Channels of distribution 

When the Companies have to market abroad they use two principal distribution channels:

• Direct selling and 

• Indirect selling.

Direct selling is employed when a manufacturer develops an overseas channel. This channel requires that the manufacturer deals directly with a foreign party without going through an intermediary in a home country. The greatest advantage of direct selling channel is the active market exploitation, since the manufacturer is more directly committed to its foreign markets. 

Direct selling has a number of problems also. It is difficult channel to manage if the manufacturer is unfamiliar with foreign market. Moreover, the channel is time consuming and expensive. Without a large volume of business the manufacturer may find it too costly to maintain the channel.

Indirect selling also known as the local or domestic channel is employed when a manufacturer in the United States for example, markets its product through another US firm that acts as the manufacturer’s sales intermediary (middleman). As such, the sales intermediary is just another local or domestic channel for the manufacturer because there are no dealings abroad with a foreign firm. By exporting through an independent local middleman, the manufacturer has no need to set up an international department.

There are several advantages to be gained by employing an indirect domestic channel.

• The channel is simple and inexpensive

• The manufacturer incurs no start up cost for the channel and is relieved of the responsibility of physically moving goods overseas.

• Because the intermediary very likely represents separate clients who can help share distribution costs, the costs on moving the goods are further reduced.

Direct Channel

There are several types of intermediaries associated with the direct and indirect channels as shown in Figure 10.1. This figure compares two channels and lists the various types of domestic and foreign intermediaries.

1. Foreign Distributor

A foreign distributor is a foreign firm that has exclusive rights to carry out distribution for a manufacturer in a foreign country or specific area. Order must be channeled through the distributor even when the distributor chooses to appoint a subagent or sub-distributor. The distributor purchases merchandise from the manufacturer at a discount and then resells or distributes the merchandise to the retailers and sometimes final consumers. In this regard, the distributor’s function in many countries may be a combination of wholesaler and retailer. But in most cases the distributor is usually considered as an importer or foreign wholesaler. The length of association between the manufacturer and its foreign distributor is established by a contract that is renewable provided the continued arrangement is satisfactory to both.

There are a number of benefits for using a foreign distributor. Unlike agents, the distributor is a merchant who buys and maintains merchandise in its own name. This arrangement simplifies the credit and payment activities for the manufacturer. To carry out the distributing function the foreign distributor is often required to warehouse adequate products, parts, and accessories. Apple Computer now does its own distribution in Japan because the services of Toray Industry, its foreign distributor, proved inadequate.

2. Foreign Retailer

If foreign retailers are used, the product in question must be a consumer product rather than an industrial product. There are many channels by which a manufacturer may contact foreign retailers and trust them in carrying product ranging from a personal visit by manufacturer’s visit to mailings of catalogues, brochures and other literature to prospective retailers.

3. State Controlled Trading Company

For some products particularly utility and telecommunication equipment a manufacturer must contact and sell to the state controlled companies.

India has State Trading Corporation (STC) which deals with import and export of cars and other items which are in SIL. Most opportunities for manufacturers are limited to raw materials, agricultural machinery, and manufacturing equipment and technical instruments rather than consumer or household goods. Reason for all this may be the limitations in shortage of foreign exchange and an emphasis on self-sufficiency as in communist and socialist countries.

4. End User

Sometime a manufacturer is able to sell directly to foreign end users with no intermediaries involved in the process. This direct channel is a logical and natural choice for costly industrial products. For most consumer products the approach is practical for some products and in some countries. A significant problem with consumer purchasers can result from duty and clearance problems. A consumer may place an order without understanding his or her country’s import regulations. When the merchandise arrives the consumer may not be able to claim it. As a result the product may be seized or returned on a freight collect basis.

Indirect Channel 

A manufacturer may find it difficult, rather impractical, to sell directly to various foreign parties (foreign distributors, foreign retailers, state controlled trading companies and end users) for a majority of products. Other intermediaries have come between these foreign buyers and manufacturers.

1. Agents who look after the interests of manufacturers

Export Broker is to bring a buyer and seller together, for which he is paid the fee. The Broker may be assigned some or all foreign market seeking potential buyers. It negotiates the best terms for the seller (manufacturer) but cannot conclude the transaction without the approval of the principal. As a representative of the manufacturer the export broker may operate under its own name or that of the manufacturer. For any action performed the broker receives a fee/ commission. An export broker does not take the title of the goods. He is very useful because he has the extensive knowledge of the market, its supply, demand and foreign customers. He can, therefore, negotiate the most favourable terms for the manufacturer.

2. Manufacturer’s export agent or sales representative

Manufacturer’s export agent is not a manufacturer’s employee. In fact, he is an independent businessperson who usually retains his/her identity by not using the manufacturer’s name. Having more freedom than the manufacturer’s own sales person, a sales representative can select when, where and how to work within the assigned territory. Working methods include presenting product literature and samples to potential buyers. An export agent pays his/her own expenses and may represent manufacturers of related and non-competing products. He can operate on either an exclusive or non-exclusive basis.

Like a broker the manufacturers export agent works for commission. Unlike the broker, the relationship with the manufacturer is continuous and more permanent. The contract is for a definite period of time and the contract is renewable by mutual agreement. The manufacturer, however, retains some control because the contract defines the territory, terms of sale, method of combination and so on.

3. Export Management Company

An Export Management Company (EMC) manages under contract the entire export programme of a manufacturer. An EMC is also known as a Combination Export Manager (CEM) because it may function as Export Department or several allied but non-competing manufacturers. In this regard, those export brokers and manufacturer’s export agents who represent a combination of clients can also be called EMC. When compared with export brokers and manufacturer’s export agents the EMC have greater freedom and considerable authority. EMC provide extensive service ranging from promotion to shipping arrangement and documentation.

4. Cooperative exporter

A cooperative exporter is a manufacturer with its own export organisation that is retained by other manufacturers to sell in some or all-foreign markets. In fact, this intermediary is also a manufacturer; however, it functions like any other export agent. The usual arrangement is to operate as an export distributor for other suppliers sometimes acting as a commission representative or broker. Because, the cooperative exporter arranges shipping it takes possession of goods but not the title.

5. Webb-Pomerene association

A Webb-Pomerene Association is formed when two or more firms usually in the same industry join together to market their products overseas. The association constitutes an organization jointly owned by competing U.S. manufacturers exclusively for the purpose of export. Basically a Webb-Pomerene Association is an export cartel. Although cartels are illegal in some of the countries like US, however, this kind of cartel is allowed to operate as long as it has no anti competitive impact on domestic marketing in the US market.

6. Purchasing/buying agent

An export agent represents a seller or manufacturer. The purchasing/buying agent represents the foreign buyer. By residing and conducting business in the exporter’s country the purchasing agent is in a favourable position to seek a product that matches the foreign principal’s preferences and requirements. Operating on the overseas customers’ behalf the purchasing agent acts in the interest of the buyer by seeking the best possible price. Therefore, the purchasing agent’s client pays a fee or commission for the services rendered. The purchasing agent is also known as Commission Agent, Buyer for Export, Export Commission House and Export Buying Agent. This agent may also become an export confirming house when confirming payment and paying the seller after receiving invoice and the title document for the client.

7. Country controlled buying agent

Country Controlled Buying Agent is only a variation on the purchasing agent because this kind of agent performs exactly the same function as the purchasing/buying agent, the only distinction being that a country controlled buying agent is actually a foreign government’s agency or quasi government firm. The country controlled buying agent is empowered to locate and purchase goods for its country. This agent may have a representative, who makes formal visit to the supplier country when the purchasing need arises.

8. Resident buyer 

Resident Buyer is another variation on the purchasing agent. The resident agent as the name implies is an independent agent that is usually located near the highly centralised production industry. Although functioning like a regular purchase agent, the resident buyer is different because the principle on a continuous basis to maintain a search for new products that may be suitable retains it. The long-term relationship makes it possible for the resident buyer to be compensated with a retainer and commission for business transacted.

9. Export merchant

One kind of domestic merchant is the export merchant. An export merchant seeks out need in foreign markets and makes purchases from manufacturers in its own country to fill those needs. Usually the merchant handles staple goods, undifferentiated products or those in which brands are unimportant. After having the merchandised packed and marked to specifications, the export merchant resells the goods in his name through his contacts in the foreign markets. The merchant completes all the formalities and arrangements, assumes all risks associated with the ownership.

10. Export drop shipper

An export drop shipper also known as a desk jobber or cable merchant is a special kind of export merchant. As all these imply the mode of operation requires the drop shipper to request the manufacturer to “drop ship” a product directly to the overseas customers. It is neither practical nor desirable for the shipper to physically handle or possess the product. Based on this operational method the shipper’s ownership of the goods may only last for a few hours.

The export drop shipper places an order with a manufacturer directing the manufacturer to deliver the product directly to the foreign buyer on the receipt of order from overseas. The manufacturer collects payment from the drop shipper who in turn is paid by the foreign buyer.

11. Export distributor

This distributor is authorised and granted an exclusive marketing right to represent the manufacturer and to sell in some or all-foreign markets. It pays for goods in his domestic transaction with the manufacturer and handles all financial risks in the foreign trade. 

An export distributor differs from foreign distributor simply in location. The foreign distributor is located in a particular foreign country and is authorised to distribute and sell the product there.

12. Trading companies

The buyers and sellers in the foreign markets have no knowledge of each other or no knowledge of how to contact each other. Trading companies have come into existence to fill this void. In international marketing activities, for many countries this type of intermediaries may be the most dominant form in volume of business and in influence. Many trading companies are large and have branches wherever they do business.