Distribution Channels in International MarketingJune 10, 2019
The sole objective of production of any commodity is to help the goods reach the ultimate consumers. In the era of modem large scale production and specialization it is not possible for the producer to fulfill this work in all circumstances. The size of market has become quite large. Therefore, the producer has to face numerous difficulties if he undertakes the distribution works himself.
Besides, in the age of specialization it is not justified on the part of a single person or organisation to entertain both production as well as distribution work. Thus the producer has to take help of many distribution channels to transfer the goods to the ultimate consumers. In other words, many different distribution channels are needed between producers and consumers for effective distribution of products.
According to Philip Kotler, “Every producer seeks to link together the set of marketing intermediaries that best fulfil the firm’s objectives. This set of marketing intermediaries is called the marketing channel.”
According to Richard Buskirk, “Distribution channels are the systems of economic institutions through which a producer of goods delivers them into the hands of their users.”
According to William J. Stanton, “A channel of distribution for a product is the route taken by the title to the goods as they move from the producer to the ultimate consumers or industrial user.”
According to McCarthy, “Any sequence of institutions from the producer to the consumer, including none or any number of middlemen is called a channel of distribution.”
After studying the definitions, the appropriate definition of distribution channel can be given as follows:
“Distribution channel is that path which includes all individuals and institutions which work to make goods reach the consumers from producers without interruption.” Thus distribution channel helps in the transfer of goods in original form from producers to consumers.
There are different types of channels of distribution and a manufacturer may select any one of these channels.
These channels may be broadly divided into two parts:
The channels of distribution for consumer products may be as follows:
1. Manufacturer → Agent → Wholesaler → Retailer → Consumer:
In this method of distribution channel, product reaches the agent from the manufacturers and from the agent to wholesaler and then to consumers through retailers. In India, most of the textile manufacturers adopt this method of distribution.
2. Manufacturer → Agent → Retailer → Consumer:
In this method of distribution, the wholesaler is eliminated and goods reach from manufacturer to agent and then consumers through retailers only. Manufacturers who want to reduce cost of distribution adopt this method.
3. Manufacturer → Agent → Consumer:
As per this method of distribution channel, there is only one middleman that is the agent. In India, for the distribution of medicines and cosmetics, this channel of distribution is commonly adopted.
4. Manufacturer → Wholesaler → Retailer → Consumer:
A manufacturer may choose to distribute his goods with the help of two middlemen. These two middlemen may be wholesalers and retailers.
5. Manufacturers → Retailer → Consumer:
In this method of distribution channel, manufacturers sell their goods to retailers and retailers to consumers. In India, Gwalior Cloth Mills and Bombay Dyeing adopt this channel of distribution to sell textiles.
6. Manufacturers → Consumers:
A producer of consumer goods may distribute his products directly to consumers. The goods may be sold directly to consumers through vending machines, mail order business or from mill’s own shops.
The channels for industrial products are generally short as retailers are not needed.
However, following methods may be adopted:
1. Manufacturer → Agent → Wholesaler → Industrial Consumer:
Under this method, product reaches from manufacturer to agent and then to industrial consumer through the wholesaler.
2. Manufacturer → Agent → Industrial Consumer:
Under this system, goods reach industrial consumer through the agent. Thus there is only one middleman.
3. Manufacturer → Wholesaler → Industrial Consumer:
This distribution channel is the same as above, the only difference is that in place of agent, there is wholesaler.
Under this channel there is no middleman and goods are directly sold to industrial consumer. Railway engines, electric production equipment are sold by this system.
Direct channel is popular for selling industrial products since industrial users place orders with the manufacturers of industrial products directly.
To plan about an export distribution, knowledge on two different aspects are a must:
(i) The marketing channel that is available in the Foreign Market.
(ii) The most appropriate channel is to link the domestic operations to the overseas channels.
The principal forms of penetrating exports markets are selling to local export houses or buying organisations for indirect exporting and appointing agents or distributors for direct exporting.
If these forms are combined with the domestic channel of distribution in the importing country, the export distribution channel can be identified as follows:
a. Direct Distribution Channel:
This figure is illustrative of distribution of channel of consumer goods. In case of industrial products, the channel will be shorter because there is no need of retailers. In fact, in many cases, there may not be any wholesaler.
b. Indirect Distribution Channel:
In indirect exporting, the firm delegates the task of selling products in a foreign country to an agent or export house.
This figure is illustrative of distribution channel of goods. In case of industrial products, the channel will be shorter because there is no need of retailers. In fact, in many cases, there may not be any wholesaler.
The channels of distribution may differ from country to country, market to market and product to product. So, the first task of the producer is to find out the possible distribution channel through which he wants to reach the consumers on the foreign market, keeping in view the characteristics of his product and the marketing strategy he wants to follow in the market.
While selecting a distribution channel for foreign markets, the management of the exporting company should consider the following aspects:
(i) Who are the consumers? Which are the available retail outlets to reach them?
(ii) Which type of market coverage is required, keeping in view the product and consumer characteristics?
(iii) Are there any internal constraints for the exporter like finance which will influence the decision regarding choice of the distribution channel?
(iv) What are the expectations from the channel members? Are there some specific expectations?
(v) What is the required support system to satisfy the expectations of the channel members?
It should be realised that the distribution channel is the mechanism through which the seller reaches the consumers and, therefore, the selected channel must be suitable to the company’s operations and marketing strategy.
The distribution process for international marketing involves all those activities related to time, place and ownership utilities for industrial and end consumers. The selection, operation and motivation of effective channels of distribution often turn out to be important factor in firm’s differential advantage in international markets. The diverse cultural differences play an important role in formulation of distribution strategies for any exporter entering foreign markets.
International marketing distribution is similar to that in domestic marketing. Main difference is in environmental effects. The exporter, therefore, needs to understand how environmental factors affect the distribution policies. Using this knowledge the exporter must use the most appropriate channels on a country-to-country basis.
The distribution system available in a country is also influenced by the economic development of the country, the personal disposable income of consumers and as well as some other factors such as culture, physical environment and the legal/political system. Exporters, while developing a distribution strategy must focus on how the goods can be transported from the manufacturing locations to the consumer most effectively.
Although distribution can be totally handled by the manufacturer, often the goods are moved through middlemen such as wholesalers, distributors, retailers or agents. An understanding of the available distribution system in a particular county is extremely important in the development of a sound distribution strategy.
There are three different approaches to channel strategy. There are Pull approach, Push approach and Gravity approach.
The details of these approaches are discussed as under:
The pull approach of channel strategy relies much upon the intensive promotional campaigns through advertising, personal selling and other promotional efforts and attempts to develop brand loyalty among consumers of the product in the market. The manufacturer is not much worried about the channel. Through advertising, publicity of the product and sales promotional activities, the manufacturer creates demand so that the consumers themselves create a pressure on the distribution outlets to carry and sell his product.
The channel members attempt to store the product in their outlets to serve the consumer best, because the consumer is sovereign. Thus, the manufacturer neither establishes his own set-up in the foreign market nor does he contact the middlemen to sell his product. The channel members are thus forced to contact the manufacturer. Due to this very nature this strategy is known as pull approach.
2. Push Approach:
Under this approach of distribution, the exporter should establish his own channel of distribution and assume full control over it to use it as a promotional instrument. The exporter, therefore, should make effective planning, establish organisation to implement it and have effective control over it. The exporter will function as the channel leader.
3. Gravity Approach:
The gravity approach of distribution channel is essentially a passive approach. Under this approach, the seller or manufacturer exporter is in touch with intermediaries and sells his whole production to that intermediary. It is the intermediaries who look after the actual distribution work in the foreign markets.
The manufacturer should not worry at all for its distribution function. The consumers do not know even who the producer of the product they are using is. The manufacturer neither establishes his own sale organisation in foreign market nor takes it seriously and the distribution work is done by the middlemen.
Which strategy out of the above approaches should an exporter follow, is a very difficult question to answer. A number of factors influence the choice. As far as gravity approach is concerned, it has a very limited role to play in distribution of goods in foreign markets. In modern age an exporter cannot find a place in an export market passively.
The pull strategy requires substantial outlay of financial resources for intensive sales promotion campaigns to create the demand for the product and develop brand loyalty. The push strategy on the other hand does not involve such huge costs. But it does require a proper discount structure and other incentives to motivate the distribution channel members. In addition, the exporter must be prepared to plan and partially finance proper sales promotional campaign.
For consumer products, both the strategies may be adopted in the foreign countries. Smaller companies generally follow push strategy in distributing the goods as its success depends more upon personal selling rather than financial outlay. The big companies can employ pull strategy for mass consumption items in developed countries.
Even in a developing country like India, large companies use this strategy. In case of industrial products, on the other hand, companies, irrespective of size, generally use the push strategy. The reason behind is that the number of buyers is small and the outlets to be contacted are also lower which can be covered through specialised sales force and does not require any mass advertising. Further, the channel members will have to be integrated with the total marketing system in order to ensure after sale service system.
As per Webster, the major points of difference between the push and pull approaches may be indicated in the following manner:
In the case of Indian exporter, pull strategy will not suit because of limited availability of foreign exchange. Gravity approach cannot be said to be the best because involvement of exporter to some extent is necessary whereas the strategy suggests quite a passive view. Thus, in Indian context it is better to adopt push strategy. The exporter should establish his own channel of distribution, manage and control it effectively through proper planning and cooperation with the distribution channel members.
The exporter may decide to sell either direct to importer or to an importer wholesaler, distributor, super-markets, and chain of stores or shopping malls or speciality stores. Which of these should exporter choose will depend on the nature of his product, the size of the market environment of the country, distribution cost and his own financial resources?
Smaller companies may sell only to an importer. Recently, a new type of distribution system has emerged in certain foreign markets. They are designated as manufacturer-importers. For example, in the USA there are a large number of units manufacturing and selling leather garments.
These units, essentially because of economies of scale, subcontract part of their business in small lots to manufacturer-exporters in developing countries. Selling to the manufacturer-importers solves the problem of internal distribution so far as the exporters are concerned, as it is handled by them.
6. Direct vs Indirect Distribution System:
Direct distribution channel is the system of distribution channel in which exporter sells the goods to consumers without the help of intermediaries, while in indirect distribution channels exporter sells his products with the help of intermediaries.
Whether the exporters adopt direct distribution system or indirect distribution system, it will depend on the relative strengths of the various factors.
The factors in favour of direct distribution channel are:
The exporting company will have direct control over the marketing operations and, therefore, can devise and implement the proper marketing strategy in tune with the changing marketing conditions.
(ii) Knowledge about the Export Market:
In direct distribution channel, the exporter may have full information on marketing opportunities and trends, competitors, product acceptance in the market and other information regarding the market.
(iii) Increase in Profit:
By selling directly in the foreign market, exporter can save the commission that becomes payable to the agents. Moreover the manufacturer enjoys full returns on the sales of his goods because he does not have to share profits with anyone. In indirect exporting, the agents purchase the products at cheaper rates and sell them to importing country at higher prices.
(iv) Customer Satisfaction:
Buyers of highly specialised equipment prefer direct dealings with the manufacturers as they expect to be completely assured of the services. Distributors may not have highly qualified staff for conducting sales negotiation for such equipment.
Following are the disadvantages of Direct Distribution System:
(i) Goodwill of the Middleman:
A new exporter’s name will be unknown in the foreign market, therefore, even though the price and quality of the product may match those of known companies, the new entrant will be at a disadvantageous position. In such a situation, it would be better to gain credibility in the market if a known distributor handle the product, because the standing of the distributor will help in assuring the customers about the quality of the product.
(ii) Huge Resources:
Direct exporting requires large funds in order to support adequately the cost of selling, to provide necessary credits, the expense of financing, the development of an export organisation, engaging own staff.
(iii) More Distribution Cost:
In this system, the distribution cost is more. In direct exporting, export house has to undertake the responsibility of marketing, while indirect exporting enables the manufacturer exporter to concentrate on production problems, leaving the question of foreign selling to the intermediaries.
Big and medium export firms generally prefer to appoint agents or distributors in the foreign markets. In such a case, the exporting firm must evolve a system of control and monitoring the agents for evaluating their performance.