USING AN AGENT OR DISTRIBUTOR A Case Study

After working many years in international trade in numerous markets, the question continues to arise – is better to use an agent or a distributor to handle my local business? Frankly there is no one answer. However I do strongly believe that it is not effective or always appropriate to appoint one type of partner only on a global basis. This case study illustrates some practical reasons as to why a market by market solution is preferable. Firstly let’s summarise a few of the pros and cons of each channel. By comparison to Distributors, Agents are a low cost, low risk option. You pay on results through commission. You also benefit from having a direct contact with end-customers as you trade direct with each of them. As a result you are selling at your price. Agents are invariably self employed and are therefore low on resources. They can locate and sell to customers but can offer little additional services. You are also shipping to each customer which may be an expensive option in addition to a high number of potential credit risks. Distributors, on the other hand, offer a company size resource not only by providing a team of salesmen but storage for stock and a local direct delivery to customers. Additionally they should be able to provide local marketing support as well as capably manage the importation of your products. So far so good. The main drawback is the loss of control. Key issues are no direct relationship with end customers as they are ‘owned’ by the distributor, trade prices are set locally by the distributor and you have no influence over sales operations. Additionally it may be difficult to gain feedback on the in-market sales performance of your products. So nothing is perfect! One factor that can influence your choice of channel is your international sales policy. You may work in an industry or provide a bespoke product which is better suited to be supplied to order and shipped direct to end customers. If there is little requirement for a local inventory of product this may better suit the use of an agent. If however you require, local sales & marketing expertise then the use of a distributor maybe more appropriate. The majority of my experience was in the exporting of consumer goods to highly competitive markets. The key issue was never to be out of stock in the marketplace as consumers would seek competitive products in these instances. It was therefore appropriate to maintain inventory in the market to meet demand. Using a distributor not only provided this local stock facility but removed any need to place product in the market on a consignment basis. Product has already been sold to the distributor, albeit on a credit basis. Stock holding was a main criterion for selecting this type of distribution channel alongside the use of a sales team who should be able to provide both regular and comprehensive expert sales coverage. All of the above seems to imply the use of distributors was the global solution to our needs. But this was not always the case. Consider the situation when a new market is being developed and products are being launched for the first time. Whilst best efforts will have been made to assess market potential, particularly for the short term, there will always be a doubt until business is actually transacted. Yet the cost implications can be quite high particularly if using a distributor to who you have passed on some of your margin in your trade terms together with a possible credit risk. From the distributor’s point of view he is also taking a calculated risk. He purchases your products in good faith on the assumption they will sell. He will commit resource before he is paid by his customers. We therefore considered the tactical use of an agent for some market launches particularly where there were concerns over the short term development business opportunities which may not have been attractive to a distributor. Once again tactically if one is able to build some good early business using agent, at relatively low cost and risk, the equity of your business will become more valuable in the eyes of the beholder. I can cite a number of instances where having launched into a market using an agent and built business incrementally over the first years, we suddenly became a more attractive proposition to prospective distributors and in turn our own bargaining power had increased. I have found that at the outset of any trading relationship with a new distributor in a new market they believe you need them more than they need you. Arguably they are right and, not surprisingly, they seek the best possible terms. To be fair to the agent, an agreement will be set up for, say, two years, and he will be targeted to seek x type of customers in y geographical area. At the end of that period business will be reviewed and decisions taken on future handling. If we then decided to switch to a distributor we always tried to find ways of maintaining an on-going relationship with that agent, assuming he had performed well. We believed it was important for good local trade relations and goodwill to ensure all parties were treated with courtesy and respect. In a number of instances we were able to incorporate some of the agent’s good work with the newly appointed distributor. We also possessed a few markets where it was practicable to supply the key customers direct with the agent acting as both a salesman and a facilitator. We gained the benefits of the direct relationship with end-customers whilst controlling our exposure to financial risks in those particular markets.

In summary an agent or a distributor can offer specific services and benefits. My company believed the global solution was to use either on a market by market basis to suit both strategic and tactical needs.