Most multinationals and global brands penetrating new international markets assign this entry process to local distribution companies. At first, they succeed and sales take wing. But after a while, they come to an impasse and end up this relationship with a lot of finger-pointing towards distributors instead of rationally figuring out what happened and how they can improve the situation. They usually run into series of unplanned actions to revitalize their sales performance. This approach also known as the “beachhead strategy” has become a routine pattern in many organizations. In other words, the pattern repeats many times as multinationals expand their market especially in developing countries until they reach a complete deadlock. If you ask managers of multinationals what goes wrong with distributors, they usually mention two important things:
1) Distributors didn’t know how to grow the market: Distributors usually follow the low risk strategy to achieve initial sales growth by selling the multinational’s major product to their existing customers. But when it comes to introducing new products that require more risks and efforts, multinationals say that distributors failed to address the issue.
2) Distributors didn’t invest in business growth: Global brands usually enter a contract with local distributors demanding minimum levels of investment.
We, at Oghab Distribution Company with more than a decade of experience in distribution confirm these problems among most distributors as well; however, we have our own ideas about why many agreements don’t succeed for a long time. At first, based on our experience, multinationals didn’t give distributors enough support for growing the business. Sometimes global brands expected the impossible. Moreover, we shouldn’t miss the point that neither party, the multinational nor the distributor invest adequately in strategic marketing plan. It may be safe for multinationals and global brands to minimize risk when penetrating various markets, but a later shortage of investment can make it difficult to increase brand growth and brand penetration. Nevertheless, Oghab Distribution Company believes that the key to solving the distribution challenges of global brands in Iran is to recognize that the market trends are predictable and that we can plan for it in the long run.
There are a few guiding principles help managers to correct imbalances between multinationals and local distributors. These guidelines are also very useful for our purpose of a better relationship with global brands trying to develop their market in Iran.
Local distributors know the distinctive characteristics of their markets. A distribution company that has the right customers can make initial sales growth. However, a conventional wisdom has it that local distributors have been merely vehicles for the market entry; few companies succeeded in continuing a relationship with multinationals over the long run. Therefore, global brands had better choose those distributors who can serve their long-term goals. They should structure this relationship in
order that distributors become a marketing partner willing to invest money and effort in long-term market development. Offering national exclusivity is a traditional way to do this. Another way is to sign an agreement with long-lasting incentives for suitable goals, such as customer acquisition or new product sales. Above all, the goal should be that the local distributor become a marketing arm of the multinational in its country.
Unfortunately, many companies signal to distributors that their intentions are only for the short term, signing contracts that allow them to take distribution rights back after a few years. Under such short-term contracts, a local distributor doesn’t have much incentive to assure long-term brand growth.