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Route to Market: Direct to Customer vs. Distributor

By: Greg Seminara,Export Solutions

Export Managers frequently evaluate tempting offers from global supermarket chains 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 country.

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. An added benefit is the ability for the manufacturer to enjoy direct dialogue with the customer, without the filtering of an intermediary. This approach works well for large manufacturers which maintain local subsidiaries or production facilities in a country.

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 and 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 supermarket 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 rely exclusively on the retailer to handle their brand 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. In many countries, brands without store level merchandising coverage are virtually invisible on the shelf.

Key Issue # 3: Inventory Levels at Direct Retailers
Manufacturers typically demand container or 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.

Key Issue # 4: No Marketing means Minimal Sales
Selling direct to global retailers usually involves the brand owner providing their brand at a low "dead net" price and delivering direct to the retailers or their international consolidation center. Hopefully, your brand will make it to the store shelf ( see key issue 2).However, there is usually no in country marketing support or local trade promotions. The consumer may see your brand for the first time, but there is no incentive at the "first moment of truth" to gain trial. I remember while working in Buenos Aires, Argentina my thrill at seeing Hidden Valley Ranch salad dressing appear at my local Walmart. Unfortunately, the product gathered dust and was ultimately discontinued because few people in Argentina had ever heard about Hidden Valley Ranch.

Big Brands-Big Markets: Direct to Customer 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 serve as your outsourced "local office". Their model provides an integrated basket of sales, in-store merchandising, marketing logistics, and financial services. 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”.


Global Retailer Strategy
Walmart, Carrefour, Costco, Cencosud, and others sponsor established global sourcing or "direct buy" programs. For some countries, these programs represent an efficient route to market solution. In other countries, exhibit caution, as direct sales to one customer can disrupt an entire market or preclude you from selling to every other customer in a large country. International retailers will only get bigger and increase pressure for global agreements. Companies face tough choices to make good long term decisions for their brands while maintaining the partnership and goodwill of global customers.

Future
Few brands are strong enough to sell in a foreign country without any support or in store activity. Normally you need a local "brand advocate" in form of your own employee or local distributor to drive your sales. Export Solutions works with our clients on "balanced" strategies to optimize sales to global retailers while creating sustainable programs to build your brand for the long term.