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Comparative analysis of distribution channels for SME exporters

| September 7, 2017 | Articles

A typical problem we run into when we work with SMEs on developing an export plan for their business is that they tend to simplify the analysis of how set up the chain of distribution in the destination market.

This is particularly true for the first link in the destination market, the one that will fundamentally be used for the product sales policy and branding in the new market. The following table illustrates the different figures that can be used as a distribution channel in the destination market, outlining their advantages and disadvantages:

 

Channel of Distribution Advantages Disadvantages
 

Direct export to importer (distributor, purchasing agent, broker)

 

 

Ease for exporter (ships product and collects payment). Reduced financial immobilization because the shipping and payment collection processes are direct. In general, there is less work for the exporter to develop the market commercially speaking.

 

 

Loss of control of the commercialization policy in the destination market in the importers’ hands. Sometimes the commercial effort and product positioning is not exactly what the exporter is seeking.

 

One’s own distribution in the target market to sell to retailers.

 

Stricter control over the commercialization policy and elimination of an intermediary in the distribution chain (importer), which has an impact on the final price of the products. Greater flexibility to manage the localization of profitability of the operation (exporting country or importing country or a combination of the two)

 

 

Financial: high immobilization of capital given that the exporter must handle the shipping, nationalization and financing for the retailer. In addition, there is a greater investment to assemble a distribution office with administrative and sales personnel.

 

 

Direct export to retailers (taking advantage of simplified regimes using courier companies for door-to-door deliveries)

 

 

Simplicity of operations for the exporter and buyer. Reduction of intermediation channels (importer, wholesaler, etc.) with the consequent impact on the final price of the product. It makes it possible to tailor sales volumes to the SME’s scale of production.

 

Couriers add considerable expense to a product’s final price. Furthermore, it can only be used for small-scale businesses, given the limits imposed on the use simplified regimes in most countries.

 

 

Use of a sales representative or agent

 

Greater control over the commercialization policy. Compared to other figures that allow the exporter to control the commercialization process of its product(s), this one requires a minimal financial investment to have a permanent presence in the export market.

 

 

Difficulty of finding suitable representatives. Adds expense to the price of the product for the end consumer given that the sales representative or agent receives a commission for each sale generated (or reduces the profit margin of sales).

 

 

Direct sales to end consumers

 

Total disintermediation: absolute control of the commercialization policy, through the direct relationship with the product’s end consumer.

 

 

Greater investment and financial immobilization to deploy sales actions aimed at end consumers. Model limited to highly differentiated and highly customizable products.

 

 

Manufacturing licenses

 

Possibility to market the product abroad, avoiding the high impact of transportation costs to remote distances or for products of low value and high weight or volume.

For licenses that do not involve provision of raw materials or parts, logistics, transport and customs are not issues.

 

 

The disadvantages arising from the legal protection of patents or inventions.

 

Franchises

 

To market a business in its entirety, including the transfer of the know-how that has made it a success in the local market, thereby reducing the chances of the business’s failure in the target market. Strengthening of the brand and business concept.

 

 

They undoubtedly lie in the difficulty of local business being successful and innovative and thus, its susceptibility for franchising.

For a small or medium-sized exporter, a thorough and comprehensive analysis of the various alternatives for creating a distribution channel in the target market is critical/ Too often than not, they only evaluate the figure of the importer/distributor (first figure described) without sufficient consideration and analysis of other options.

MasterCard Biz is helping SMEs to think and create alternative channels for expanding their business internationally, taking advantage of e-commerce, and the specialization of logistics for this type of operation. MasterCard Business cardholders can request free consulting services about this and other critical issues in their cross-border expansion.

 

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