Channels of distribution

Companies use two principal channels of distribution when marketing abroad:

  1. Indirect selling,
  2. Direct selling.

Direct selling is employed when a manufacturer develops an overseas channel. This channel requires that the manufacturer deal directly with a foreign party without going through an intermediary in the home country. The manufacturer must set up the overseas channel to take care of the business activities between the countries.

Advantage of direct-selling channel

  • Active market exploitation since the manufacturer is more directly committed to its foreign markets.
  • There is greater control since the channel improves communication because approval does not have to be given to a middleman before a transaction is completed.

Problems of direct selling

  • It is a difficult channel to manage if the manufacturer is unfamiliar with the foreign market.
  • The channel is time consuming and expensive since without a large volume of business, the manufacturer may find it too costly to maintain the channel.

Indirect selling, also known as the local or domestic channel, is employed when a manufacturer in the United Kingdom, for example markets its product through another British firm that acts as the manufacturer’s sales intermediary (or middleman). As such, the sales intermediary is just another local or domestic channel for the manufacturer because there are no dealings abroad with a foreign firm. By exporting through an independent local middleman, the manufacturer has no need to set up an international department. The middleman, acting as the manufacturer’s external export organization, usually assumes responsibility for moving the product overseas.

Advantages of employing an indirect domestic channel

  • The channel is simple and inexpensive as the manufacturer incurs no start-up cost for the channel and is relieved of the responsibility of physically moving the goods overseas. Because the intermediary very likely represents several clients who can help share distribution costs, the costs for moving the goods are further reduced.

Limitations of indirect channel

  • In case the manufacturer has given up control, the situation may adversely affect the product’s success in the future. If the chosen intermediary is not aggressive the manufacturer may become vulnerable, especially in cases where competitors are careful about their distribution practices.
  • Indirect channel may not necessarily be permanent. Being in the business of handling products for profit, the intermediary can easily discontinue handling a manufacturer’s product if there is no profit or if a competitive product offers a better profit potential.

Types of Intermediaries in Direct Channel

  1. Foreign distributor – A foreign distributor is a foreign firm that has exclusive rights to carry out distribution for a manufacturer in a foreign country or specific area.
  • Orders must be channeled through the distributor, even when the distributor chooses to appoint a subagent or sub distributor.
  • The distributor purchases merchandise from the manufacturer at a discount and then resells or distributes the merchandise to retailers and sometimes to final consumers.
  • The length of association between the manufacturer and its foreign distributor is established by a contract that is renewable provided the continued arrangement is satisfactory to both.
  • A distributor may sometimes take on the name of the brand distributed even though the distributor is an independent operator and not owned by the manufacturer. Brother International Corp. is an independent US distributor of Brother Industries, Ltd., a Japanese firm. Longines-Wittnauer Watch Co. distributes the Swiss-made Longines watch in the US market.

Benefits in using a foreign distributor

  • The distributor is a merchant who buys and maintains merchandise in its own name. This arrangement simplifies the credit and payment activities for the manufacturer.
  • To carry out the distribution function, the foreign distributor is often required to warehouse adequate products, parts, and accessories and to make facilities and personnel immediately available to service buyers and users.
  1. Foreign retailer – These are used in cases where the product in question must be a consumer product rather than an industrial product.
  • The manufacturer contacts a foreign retailer through personal visit by the manufacturer’s representative to mailings of catalogs, brochures, and other literature to prospective retailers. The use of personal selling or a visit, although expensive due to travel costs and commissions for the manufacturer’s representative, provides for a more effective sales presentation as well as for better screening of retailers for the distribution purpose.
  • The use of direct mail, although less expensive, may not sufficiently catch the retailers’ attention. For such big-ticket items as automobiles or for high-volume products, it may be worthwhile for a manufacturer to sell to retailers without going through a foreign distributor.
  • In fact, most large retailers prefer to deal directly with a manufacturer. In Europe, for example, a number of retail food chains are becoming larger and more powerful, and they prefer to be in direct contact with foreign manufacturers in order to obtain price concessions.

State-controlled trading company – For some products, particularly utility and telecommunications equipment, a manufacturer must contact and sell to state-controlled companies.

  • Many countries, especially those in Eastern Europe, have state-controlled trading companies, which are companies that have a complete monopoly in the buying and selling of goods. Hungary has about a hundred state trading organizations for a variety of products, ranging from poultry to telecommunications equipment and for both imported and exported products.
  • Being government sanctioned and controlled for trading in certain goods, buyers for state-controlled trading companies are very definitely influenced by their governments’ trade policies and politics.
  • Most opportunities for manufacturers are limited to raw materials, agricultural machinery, manufacturing equipment, and technical instruments rather than consumer or household goods. Reasons for this limitation include shortage of foreign exchange, an emphasis on self-sufficiency, and the central planning systems of the communist and socialist countries.
  1. End user – This is where a manufacturer is able to sell directly to foreign end users with no intermediary involved in the process.
  • This direct channel is a logical and natural choice for costly industrial products.
  • For most consumer products, the approach is only practical for some products and in some countries.
  • A significant problem with consumer purchases can result from duty and clearance problems. A consumer may place an order without understanding his or her country’s import regulations. When the merchandise arrives, the consumer may not be able to claim it. As a result, the product may be seized or returned on a freight-collect basis.
  • To solicit orders, a manufacturer may use publications to attract consumers. Many US magazines receive overseas distribution, and the advertisements inside are read by foreign consumers. US magazines, including Time, Newsweek, and Business Week, facilitate the ordering process since they publish international editions.

Types of Intermediaries in Indirect Channel

There are many kinds of local sales intermediaries, which be may be grouped under two broad categories:

  1. Domestic agents
  2. Domestic merchants

The basic difference between the two is ownership (title) rather than just the physical possession of the merchandise.

Domestic agents never take title to the goods, regardless of whether or not the agents take possession of the goods.

Domestic merchants own the merchandise, regardless of whether or not the merchants take possession.

  • An agent represents the manufacturer, whereas a merchant (e.g., a distributor) represents the manufacturer’s product.
  • The merchant has no power to contract on behalf of the manufacturer, but the agent can bind the manufacturer in authorized matters to contracts made on the manufacturer’s behalf.
  • Agents can be further classified according to the principal whom they represent. Some agent intermediaries represent the buyer; others represent the interest of the manufacturer.
  • Those who work for the manufacturer include export brokers, manufacturer’s export agents or sales representative, export management companies, and cooperative exporters.
  • Agents who look after the interests of the buyer include purchasing (buying) agents/offices and country-controlled buying agents

Domestic Agents

  1. Export broker
  • The function of an export broker is to bring a buyer and a seller together for a fee. The broker may be assigned some or all foreign markets in seeking a potential buyer. They negotiate the best terms for the seller (i.e., manufacturer) but cannot conclude the transaction without the principal’s approval of the arrangement.
  • As representative of the manufacturer, the export broker may operate under its own name or that of the manufacturer.
  • For any action performed, the broker receives a fee or commission.
  • An export broker does not take possession or title to the goods and so is less frequently involved in the export (shipping) of goods than in the import (receiving) of goods.
  • The export broker is useful due to its extensive knowledge of the market supply, demand, and foreign customers.
  • The broker is also a valuable associate for highly specialized goods and seasonal products that do not require constant distribution.

Manufacturer’s export agent or sales Representative

  • This is an independent businessperson who usually retains his or her own identity by not using the manufacturer’s name.
  • An export agent pays his or her own expenses and may represent manufacturers of related and noncompeting products.
  • Like a broker, the manufacturer’s export agent works for commission. Unlike the broker, the relationship with the manufacturer is continuous and more permanent.
  • The contract is for a definite period of time, and the contract is renewable by mutual agreement. The manufacturer, however, retains some control because the contract defines the territory, terms of sale, method of compensation, and so on.
  • The manufacturer’s export agent may present some problems to the manufacturer because an agent does not offer all services. Such services as advertising, credit assistance, repair, and installation may be excluded.
  • The manufacturer relinquishes control over marketing activities, and this can hurt a manufacturer whose volume is too small to receive the agent’s strong support.
  1. Export management company (EMC) / combination export manager (CEM)
  • An export management company manages, under contract, the entire export program of a manufacturer.
  • Those export brokers and manufacturer’s export agents who represent a combination of clients may also be called EMCs.
  • When compared with export brokers and manufacturer’s export agents, the EMC has greater freedom and considerable authority.
  • The EMC provides extensive services, ranging from promotion to shipping arrangement and documentation.
  • EMC is responsible for all of the manufacturer’s international activities.
  • Foreign buyers usually prefer to deal directly with the manufacturer rather than through a third
  • Party because EMC usually solicits business in the name of the manufacturer and may even use the manufacturer’s letterhead.
  • Identifying itself as the manufacturer’s export department or international division, the EMC signs correspondence and documents in the name of the manufacturer.

An EMC typically requires at least a one-year contract to handle a manufacturer’s products, more often; it is a three-year contract.

EMCs are compensated in several ways frequently being through the form of a commission, salary, or retainer plus commission.

Reasons why a firm uses an EMC

  1. It has international marketing expertise and distribution contacts overseas.
  2. Due to the many services provided, an EMC’s costs are relatively low presented by efficiencies of scale; that is, costs can be spread over the products of several clients.
  3. The EMC provides shipping efficiency because it can consolidate several manufacturers’ products in one shipment.
  4. The orders are consolidated at the port and shipped on one ocean bill of lading to the same foreign buyer.
  5. By consolidating shipments of products from several principals, a company obtains better freight rates.
  6. Since many EMCs provide financial services, manufacturers are guaranteed payments and collections  from overseas buyers
  7. EMC allows the manufacturer to concentrate on internal efforts and its domestic market due to the many services they handle which could be held by manufacturer.

Disadvantage using EMCs

  • An EMC prefers new clients whose products complement the EMC’s existing product lines.
  • The EMC is very likely not interested in unknown products or new technologies that require too much time and effort in opening new markets overseas.

Cooperative Exporter

  • A cooperative exporter is a manufacturer with its own export organization that is retained by other manufacturers to sell in some or all foreign markets.
  • The usual arrangement is to operate as an export distributor for other suppliers, sometimes acting as a commission representative or broker.
  • Because the cooperative exporter arranges shipping, it takes possession of goods but not title.
  • The cooperative exporter’s motive in representing other manufacturers primarily involves its own financial interest.
  • Having fixed costs for the marketing of its own products, the cooperative exporter desires to share its expenses and expertise with others who want to sell in the same markets abroad.

Purchasing/buying agent

  • A purchasing/buying agent represents a foreign buyer. By residing and conducting business in the exporter’s country, the purchasing agent is in a favorable position to seek a product that matches the foreign principal’s preferences and requirements.
  • Operating on the overseas customer’s behalf, the purchasing agent acts in the interest of the buyer by seeking the best possible price. The purchasing agent receives a fee or commission for the services rendered.
  • The purchasing agent is also known by such names as commission agent, buyer for export, export commission house, and export buying agent.
  • Since the agent operates on an order basis, the relationship with either seller or buyer is not continuous.

Country-controlled buying agent

  • This is a variation of the purchasing agent is the country –controlled buying agent. This kind of agent performs exactly the same function as the purchasing/buying agent, the only distinction being that a country-controlled buying agent is actually a foreign government’s agency or quasi-governmental firm.
  • The country-controlled buying agent is empowered to locate and purchase goods for its country. This agent may have a permanent office location in countries that are major suppliers, or the country’s representative may make formal visits to supplier countries when the purchasing need arises.

Resident buyer

  • Another variation of the purchasing agent is the resident buyer. The resident buyer is an independent agent that is usually located near highly centralized production industries.
  • Although functioning much like a regular purchasing agent, the resident buyer is different because it is retained by the principal on a continuous basis to maintain a search for new products that may be suitable.
  • The long-term relationship makes it possible for the resident buyer to be compensated with a retainer and a commission for business transacted.
  • The resident buyer provides many useful services for a manufacturer. It can offer a favorable opportunity for a supplier to maintain a steady and continuous business relationship as long as the supplier remains competitive in terms of price, service, style, and quality.
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