8. Distribution
In previous studies distribution has cropped up as a theme on a regular basis and, in our stepping stones model of export development, controlling offshore distribution is one of the key early steps.
Distribution is probably the most critical step in the export growth process. It can be one of the biggest overhead costs for exporters and it is an area where most companies admit to either making mistakes, or having to make changes. Distribution lies at the heart of the connection between what the market wants and what is supplied and is an important source of information for developing company strategy. Size and location mean that establishing international distribution systems comes earlier and is a bigger issue for New Zealand companies than is the case for firms in most other countries.
In this chapter we examine in detail the various distribution strategies that companies pursue and the rationale that might lie behind each of them; the role distribution plays in determining firm growth and size; and some implications for export development.
8.1 The Basic Recipes
Although there appears to be no preferred distribution strategy amongst the 30 companies in this study, there is one aspect that is common to the majority of strategies - that is ownership or control/influence so that firms can manage how their product is handled and presented to customers. Almost every company has modified or changed significantly their distribution strategy since beginning exporting.
We have identified five general approaches to distribution. There may be more and certainly there is a range of minor variants of the five strategies discussed below.
8.1.1 Deal Directly with Customers
Where a company sells a few expensive products - one-off capital equipment items - it is practical and logical to deal directly with customers (for example airline manufacturers). The direct approach is also appropriate where the firm sells to a few large customers. Selling components to the motor industry is a good example -companies that produce original equipment for a particular vehicle will tend to deal directly with the manufacturer or major component supplier. The relationship is strong and is based on tightly specified commitments on quality, cost, delivery, etc.
There are around four companies in this study that have distribution strategies centred around direct relationships between the New Zealand operation and customers. This distribution approach is typically associated with capital or intermediate goods.
There are several instances of companies building their exports around a single major customer. This strategy reflects the stage of development of the firm's export business and/or the scale of its business rather than the nature of the product or market. In the early stages the firm latches on to a customer that will absorb a big chunk of the output from the New Zealand firm. The benefit from this approach is that it gives the exporter its first big break (secure export earnings/cashflow) and a toehold in the market. But the risk is that the exporter becomes overly dependent on one customer and fails to develop a more sustainable distribution and export strategy.
8.1.2 Owned Distribution
One of the clearest trends over the past ten years has been the steady shift to owning or controlling distribution. Companies will often start off using independent agents or distributors, and as they can afford to they set up, or buy, their own agents or distributors.
The need to directly control the distribution process relates to the fact that exporters believe that independent distributors do not devote sufficient attention to selling their products. This partly reflects the relative insignificance, or lack of scale, of the New Zealand exporter and perhaps the specialist/niche nature of the product. The incentive to push small quantities of a narrow range of products is likely to be weak unless there are big margins available.
An important benefit from owning the distribution function is that it provides direct feedback from the market about the company's products, and the market conditions that are relevant to the New Zealand business.
In most cases firms either buy into an existing distributor or they set up their own distribution businesses focused on selling just the company's products. Increasingly, though, exporters are looking to sell other company's products through these distribution channels to improve returns from the investment in distribution and to provide customers with a broader range of products. We discuss the idea of leveraging distribution channels in more detail below.
In 1999 we reported the following -
"For those companies that have extended their ownership up their value chain over the past two to five years, the results have largely met expectations. One company indicated that it had been one of the biggest and best strategic moves they had made in the past half dozen years."
8.1.3 Distribution on a Plate
One of the reasons why New Zealand businesses might look favourably on foreign ownership is that it offers access to a well-established international distribution network (e.g. BHP, New Zealand Steel). That is true for the majority of companies that are, or have become, foreign owned. However, the apparent benefits of having distribution available on a plate are not always so positive in reality - at least three firms were suffering from being a bit-player within their multinational owner's distribution system.
At least two foreign owned companies in this study would argue that having to go through parent company distribution channels is creating as many problems as benefits for the New Zealand business. In one case the New Zealand business and its specialist products lack profile within the international group. The local chief executive's current priority is to lift the profile of his firm's products especially amongst the international sales force in order to win more sales. In the other case the company's parent has forced the New Zealand business to merge its distribution businesses in with the parent's network. The result is that it has lost its traditional direct contact with the market and the parent company's distribution channels are far less responsive. The outcome is that they have lost a significant degree of control over their distribution and with it good knowledge of the market and key customers.
In both cases the experience has been the reverse of what New Zealand companies are aiming for in distribution - ownership and control - and highlight the potential downside of using parent-provided distribution channels.
8.1.4 Retail
There are a number of companies that have set up distribution systems right through to owning retail outlets. These "total distribution" systems are mainly confined to Australia and New Zealand but some companies have moved further afield with this recipe. This approach is confined mainly to the apparel exporters, but there are other businesses that have extended their distribution right to final consumers.
It is akin to the first approach above - dealing directly with customers. But the big differences are that there is a myriad of products and a large number of customers; it is a final product; and turnover can be rapid.
Typically the business is about building and leveraging a brand, hence the need to control the distribution to the end point. Good knowledge of the product is essential to enhance the brand and to capture customer feedback. We examine brand building strategy at greater length below.
Establishing such a comprehensive distribution system is expensive and creates a major business overhead. Consequently sales volumes are crucial to generating a satisfactory return from the investment. But one firm argued that there was little if any direct financial return from owning retail outlets, but they were a good source of cashflow and market intelligence.
Information technology plays a key role in these sophisticated distribution systems. For one company its logistics and distribution technology was probably its core competitive advantage. For another, IT systems were critical to a virtual distribution system that enabled the company's product to be shipped directly from the New Zealand plant to (independent) retailers in Australia and Europe. The company also had in-country free-call fax and phone numbers and local bank accounts, so that local retailers could deal with them just as easily as they could with local suppliers.
Most of the companies that own their own retail outlets will also use their own sales people to sell to independent retail outlets, or the firm will negotiate directly with department stores. In this sense own-retailing is one important part of a mix of distribution strategies. Certainly owning retail outlets is not seen as appropriate in all markets and not an exclusive approach for selling in any individual market.
8.1.5 Independent
There are two quite different strategies that revolve around using third parties to distribute the product.
The first is the most common approach to distribution for new exporters or those targeting a large number of markets with small amounts of product. It involves finding an agent or company that will distribute the company's product in a particular market, and then negotiating the terms and conditions of a contract.
The second approach has not been obvious in previous studies and appears to be associated with more sophisticated exporters. It involves the New Zealand firm "tendering out" the distribution of the product. An important precursor to this process is establishing the credibility of the firm and its product(s). In one case the company set out to win public accolades for its products in the target market. The three or four firms that exemplify this approach tend to be very well prepared and invest considerable time and money "presenting to" pre-selected potential distributors. The intention is to have more than one top quality distributor wanting to handle the firm's products so that they can select the best distributor and work closely with them on marketing and product presentation.
The resulting relationship is often more than simply a manufacturer-distributor relationship. In some cases the distributor will become a licence holder for the product, manufacturing and selling it. In others the distributor will invest heavily in building and pushing the brand and may become the logical buyer of the business. In yet another case the distribution business is a joint venture between the foreign distributor and the New Zealand manufacturer.
8.1.6 Summary
The characteristics of the product and the nature of the customer base, as well as the stage of export development have a big bearing on the appropriate distribution strategy for companies.
If the product is a capital item or a niche intermediate good it will generally be sold to a relatively small group of identifiable customers who will take large orders. That encourages firms to deal direct with clients and avoids the need to invest in expensive distribution networks.
Where the product is selling into a larger and more fragmented market (it may still be an intermediate or capital good) the sensible distribution strategy is likely to involve owning or controlling distribution. In a growing number of cases that is achieved via foreign ownership. The same is true for final consumer products where brand may be an important attribute. Being able to manage or control this process to the point of final sale is very important.
For new exporters or those with a very wide range of products and/or markets a mix of owned and independent distribution appears to be the most logical approach. As firms establish themselves in markets they tend to seek control of distribution. This may simply mean having their own sales person in the market rather than relying on an independent agent.
Some companies are pursuing sophisticated strategies to establish strong relationships with powerful in-market distributors. In some cases these relationships will result in licence and royalty arrangements.
8.2 Distribution and Growth
International distribution systems are expensive capital investments. The fixed cost nature of distribution puts an onus on exporters to ensure they have sufficient sales to justify such a large investment. On the other hand companies can see that without an effective distribution strategy it is difficult to expand sales. The obvious tension between the size of the business (level of export sales) and investing in distribution produces an array of solutions, many of which are discussed above.
From this and earlier studies it is clear that distribution is one of the critical issues facing export businesses, and often denotes a major growth point. It is also the case that firms are on a learning curve with respect to finding a distribution strategy that is appropriate to their business. We have witnessed a number of changes in strategy, with some firms completely abandoning one distribution system in favour of another.
The searching process is consistent with the magnitude of the issue for firms and also the growth and development of the export business. What may have been a necessary distribution strategy initially because of low sales volumes and a lack of capital is replaced by a more sophisticated system later. The ideal distribution system is seldom able to be deployed in the early stages of export development.
8.2.1 The Elements for Success
Distribution is an integral part of a successful manufacturing export business, but from the firms interviewed for this study it is apparent that a good distribution system relies on a number of other areas of firm performance:
- The product must be credible and be able to stand out in the market. Companies that have sought-after products find it easier to secure good distributors or easier to justify setting up their own distribution.
- Product support for the distributor/retailer is crucial to backing up good products. There are companies in this study that provide a great deal of high quality support to the sales effort via catalogues, brochures, regular sales seminars, after sales support, web sites, etc. This support encourages strong commitment from independent distributors and/or retailers.
- Reliable and regular delivery is important to overcome worries amongst distributors and customers about dealing with such distant suppliers. Delivery is a major issue for New Zealand exporters and consequently they tend to pay more attention to it than local suppliers do. There are several examples in this study of exporters being rated more highly by their foreign customers for delivery and service than local suppliers.
8.2.2 Brand
Brands are becoming an increasingly important part of company strategy. For one company in this study, building a global brand was the concept behind starting the business. Brands are an important component of export strategy in at least nine other companies. In some cases firms have consciously pursued brand development, in others it has been a slow realisation that their brand is an increasingly important asset.
Establishing a global brand may be a logical route to international growth given the scale and location disadvantages faced by New Zealand firms. A recognisable brand that international distributors and retailers are keen to sell opens up the possibility for the New Zealand business to co-ordinate the other aspects of the business - manufacturing, design, logistics, sales support - to achieve something like a world scale operation. Businesses can contract out manufacturing to large-scale low-cost plants around the world, logistics and sales support relies more on modern technology than scale, and New Zealand appears to be able to deliver world class R&D and design output.
The key ingredient is the management expertise to pull these strands together on an increasingly large scale. There is at least one company in this study that is showing signs of being able to do the above, and there is another that has a clear plan to do so.
8.3 Implication for Export Development
We know that the high fixed cost of establishing an international distribution network is a significant growth hurdle for New Zealand businesses and that there are low marginal costs involved in raising the volume of product moving through an existing distribution channel.
The obvious implication is that exporters should be looking for more product to sell through their distribution networks. Some companies have recognised this and are working on expanding their product range to better utilise the distribution capacity they have invested in.
Some companies have even begun to sell other companies' products through their distribution network to lift returns from their investment in distribution and provide a bigger range of product to potential customers. So far there is no evidence from the firms interviewed that any of them have sought to collaborate on distribution with other New Zealand exporters. Two important pre-requisites would be that the products complement rather than compete against one another, and secondly that there is a common customer base (for example, international telecommunications companies).
Distribution networks will become a more valuable asset within export firms than manufacturing plant and equipment. Many apparel exporters have already proved this point. Given the critical nature of distribution it would seem to be a priority to identify best business practice in this area, and also a deeper understanding of strategies that are being pursued by our most successful export businesses.
The use of modern technology to minimise the fixed costs involved in setting up distribution channels and also to enhance their performance and degree of service to customers is evident from one or two firms in this study. But the potential technology offers to remote and small-scale firms in terms of distributing their product appears to remain largely untapped.
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