverse exchange rates or politically inspired consumer resistance. Frequently, when a manufacturer is not well-known abroad, the intermediary’s reputation becomes that of the manufacturer – often with devastating effects.
Screening likely candidates should involve:
- Sending a letter, including product information and distributor requirements in the native language, to each prospect
- Following up the best respondents to extract information that is more specific. This would include product lines already being handled, territory covered, size of operation, number of salespersons, etc.
- Checking references from other clients and customers of the prospective intermediary
- Where possible, visiting the most promising candidates in person
Once a suitable intermediary has been identified, a distribution agreement should be drawn up. This would detail the specific responsibilities of both the exporter and the intermediary, and should specify an annual sales volume target. This target will serve as a basis for evaluation of the distributor and failure to meet it could give the exporter the right to terminate the contract.
The role of the intermediary
The marketing function of the foreign intermediary is multi-faceted. Thus, the intermediary could be involved in any of the following:
- Assembling products so that they form a range of complementary items that are likely to be of interest to buyers
- Converting bulk items into smaller lots in accordance with customer requirements
- Adapting goods to meet the needs of the marketplace
- Organising the physical distribution of products, i.e. transportation and storage within the marketplace
- Setting appropriate prices for the goods
- Handling sales promotion and advertising
- Identifying buyers and selling to them
- Extending credit to buyers, where this is required.
Once intermediaries have been selected, a motivational programme should be instituted to maintain their interest in the product(s). Apart from financial incentives, the exporter might also provide:
- Staff training
- Advantageous credit terms
- Company communication including company newsletters, web pages etc.
- Visits by intermediaries to the company’s headquarters
- Visits by the company’s staff to intermediaries’ offices
- Technical assistance and product support services
- Adequate product information
Terminating distributor agreements
The exporter may wish to terminate a distributor agreement, perhaps because market conditions have altered, a intermediary’s performance has not been up to standard, or company mergers have necessitated a change in distribution policy. Dismissing intermediaries is not an easy task because of the legal protection they enjoy in most parts of the world.
In Norway, for example, the manufacturer must be able to prove the negligence of the channel member concerned and even if the dismissal is sanctioned, it is likely that the intermediary will have to be reimbursed for his investments in establishing customer contacts and creating goodwill. In other countries, a intermediary cannot be dismissed without the dispute going before an arbitration board to establish whether or not the relationship should be terminated.
The customary practice, in case of a contact being terminated, is for the dismissed party to receive indemnity equal to one year’s commission – an unexpected cost that could adversely affect the export marketing plan. To avoid such an eventuality, seek legal advice in each export market prior to drawing up a contract and should ensure that selection procedures are such that do not cause a predicament of this nature.
A high degree of control over international channels of distribution is particularly difficult because of the often lengthy channels involved. Some companies set up their own distribution systems to solve this problem while others issue franchises or establish exclusive distributorships.
Control should be two-tiered:
- Control over the whole distribution system
- Control over individual intermediaries
Overall controls need to be implemented for the entire system to ensure that the export operation meets both cost and market coverage objectives. Distribution specifics such as pricing margins and transhipping parameters should be clearly defined. Problems may arise, for example, when goods intended for one country are diverted through distributors to another where they compete with existing retail or wholesale organisations handling the same product.
Marketing objectives have to be clearly spelt out to the intermediary. Standards of performance ought to include; sales volume objectives, expected market share in each market, feedback on inventory turnover ratios, the number of accounts per area, growth objectives, price stability objectives, and the quality and extent of any publicity/promotion. The standards set should be specific and in writing to facilitate regular evaluation of performance. When standards are not met, the causes should be investigated.