While working for a Nordic manufacturer of men’s clothing that aimed to expand in the Netherlands, I was tasked with scouting out the market and sussing out the end-user.
The type of clothing was a pair of jeans. After interviewing various people, I discovered that there was a small group of trend-setting immigrants who wore this type of jeans. So, I spoke to them. They liked the product and suggested a couple of local stores that might be interested in selling them.
I went to the stores. They told me about a particular agent they preferred to buy from and the rest was history — that distributor became the solution for this Nordic manufacturer.
Finding the right distributor is the key to your success when expanding in a new foreign market.
The question is, how do you find the right distributor? And what kind of distribution chain should you use?
Before we dive right in, ask yourself the following questions:
Keep these questions in mind while you read this article.
You have options. You can either build up your own organisation in the foreign market, partner with local companies, or allow someone else to take care of your foreign markets.
Without further ado, let’s dive in.
This is common sense. Firstly, you must find the end user that is going to buy your product. This requires prior research into the market conditions and the buyers of your product.
Let’s say you’re a producer of mining machinery and you want to export your product to Asia. What do you do? Firstly, contact the local mining companies and present your product to them. Ask them how and from whom they buy their machinery and the price they tend to pay. This indicates your potential future partners, your competitors, and the price level on the market.
Years ago, I was the North American representative of a Swedish manufacturer that made blow-off nozzles with low noise levels and low air consumption. I was tasked with looking for distribution in the USA. I found that a key client base for this product was the steel mills and interviewed over 100 maintenance managers. After convincing them of the benefits of these blow-off nozzles, they told me the distributors they bought from. These distributors became the base for dealers in each state.
In short, find local specialised distributors who already sell to your end-user. End. Of. This is particularly true of the automotive and aircraft industries, whose companies only deal with approved clients.
Having as many distributor levels as possible isn’t the best solution. Short distribution chains enable ease of communication and faster market feedback. Many distribution levels overcomplicate things.
There’s more. Keeping your distribution levels low also influences your profitability and export price, which you can learn more about here.
Let’s dig deeper. The market decides what the customer wants to pay, but middlemen need to make money on the journey to the end user. You also have to factor in shipping costs, customs duties, and taxes.
Here’s an example.
In the above case, freight is 9% and customs duty is 6%. The importer wants a 40% profit and the sub-distributor a 35% profit. The other levels want 25% each. Your factor, therefore, is 5.27 times your export price — you get less than 20% of what the customer wants to pay. In other words, if the customer is willing to pay $ 527, you as the exporter will get only $ 100.
In short, maximise your export price by limiting your distribution chain.
What can we learn from that? Keep your distribution chains as low as possible to maximise profit.
By selling directly to dealers as seen above, you only lose 20% of your distribution if one doesn’t work out. Moreover, direct contact with each dealer ensures smoother communication channels.
I set up distribution for a Swedish company in the USA and Canada. We used local companies that sold directly to end-users. The Swedish company sold, shipped and invoiced directly to each separate distributor, giving them the exclusive right to their respective territories. As the Swedish company’s representative who found and activated these local distributors, I received a commission on invoiced sales.
This could be a workable solution for smaller companies that lack the necessary resources to find and activate the market. You want to find a local contact in the same time zone who understands the ins and outs of both markets. Ultimately, an exporter gets 50% of what the end-user pays.
You can start a joint venture — a company with a local partner boasting an existing client base and distribution channel. However, this would give you limited control.
You could arrange a licensing agreement, which would allow a local company to manufacture and sell your products and services. In turn, you would be paid a licensing fee.
The most common solution for SMEs is to have an importer or distributor on the foreign market — someone who buys the products or services from the exporter and sells them directly to the end user.
Expanding into new markets is critical to your business’s success. It increases your sales. Lowers your marginal costs. Increases your profit.
Selecting the right foreign partners is the key. Take the time to find the right partners for each specific market and adapt your sales promotion to each market. Moreover, treat your partners like employees — listen to them, support them and activate them.
Finding the right distributors requires you to decide who the end users are. Speak with them. They will guide you to the right distribution solution and future partner.
If you want to read more about running a successful exporting business, you can download Leif’s book here.
Check out Leif’s website on running a global exporting business here.
Good luck with your journey!
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