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EU - Distribution Channels

6.1 Distribution Channels

Overall distribution is an important factor when exporting products and the availability and structure of the distribution channels will have a major influence on costs. When considering distribution channels an exporter should evaluate distribution and channel. Exporters seeking to penetrate international markets must understand  the  distribution needs, options and assess their impact on costs.

When evaluating transport, considerations should include available carriers,  shippers, freight forwarders and customer brokers in addition to the roads,  rail  networks, air transport, bridges, ferries and ports. Depending on the market the geography, topography and climate may need to also be factored. When considering distribution channels the transport aspect is often overlooked but can strongly influence the movement of products.

When it is determined that a product can be physically shipped to a market, the distribution within that market, through various channels should be evaluated. As previously outlined in the Market  Entry Strategy section, the traditional means of product market entry can be classified into three broad categories, which are direct exports, indirect exports and foreign direct investment. Within  each category various potential avenues for distribution channels could be considered.

To reach consumers, a number of avenues can be explored. The most straight forward example of a distribution channel is a specialty food manufacturer that takes an order and ships it directly to the final consumer. For smaller firms, the process for such a distribution channel is often not cost effective due to the required resources and many activities to complete a small export order. Depending on the size and experience of the exporters various channels should be considered.    An exporter could consider selling directly to retailer or through wholesalers, distributors, sales agents and/or food brokers. The table below outlines the role, advantages and disadvantages for each distribution channel. An exporter will need to determine how best commit their available resources in order to develop an international business. The selection of a distribution channel is of the utmost importance in order to develop a market entry strategy to become competitive.

Distribution

Channels

Advantage

Disadvantage

Retailers

By selling directly to the retailer this will

eliminate the presence of a middle man and any associated costs. Control of positioning, pricing and branding remains with the manufacturer.

Manufacturer will be responsible for all

market development costs including marketing, promotions, sales and distribution, which can be difficult for smaller manufacturers.

Wholesalers

Purchase products in bulk and distribute

to retailers or other customers in the local market. They are useful because they have established customers and take responsibility for selling, distribution and marketing from the exporter.

Wholesalers carry competing lines of

products. After taking possession of the products, the wholesaler can exercise control over how the products are positioned, marketed, priced, sold and delivered, unless contractual arrangements specify otherwise. The wholesaler can also control the distribution channel, making it difficult for the producer to deal directly with end- users and find out what they really want. Unless the wholesaler is extremely trustworthy, the transaction could end up

serving the wholesaler's business interests

more than it does the exporter.

Distributors

Distributors are wholesalers that typically carry non-competing lines of goods. The distributor can function as a partner, advising the exporter on how to modify the product for maximum success. Depending on the contractual arrangements, the exporter may be relieved of many of the risks and complexities associated with

marketing and delivery. Distributors can sell to retailers or wholesales who then sell to retailers.

After taking possession of the products, the distributor can exercise control over how they are positioned, marketed, priced, sold and delivered, unless contractual arrangements specify

otherwise. The distributor can also control the distribution channel, making it

difficult for the manufacturer to deal directly with end-users and find out what they really want. Unless the distributor is extremely trustworthy, the transaction could end up serving the distributor's business interests more than it does the exporter.

The retail distribution of specialty food is composed of supermarkets, warehouse clubs and supercenters, convenience stores, natural food stores and specialty food stores.

An exporter should be able to "articulate "how he or she will be servicing the account. Retailers want to know "who do I call if there is a problem" and how and who will look after it? This point is particularly important for foreign suppliers who are physically located at greater distances away from the customer. Asking retailers who they would recommend using as a broker has merit even if the plan is to represent yourself in this capacity in the initial growth stages of exporting.
 
What comes first?  Securing distribution or securing the sale with the retailer?

These two functions work in tandem, however nothing happens without the initial sale to the retailer. It is important to think about the nature of the sale: some retailers will order direct  from the manufacturer and look after their own warehousing and distribution. Some retailers will simply pull the product through an established distributor. Retailers can encourage distributors to carry new products if they have decided they want them. The best case scenario is to have a clear sense of the good distributors that are operating in the market and servicing that particular retailer. Being knowledgeable about the distribution environment prior to having discussions with a retailer is beneficial and will provide for advanced familiarity in subsequent discussions.

What knowledge might be important to know in a meeting with a retailer?

You have to think like a retailer and see it from their point of view. They have overall responsibility for the performance of the entire category of goods. For a vendor to be competitive and knowledgeable, they should find out what competitive allowances are being offered to customers by competitors. Preparation for a retail meeting is therefore critical. Information to be thinking about and potentially gaining prior to a meeting might include having knowledge of pricing and promotion trends, brand, category and SKU profitability, allowances that are offered but applied to the product price, promotion timing of  competitors and the category, competitive strategies  for  high/low  pricing, “planogramming” insights, cost analysis and forecasting for trade pricing.