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The niche industrial distributors dilemma

This is a key dilemma facing distributors and affecting the niche industrial import export sector. It affects how manufacturers and distributors must evaluate their relationship from the very beginning.

All around the world there are companies producing goods, exporting them, distributing them for overseas principals and there are companies setting up their own overseas sales outlets.

This article sets out a key dilemma for the importing industrial distributor, which may to some extent exist in same country reselling arrangements, and certainly affects both the reseller and the principal.

What is too much and what too little effort?

This could also be described as:

"the risk of sinking the ship or missing the boat".

The dilemma is simply this:

On the one hand (sinking the ship) if an importing distributor does very well with a product range for an overseas principal, that principal may become so confident in the success of its products in the overseas market it will enter the market itself with a wholly owned subsidiary and terminate the relationship with the distributor. The result for the original distributor is that they lose the business while the manufacturer has become established in the new market.
Distributor = 0 principal = 1.

On the other hand (missing the boat) if the distributor does not make enough of an effort then the principal, convinced of the viability of its product range, may terminate arrangements with that reseller in any case and establish new distribution arrangements with one of the distributors competitors. The result for the distributor is that they loose the business, and miss the boat, while the manufacturer also does not get or at least delays becoming established in the new market.
Distributor = 0 manufacturer = 0.

So the first example is preferable at least for the principal manufacturer but not for the distributor, while the second example is preferable to neither party.

The possible result of the realisation of this risk is that distributors be tempted to do enough to retain the business but not enough to persuade the principal to enter with a wholly owned subsidiary.

You might ask if this risk occupies the minds of distributors to which I could retort that it was explained to me in great detail over drinks by the owner of an importing distributor with exclusive country rights for various niche industrial products. It was certainly real for him.

Discussions with some distributors have fallen over because of disagreement on payments due to distributors on termination precisely because of their perception of this risk.

Clauses setting out compensation on termination can be key elements in contracts with experienced distributors especially if they are planning to take unproven products into a market which are likely to require greater work to establish than would be the case with a proven seller.

Companies with proven products and brands may find they are able to avoid such clauses altogether because the distributor is likely to be able to make profits from earlier in the time span. If you are considering developing a market more investment, costs and risks are involved which highlight this concern about "sinking the ship or missing the boat".

Some high profile cases show that even long established relationships have been terminated at short notice after which the principal has set up its own local sales offices sometimes within walking distance of the original distributor to tempt key staff to the new firm.

Are the risks in example 2 of "doing too little" also real for the principal?
I think they certainly are. Scanning press releases will provide evidence of principals switching distribution arrangements when these seem not to have resulted in expected business levels.

What does all this mean for the participants concerned?

There is certainly a requirement to keep a wary eye on the other participant to try to understand their business and personal longer-term goals.

A close eye is also required on the stability of key decision makers in each company as arrangements are often changed following a change in the individuals in decision making capacity at either company. Retirement of key individuals who had a personal stake in the relationship was an apparent reason behind divorce in a recent high profile industrial case.

Food for thought I hope.

Author Mark Abraham (mark@sticky-marketing.net) 30th November 2001