In a previous Selling to China column, I discussed the massive opportunity in China e-commerce and what this means for foreign companies. But this overview leaves at least one important question unanswered: should a company planning to enter the China market—or one already selling on the mainland but thinking about selling online—simply work through a distributor, or should it manage the process directly? In other words, can the same China-based partner that is handling off-line distribution for you also run a Web store, or should you find an e-commerce marketplace or service provider with which to work directly?
Each approach has its advantages, so let’s take a look. (Here’s a clue: The same e-commerce revolution that has transformed the way consumers approach a product is also transforming the way the merchant approaches a new country.)
The Distributor Model: Using a distributor has been the most common way for companies to expand to new markets. In its simplest version, the company gives up a significant percentage of sales revenue (easily 50%+) in exchange for a local distributor handling all sales in a given territory. Significantly, the distributor purchases the inventory so the company gets immediate bottom-line benefits. This model came to maturity when companies first started to go abroad in the 19th century. The parent company had no means to manage sales or the distributor relationship in the new country, so the model of a local distributor buying and reselling the merchandise was the only practical solution.
Merchants have long harbored reservations about this model, however. Besides the reduction in profit margin, there are concerns surrounding quality control and branding. Will a distributor be as thorough in building the brand as the brand owner? What kind of e-commerce expertise does this distributor have?
Another concern is the agency issue. Will the distributor remain an effective promoter of the product if building a market is a long-term proposition, with possible payoff over the horizon? Remember, some distributors sign many brands and only make an effort after they see initial success. Many a food or apparel producer has signed with a distributor in China, for example, only to realize the distributor has dozens of such arrangements and that their particular brand does not get much attention. These distributor-related problems can be can be particularly acute for brands that lack a high level of global recognition.
The DIY model: In this scenario, the company enters the market directly, typically working with service providers to reduce cost and complexity. (Full disclosure: this is the core service provided by my company, Export Now.) A DIY merchant might hire experts for warehousing of inventory and logistics, or it could contract with a service provider for turnkey e-commerce support, but the company effectively is running its China e-commerce operations just as it runs its home market operations. With this vertical integration, the company can significantly improve its net revenue but it must absorb some up-front costs including inventory.
This DIY approach makes more sense in key markets. A U.S. company, for example, might choose to directly run its operations in Canada, Mexico, the U.K. and China, but it might use distributors in other markets. Or it might run its e-commerce operations directly in China, but use a distributor or a licensee to run its offline sales.
The e-commerce revolution: the question of whether to use a distributor or go DIY was given new life with the advent of e-commerce. In the pre-Web world, a merchant who wanted to develop a market in France, Brazil, or China had to find a distributor in those markets, as the cost of stationing one’s own team there was prohibitive. That calculus changed with the advent of online shopping, because now a company can sell in a country via the Internet without having to station personnel there. Meanwhile, the emergence of modern ERP systems allows a company to exert the same management oversight of overseas e-commerce as it does for its domestic e-commerce.
Now companies have a choice. To take the China example, an apparel maker might find that in the years it is building offline distribution, e-commerce could easily account for over 50% of its gross revenue. Why should that company give up its margin on the online portion of sales to a distributor? Besides boosting revenue, e-commerce allows a brand to standardize its messaging and control quality. It also leaves room for experimental marketing, as data feedback arrives in real time (We discussed the importance of data feedback in Selling to China: The Most Common Mistakes Merchants Make).
The global shift to e-commerce means that brands no longer have to be passive regarding market entry. Instead of relying on distributors, they can reach customers on their own. Now the merchant can decide when to enter a new market, what kind of weight should be given to different sales channels, and what kind of messaging and branding activity should take place—all while enjoying profit margins not possible with distributors.
Frank Lavin is the CEO of Export Now, which runs online stores in China for U.S. brands. He formerly served as U.S. Undersecretary of Commerce for International Trade.