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Choosing an Export Distribution Channel

Choosing an Export Distribution Channel Once a business has identified the market/markets to export to, the next step is to establish who will sell the product/service to potential customers and how it will be sold and distributed. How a business organises their sales presence in export markets is one of the key decisions to be made by an exporter. The choice of selling method will be influenced by the nature of the product/service. It is important to assess the usual local distribution practice with regard to similar products. There are 2 main ways of exporting to overseas markets, these are:

1. Direct Exporting Selling Direct from the exporter’s location 2. Indirect Exporting Opening Operations in Overseas Markets Using a Commission Agent Using an Overseas Distributor 1. Direct Exporting Selling Direct Some larger companies prefer to purchase directly from the manufacturer without the services of a middleman. This typically involves making frequent sales visits to the particular country, as well as telephone sales or accepting of overseas orders on an e-commerce website. This can be a straightforward, cost effective way of entering overseas markets; however, it can have implications. It may leave the exporter remote from customers, and unable to share the exporting workload with partners or intermediaries. Advantages of Direct Selling Existing resources can be used to start exporting into the overseas market Enables a business to maintain full and direct control over the process It is a strategy that can be easily reversed Profit does not have to be shared with partners or intermediaries Disadvantages of Direct Selling A good knowledge of the overseas market is essential in order to locate buyers and establish business relationships The exporter will be responsible for logistics, unless the business commissions a specialist freight forwarder to handle this The exporter is often remote from customers The exporter is unable to share exporting workload with partners 2. Indirect Exporting Opening Operations in Overseas Markets This is generally the most costly and time consuming method to enter an overseas market, however, it can be the most rewarding. A business can set up an overseas operation by: Opening a local office, using existing employees as staff Setting up a new business in the overseas market – a locally registered subsidiary company. This subject to local regulations and legislation Partnering with a local business in the form of a joint venture, to set up the new business with shared ownership Very few companies will be in a position to immediately set up their own office with resident personnel; however, this is often the long term objective in the key overseas markets. Furthermore, there are vital legal and financial implications involved in setting up in an overseas market. A company should seek legal advice from a solicitor and an accountant business adviser when considering this option. Advantages of Opening Operations in Overseas Markets Enables exporter to plan long term sales Customers take a product more seriously when it is locally based, especially when after sales service is required A joint venture enables the company to share the risk Disadvantages of Opening Operations in Overseas Markets An in depth knowledge of local employment and tax law is a necessity If things go wrong, this could lead to very high costs Multiple financial implications involved 3. Indirect Exporting – Using a Commission Agent An overseas agent represents the exporter in the overseas market, sells the exporter’s product or service to the overseas customer and routes orders back to the domestic market. Once the goods are paid for by the customer, the overseas agent receives commission from the exporter. The commission varies from 2% to 15%, depending on the nature of the goods being handled. Commission should be included in the price quoted to the customer. It is essential to recruit a commission agent that has extensive experience in the particular business context, as well as relationships with potential buyers. Advantages of Using a Commission Agent Recruitment, training and payroll costs of using your own employees to enter the overseas market are avoided The commission agent is well placed to identify and exploit opportunities More control over price and brand image are maintained when using an agent – compared with using a distributor Disadvantages of Using a Commission Agent o The exporter is still responsible for trade logistics such as shipping o There can be a problem with after sales service when selling through an intermediary o After sales service can be difficult when selling through an intermediary 4. Indirect Exporting

Using an Overseas Distributor A distributor buys the goods from the exporter, and then takes responsibility for selling them on to a third party. The role of a distributor is to find customers for the exporter’s goods. Distributors bridge the gap between the exporter and the end-user customers. It is imperative to seek legal advice before concluding a distributorship agreement. Advantages of Using a Distributor Using a distributor enables a business to access international markets, and avoid logistics issues and risks associated with trade It is a lot more straight forward for an established distributor to introduce a new brand into the market than it would be for the exporter Distributors normally invest in the marketing of the goods in order to boost their sales Many distributors buy in bulk, to ensure they carry a stock of the goods they are selling; they also look after warehousing and inventory control Disadvantages of Using a Distributor Distributors often demand significant discounts and liberal credit terms from exporters, in return for taking on trade related risks and burden There is a risk of losing control of the way goods are marketed and priced Distributors frequently demand long periods of exclusivity, so therefore it is essential that the distributor has identified a potential market and has extensive experience in selling the particular goods Whilst a commission structure can be employed to motivate a sales agent, this is not the case with a distributor Useful tips when choosing an agent or distributor The agent or distributor should be selling to the same companies which interest you Agents and distributors must have relationships with potential customers Do not give the agent exclusivity for too large an area – ensure that the area allocated can be covered effectively Consult your lawyer in relation to the type of agreement you intend to enter into with a potential agent, and do not sign any agreement without approval from your lawyer Verify your distributors financial standing to ensure he/she is financially sound Agreements made with agents and distributors should be formalised in a clear written contract! Key points that should be included in a contract with overseas agents and distributors: Checklist Names and addresses of the businesses involved and the nature of the relationship A clear description of goods • The geographic location in which the company goods will be sold The price received from distributors for goods and the price an agent will charge customers The commission an agent is to receive • Due date of payment, currency and exchange rate Termination date for the contract agreement Confidentiality clause Intellectual property – identify the rights the agent or distributor has regarding the use of company titles, brands, logos, etc. Exclusivity – what rights the agent or distributor has to the goods • Jurisdiction – Identify which country’s laws apply to contract

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