International Brand Export Managers frequently evaluate tempting offers from retailers desiring to purchase “direct”, eliminating the local distributor/importer middleman. While this can be an attractive strategy in a few scenarios, it often sets a dangerous pricing precedent which becomes difficult to “unwind” when you seek to optimize sales to the entire market.
Rationale: Direct to Retailer
Direct sales from manufacturers straight to retailers eliminates your distributor margin. This can translate to a lower price to the consumer, typically in the range of 20-30 %. This strategy reduces “touch points” in the supply chain, as the inventory does not need to be stored in a distributor’s warehouse prior to being reshipped to the customer. Global retailers are often more credit worthy than local distributors. An added benefit is the ability for the manufacturer to enjoy direct dialogue with the customer, without the filtering of an intermediary. This strategy works well for large manufacturers which maintain local production facilities in the market.
Key Issue # 1: Pricing to other Market Customers?
Most markets feature several important chain retailers plus a large assortment of small shops. Ultimately, an exporter will seek to sell all major retailers in a market and then “down the trade” to convenience oriented stores. This requires a manufacturer to invest in local infrastructure/systems or hire a distributor. These incremental costs usually must be passed on in form of a higher price to the market. This presents a challenge: New customers balk at a price dramatically higher than a competing retailer and “Direct” customers are typically not interested in a 20-30 % price increase to cover the cost of a distributor.
Key Issue # 2: In-Store Merchandising
Brand owners maintain sales merchandising teams to service a retailer at store level. These sales oriented teams guarantee that Chain headquarter plans are executed at retail point of purchase. Exporters that sell direct to retailers may rely on the retailer to execute at store level for them. Unfortunately, this strategy is rarely successful. The retailers store level personnel are focused on their own priorities, not those of your brand. Manufacturers are forced to invest in retail coverage or face a significant disadvantage
Key Issue # 3: Inventory Levels at Direct Retailers
Manufacturers typically demand container/truck load orders for direct purchase. This may require a retailer to purchase several months of inventory versus their target of 1-2 weeks safety stock of local brands. This irregular order cycle frequently causes a retailer to wait until stock is close to depleted prior to reacting to placement of a new order. This causes periodic out of stocks and the need to reestablish the brand at store level when inventory is replenished.
Big Brands-Big Markets: Direct to Retailer Works
This route to market obviously works when a manufacturer maintains a production facility and local business team in a country. This strategy functions for exporters in some markets when one customer commands 50 % or more market share and independents/small shops account for a small portion of the business. It may be possible to deploy a hybrid model where direct sales are supplemented by an outsourced squad of merchandisers.
Distributor: Preferred Option for International Brands
Distributors/Importers (USA:Brokers) provide an integrated basket of sales, logistics, and financial services for the manufacturers they represent. They serve as a cost effective business model for exporters desiring to expand in international markets. Distributors are a variable cost option, with compensation proportional to your brand sales, eliminating the need to invest in fixed cost infrastructure. Distributors represent an excellent alternative for mid/small exporters. Distributors serve as a worthwhile option for big brands in small countries, fragmented markets, or markets with high “cost to serve”.