For many organizations looking for a presence in a foreign market, the first step is to establish a representative office. Opening a branch office is a foreign direct investment entry strategy. It is often used as the first step in a market entry strategy, to gain a foothold, make an organization’s presence known and obtain valuable information about the target market.

A representative office is a good way to get solid information about market dynamics, customer preferences and product suitability. It can also lobby, on behalf of the organization, to remove regulatory and other types of barriers. Virtually any type of business might benefit from using a representative office as the initial market entry mechanism. A small service-type business may never evolve beyond the representative office, while a capital-intensive business may use the representative office as the first step in a multi-stage strategy.

Retail outlets

Some organizations go beyond the representative office to create a network of retail outlets on behalf of the parent organization. Such outlets might be wholly owned and operated by the parent, as is the case with Walmart, or they can be dealerships, owned by operators with an exclusive relationship to the parent.

Establishing a retail outlet gives the parent organization direct control over the whole distribution chain, from initial production to final sale. It puts the organization in direct contact with its customers, allowing for a closer monitoring of their reactions.

However, it also makes the organization directly responsible for hiring and training staff, managing inventory and operating the outlets. This may be less an issue of cost than of administrative complexity. Generally, only large corporations handling significant volumes of merchandise geared for a mass market will be interested in controlling their own retail outlets.

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Case Study: Taste Spain

Taste Spain, a Spanish food vendor, set up two wholly foreign-owned enterprises (WOFEs) to meet growing demand for wine and food products in China.

Through market research, the organization discovered that China’s demand for consumer food and wine products is great but supply is limited, creating vast opportunities for newcomers.

Taste Spain initially set up a WOFE with the business scope of importing and selling wine. It found that the distribution network was fragmented and time consuming to navigate. It also found that warehouses were badly managed, so it decided to set up its own storage facilities for greater quality control.

After increased demand from distribution partners, it decided to set up another WOFE to import and distribute Spanish agricultural goods and food.

From submitting a sample for inspection to receiving approval from the General Administration of Quality Supervision, Inspection and Quarantine of P.R.C. (AQSIQ), the entire process for labelling approval took three to four months.

To protect its intellectual property, Taste Spain registered its trademark with the China Trademark Office (CTO) in both colour and black-and-white versions. The entire trademark registration process took about 18 months.

Advantages and disadvantages of opening a branch office

Opening a branch office in a target country is a relatively simple way to establish a presence, gather useful intelligence, network, perform product testing or even conduct marketing before making a more serious commitment of resources. However, it will incur costs and could present tax or legal problems. Property leases also have to be dealt with.

Owning a retail chain overcomes most market barriers. It facilitates gathering intelligence about customer preferences and supports a high level of responsiveness to customer demand. It gives an organization complete control over how its products are positioned, advertised, marketed and sold. The organization can train its staff to respond to customers in a certain way. It can use its retail outlets to deliver after-sales service. This strategy also gives the organization direct contact with the end-users of the product, enabling it to remain responsive to changing tastes.

However, this strategy is very expensive and time consuming. The organization must assume responsibility for every link in the distribution chain and consider issues associated with fulfilling legal and tax requirements.

When is opening a branch office a suitable strategy?

Opening a branch office is a strategy that organizations should consider if they:

• Want to establish or expand their presence in a target country relatively easily
• Can devote the managerial time required to employ personnel, find and manage offices and maintain operations
• Can deal with the legal aspects of being liable for civil action taken against the office

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A well-qualified international distributor finds customers, knows the local language and culture, and can provide foreign services such as obtaining import licenses, clearing goods through customs and performing product installation and warranty repairs.

The international distributor is the “local” face of your organization.

Remember the different types of international sales entities

It is important to understand the distinction among three distribution terms.

The term “agent” may imply more than one simply performing a sales or distribution function.  Indeed, it may indicate authority to obligate the manufacturer (or “principal,” as it is referred to in this relationship) to other persons or companies.

A sales “representative” arranges sales for the principal.  That is, title to goods normally passes directly from the principal to the customer, and not through the representative.  The representative’s compensation takes the form of a sales commission paid by the principal.

A “distributor” usually purchases your product and resells it to the customer.  It is from the resale margin that the distributor is compensated.  Distributors are more likely to carry inventory and to provide after-sale support and service than an agent or sales representative may.

While the terms “distributor,” “representative” and “agent” each have a separate and distinct meaning, not to mention significant legal implications, for ease of reference they will collectively be referred to in this article as “distributor.”

The Dating Game – How do I find my dream distributor?

So how does one find an effective distributor?  There are traditional methods such as reviewing trade publications, obtaining international bank references, soliciting international customer input, etc.

Two methods on opposite ends of the expense/effort spectrum, however, are especially effective.

Assuming one has the financial resources and time, attending a trade show in the region where you are searching for a distributor or distributors is an excellent opportunity to have a first-hand view of their marketing, customer relations and sales efforts.

This is a rare chance to view your potential distributor through the customer’s eyes.  Visit the distributor’s displays and interact with the distributor’s sales personnel.

This “blind date” provides an excellent opportunity to test how they might represent your product or service.

For a more cost-effective, albeit less personal, alternative, consider utilizing the assistance of government agencies.  For example, UK Trade and Investment (UKTI) will assist with international trade advice, including how to find an international distributor.

Similarly, the U.S. Department of Commerce’s Commercial Service provides a Gold Key Matching Service.

For a cost ranging from US$350 for small to medium size companies, to US$2,300 for large companies (defined as companies with more than 500 employees), the Commercial Service will review your list of distributor requirements, vet potential distributors, narrow the candidate list to a handful of the most qualified companies, and arrange your introduction to those companies.

To save travel time and expenses, the Commercial Service will even provide video conferencing services with the potential international distributors.

Keep your hands off my distributor

You may think this too much trouble.  Isn’t it a good idea to simply steal your competitor’s international distributor?

A “hands off” approach may be well advised.  When a distributor leaves one principal for the principal’s competitor, expensive and time consuming litigation is not an uncommon result.

How many units of your product will you have to sell to generate sufficient revenue to pay your attorneys, while the competing principals fight over what constitutes trade secrets and proprietary information?

How many management hours will be taken away from your core business to engage in litigation?

And what about the distributor’s loyalty to your company?  Don’t be naïve.

If the distributor was willing to leave its former principal for a new relationship with your company, don’t be surprised when your distributor leaves your company for the next principal.

The best predictor of future behavior, after all, is past behavior.

Is your company in need of a new international distributor? Which of these steps seems most helpful for your business?

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