Selecting the most appropriate channel mix – using the optimal distribution model for any new market – is like finding your way in a multidimensional maze. It is one of the most complex and risky decisions top management has to make, as each market comes with its own set of conditions and requirements.
There is plenty of information available about characteristics of the different distribution channels. Therefore, in this post I would like to focus on how to select the best distribution model for your brand. A distribution model that allows you to expand into the targeted channels in a specific country in your market segment!
In preparation for this post, I tried hard to find a systematic approach or a correlation between distribution channels and models that could be used in any market.
The bad news is that there is no ‘one size fits all’ solution. The solution doesn’t only depend on the specific market conditions and dynamics, it differs as well by market segment and by your experience with brand distribution models. If you don’t have any experience with managed spaces in your home market (on a wholesale model) – you should NOT start with concessions in a new market! Even if it is the most relevant distribution model for this target market.
Here are the elements you need to research and understand, before making a decision on channel mix and distribution model:
Understand the Relevant Distribution Structure in Your Specific Market Segment
That might sound easier than it actually is. Yes there is plenty of information, along with studies and statistics of varying quality out there. But once you try to narrow it down to your specific segment, you will most likely not find it that helpful anymore. Here a few examples: multibrand retail in Italy is still dominated by independent retailers, while the UK is dominated by department stores. Germany for example is dominated by a few nation-wide department stores and local hero specialties for mid-price brands. For distribution of premium and luxury brands, the local hero specialties are the most important ones. In emerging markets very often you will not find significant multi-brand retail partners in the premium and luxury segment at all. Thus, building your own distribution network is inevitable.
Know the Dominating Players in Each Channel and Their Financial Expectations
It is crucial to know the big players in your relevant market segment. Understanding their financial expectations (sales density, margins, 4-wall contribution and expansion speed) helps to evaluate your readiness. Russian retail groups (operating brand stores for foreign partners) are expecting a fair margin split, based on an open book policy. Trusting each other and sharing profit opportunities and risks is more important than maximising profit.
Selected Middle East Retail Groups
|M.H. ALSHAYA CO.
|Pull & Bear
|AK Annie Klein
|Bath & Body Works
|G Star Raw
|American Eagle Outfitters
|24 Hours Market
|Table Source: Heike Blank
Retail groups in the Middle East on the other hand, don’t care whether you as a brand make any profit, as long as they do. Although the retail landscape has become tougher each day in the Middle East, they are still spoiled by a past of unprecedented sales density and booming productivity of mono-brand stores. Due to their dominance in the retail sector and their huge brand portfolio (see table above), you need to outperform the competition – otherwise you will find yourself at the end of the food chain. This means you will get the least favourable locations and the least experienced management and sales staff.
What Are the Differences in Preferences, Tastes and Consumer Behaviours, Compared to Your Home Market?
Undoubtedly, this is one of the most important market insights you need to have as it is the decider on the sell-through and profit potential of your product/assortment. For more detailed information on this subject please take a look at my previous post on product adaptation for international expansion.
In a nutshell, you need to decide what product/assortment adjustments you are willing and able to handle and whether that pays off by growing turnover and profits.
The bigger the differences to your home market, the more important it is to start with a reliable partner. Start with a distribution model (distributors/importers/partner retail) that allows you to learn and gain market insights, without exposure to huge financial risk.
What Does the Operations Model Between Partners Look Like? What Process and Organisational Changes Do You Need to Implement to Serve a New Market?
A few questions:
- Are you able to allocate floor sets for complete shipments?
- Do you have bonded warehousing at your sourcing locations to prevent back and forth shipment? Does your order processing, allocation and invoicing system allow for the splitting of production orders by market destination?
- Is your product development able to integrate multiple feedback from multiple markets?
What Experiences Are You Having With the Different Distribution Models in Your Home Market?
Unfortunately, there is not always a sufficient play ground in your home market for testing new distribution models. Although they’re the best in class in the concessions business, UK brands often struggle with managing spaces in Germany. Managing the multidimensional interactions with German retailers before making a joint decision clearly poses a new challenge. Being accountable for the financial success without having (almost) complete control clearly comes with new risks.
How to Approach a Decision on Channel Mix and Distribution Model?
- Do the Maths! Find YOUR answer to all of the above mentioned questions!
- Invest into negotiations with multiple partners for different distribution models. Yes, this will push the travel costs of your business development/sales team into new dimensions. But it is well spent if it helps you to prevent a costly trial-and-error-approach.
- For markets with huge differences to your home market, start with distributors or importers. Both are models that allow you to gain market insights without massive financial risk exposure.
- If you are lacking experience with a distribution model, run a pilot test in your home market first. This helps you to a certain degree to understand dynamics and requirements of a new distribution model. If that is not possible for whatever reason, make sure you get as well prepared as you can. Run a pilot to test it in the new market. Define evaluation criteria and critically challenge the project team on both sides.
- The maturation process of a brand in a new market requires an evolution of distribution models as well. Always keep a buy-back or a joint venture option in the back of your mind. Fixing a system for it in your initial contracts will help to negotiate once you want to take it to the next level.
About the Author:
Heike Blank has worked for big organisations such as VF Europe and s.Oliver but also for niche brands such as Ecko Unltd. and Zoo York in top executive positions. Opening and managing own retail, partner stores, concessions and shop-in-shops in 23 countries in Europe, the Middle East and Asia gave her a deep understanding about the importance of a brand specific balance between customising and standardising the business model when conquering a new market. Please feel free to email her for further discussion on these topics. Or for more about her see here.