FT beyondbrics Feature – EM distribution: try DIY?

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Frontier Strategy Group’s latest research on channel management in emerging markets was featured on the Financial Times’ beyondbrics blog on January 23, 2013. Please find the article below:

With major EM economies slowing in 2012, regional heads of multinational companies are increasingly having to focus on their margins. As new research from the Frontier Strategy Group shows, many are considering boosting them by running some of their own distribution operations.

In a survey of 136 executives from 82 multinationals operating across emerging markets, FSG found their respondents to be none too happy with their distributors. On average, EM distributors take a 25 per cent cut of revenue, and nearly two thirds of respondents said they were planning to work towards a better deal.

Joel Whitaker, head of global research at FSG tells beyondbrics that MNCs moving into emerging markets have conventionally “focused on capturing opportunities as broadly as possible as quickly as possible, leading them to rush into relationships which give considerable power to local distributors.”

You might think that with an in-demand product and a good brand, an MNC should hold the whip hand. However, due largely to their lack of local knowledge, 94 per cent of companies surveyed used indirect distribution channels, so switching between channels is not always easy.

Healthcare, for example, says Dan Kornfield, FSG’s director of strategic research, is “usually defined by a set of big distributors with relations with government. This creates an odd balance of power, where the middle man may be more picky than the supplier.” In more high tech enterprises, such as chemical engineering, the time taken to train distributors can be an additional bind.

Russia stands out in the survey as a particularly hard place to manage distribution. Of the four Brics it stands out as having the lowest average number of distributors per company at just five, compared with 174 in China, 39 in Brazil and 70 in India. It also has the largest average cut taken by distributors at 31 per cent – compared with 25 per cent in China and Brazil and 19 per cent in India – and the highest levels of dissatisfaction with distributor transparency, at 80 per cent.

Russia is defined, says Martina Bozadzhieva, a CEE researcher at FSG, “by a lot of small distributors with great local knowledge but insufficient resources to cover large distances, and a few very large distributors which can”.

The latter companies will often be handling goods from competitors too and consequently, Bozadzhieva says, “are touchy partners to work with. They give you fast geographic access, but they are hard to incentivise, and would not mind if you dropped out.”

Overcoming this could entail DIY distribution: 43 per cent of survey respondents said they were planing to move into direct distribution in at least one of their market segments, and 18 per cent said they were planning to acquire at least one of their distributors.

Alcoholic beverage companies in Latin America, FSG say, have demonstrated how it can be done successfully. “They have mapped out the networks, they know the logistics, they know what it takes to hire the right people – they have realised they can cut out the middle man,” says Kornfield. This comes not only with extensive experience of the local market, he says, but with a strong brand to wield.

When this experience is lacking, though, high risks are involved. Where choice of distributors is limited, causing offence can be costly, and what causes offence can vary from place to place.

“There is huge variation geographically around how easy it is to disengage with distributors”, Whitaker says. “Business in India tends to be more transactional, and that is very familiar to companies from western markets, a lot of their toolkit works well there.

“But a company in Indonesia that tries to rip up a distribution relationship is going to find it much more difficult. The consequences can be quite severe as it’s seen as a more personal relationship.”

And then of course, it might be all too easy to look enviously at the cut being taken by distributors and assume it would be easy to replicate.

“We had a client in consumer goods in Nigeria who was dissatisfied with its distributors. Getting the goods into market was very slow and costly, and because they had the resources they thought they’d go direct”, Bozadzhieva says. “They found it was very challenging, the cost increased, their competitive position deteriorated, and eventually they had to re-enter from scratch with a new distributor.”

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