How to set up your foreign distribution
While working for a Nordic manufacturer of men’s clothing that aimed to expand in the Netherlands, I was tasked with scouting out the market and sussing out the end-user.
The type of clothing was a pair of jeans. After interviewing various people, I discovered that there was a small group of trend-setting immigrants who wore this type of jeans. So, I spoke to them. They liked the product and suggested a couple of local stores that might be interested in selling them.
I went to the stores. They told me about a particular agent they preferred to buy from and the rest was history — that distributor became the solution for this Nordic manufacturer.
Finding the right distributor is the key to your success when expanding in a new foreign market.
The question is, how do you find the right distributor? And what kind of distribution chain should you use?
Before we dive right in, ask yourself the following questions:
- What are your long-term goals?
- How many resources are you willing to utilise and what are your staff resources and your knowledge of international business?
- The degree of control you want on the foreign market
- The risk level you allow
- Willingness to adapt to the local market and support it
- Which markets can fit and are interested in your product or services?
Keep these questions in mind while you read this article.
You have options. You can either build up your own organisation in the foreign market, partner with local companies, or allow someone else to take care of your foreign markets.
Without further ado, let’s dive in.
Rule number 1: Success starts with the end user
This is common sense. Firstly, you must find the end user that is going to buy your product. This requires prior research into the market conditions and the buyers of your product.
Let’s say you’re a producer of mining machinery and you want to export your product to Asia. What do you do? Firstly, contact the local mining companies and present your product to them. Ask them how and from whom they buy their machinery and the price they tend to pay. This indicates your potential future partners, your competitors, and the price level on the market.
Years ago, I was the North American representative of a Swedish manufacturer that made blow-off nozzles with low noise levels and low air consumption. I was tasked with looking for distribution in the USA. I found that a key client base for this product was the steel mills and interviewed over 100 maintenance managers. After convincing them of the benefits of these blow-off nozzles, they told me the distributors they bought from. These distributors became the base for dealers in each state.
In short, find local specialised distributors who already sell to your end-user. End. Of. This is particularly true of the automotive and aircraft industries, whose companies only deal with approved clients.
Rule number 2: Choose the right distribution chain
Having as many distributor levels as possible isn’t the best solution. Short distribution chains enable ease of communication and faster market feedback. Many distribution levels overcomplicate things.
There’s more. Keeping your distribution levels low also influences your profitability and export price, which you can learn more about here.
Let’s dig deeper. The market decides what the customer wants to pay, but middlemen need to make money on the journey to the end user. You also have to factor in shipping costs, customs duties, and taxes.
Here’s an example.
In the above case, freight is 9% and customs duty is 6%. The importer wants a 40% profit and the sub-distributor a 35% profit. The other levels want 25% each. Your factor, therefore, is 5.27 times your export price — you get less than 20% of what the customer wants to pay. In other words, if the customer is willing to pay $ 527, you as the exporter will get only $ 100.
In short, maximise your export price by limiting your distribution chain.
- If you only use the two first levels (as seen in the above example), it will only be about 3 (2.96) times. In other words, you keep more than 30%.
- If you have selected the wrong importer and it doesn’t work out or they stop selling for you, you lose 100% of your distribution.
- If you sell directly to a series of local dealers spread over different geographical areas, the factor is just over 2 (2.14) and you get almost 50% of what the customer pays.
What can we learn from that? Keep your distribution chains as low as possible to maximise profit.
By selling directly to dealers as seen above, you only lose 20% of your distribution if one doesn’t work out. Moreover, direct contact with each dealer ensures smoother communication channels.
I set up distribution for a Swedish company in the USA and Canada. We used local companies that sold directly to end-users. The Swedish company sold, shipped and invoiced directly to each separate distributor, giving them the exclusive right to their respective territories. As the Swedish company’s representative who found and activated these local distributors, I received a commission on invoiced sales.
This could be a workable solution for smaller companies that lack the necessary resources to find and activate the market. You want to find a local contact in the same time zone who understands the ins and outs of both markets. Ultimately, an exporter gets 50% of what the end-user pays.
Selling to local distributors: pros and cons
- Well-established in the local market with knowledge and customer contacts
- Lower initial costs for the exporting company
- Has an already built-up service organisation
- (Usually) lower sales cost
- Local representative makes substantial commitment by buying your products
- The local network already has an established customer service organisation with increased goodwill for exporters
- A local representative has good knowledge about local products and markets that can compensate for the lack of knowledge of the distributor’s products
- No need for you to put local resources in place
- Foreign partner takes on most of the risk except for product liability
- Less demand on you to develop knowledge of the local market
- Limited market and political risks
- Fewer possibilities for the exporting company to control or influence sales
- Local distributor has less knowledge about your products and will need more ongoing support, especially at the start.
- A bankruptcy could result in losing the market. This is if you do not have several separate distributors
- A local distributor can sell competing products if you have disagreements. Be aware.
- Limited opportunity to direct activities; risk of losing sales or representatives in the country
- A risk that your representative stops selling your product in favour of one of your competitors. Local representatives can become future competitors. This is not normally the case if the foreign supplier is incredibly supportive of the distributor
- A poorly performing representative could cause your product to have a bad image if clients are not served properly
- Your product could suffer from a low profile if the client has a broad range of products
- You gain limited knowledge about the market and fewer customer contacts
- Your representative may not be able to fulfil special requests from you or the market
Is there any alternative to local distributors?
You can start a joint venture — a company with a local partner boasting an existing client base and distribution channel. However, this would give you limited control.
You could arrange a licensing agreement, which would allow a local company to manufacture and sell your products and services. In turn, you would be paid a licensing fee.
The most common solution for SMEs is to have an importer or distributor on the foreign market — someone who buys the products or services from the exporter and sells them directly to the end user.
The end-user is the key to your success
Expanding into new markets is critical to your business’s success. It increases your sales. Lowers your marginal costs. Increases your profit.
Selecting the right foreign partners is the key. Take the time to find the right partners for each specific market and adapt your sales promotion to each market. Moreover, treat your partners like employees — listen to them, support them and activate them.
Finding the right distributors requires you to decide who the end users are. Speak with them. They will guide you to the right distribution solution and future partner.
If you want to read more about running a successful exporting business, you can download Leif’s book here.
Check out Leif’s website on running a global exporting business here.
Good luck with your journey!
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