Distribution Channels in International

Marketing
By P Mittal|Distribution Channels

In this article we will discuss about:- 1. Meaning and Definitions of International

Distribution Channels 2. Types of Distribution Channels 3. Export Distribution
Channels 4. Different Approaches to Export Channel Strategy 5. Level of
Distribution 6. Direct vs Indirect Distribution System.

Contents:

1. Meaning and Definitions of International Distribution Channels

2. Types of Distribution Channels
3. Export Distribution Channels
4. Different Approaches to Export Channel Strategy
5. Level of Distribution
6. Direct vs Indirect Distribution System

1. Meaning and Definitions of International

Distribution Channels:
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.
Definitions:

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.

2. Types of Distribution Channels:

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:

i. Distribution Channel of Consumer Goods:

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.

ii. Distribution Channel of Industrial Products:

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.

4. Manufacturer → Industrial Consumer:

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.

Producer → Agent → Industrial buyer

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.

3. Export Distribution Channels:

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.

4. Different Approaches to Export Channel

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:

1. Pull Approach:

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.
5. Level of Distribution:
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:

(i) Control:

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.