Overseas distribution dos and don’ts

GrowthBusiness talks to entrepreneurs who have cracked overseas markets, including a  laser manufacturer and a distributor of Hello Kitty-branded mobile phones.

GrowthBusiness talks to entrepreneurs who have cracked overseas markets, including a  laser manufacturer and a distributor of Hello Kitty-branded mobile phones.

GrowthBusiness talks to entrepreneurs who have cracked overseas markets, including a laser manufacturer and a distributor of Hello Kitty-branded mobile phones.

Hello Kitty isn’t a bad role model for a brand wanting to conquer the world. The Japanese cartoon character has lasted 34 years, surviving upheavals in fashion and crossing cultural boundaries, and parent company Sanrio now boasts sales of nearly US$1 billion.

‘The power of this brand is amazing,’ gushes Michael Richardson, MD of Comment Retail Services, a UK-based company that distributes Hello Kitty mobile phones in Europe. ‘It ranges from pencil cases in the UK to passenger aeroplanes in Thailand and something described as a feminine massager.’

Comment has enjoyed a small part of this success, having grown its turnover to more than £27 million since it launched in 2005. The company rebrands regular mobile phones with Hello Kitty logos, software and packaging, then distributes these in the UK as well as into Spain, Portugal and Germany.

‘For each region, you have to know where the brand sits within the population and which retailer is most appropriate to reach those customers,’ explains Richardson. ‘In Spain, Hello Kitty is quite an adult brand, so the handset we distribute there is designed for a relatively well-to-do lady.’

‘The people I’ve seen fail are the ones who play one distributor off against another’

Finding the right distribution channels has been equally important for a very different company: high-tech laser manufacturer Powerlase. CEO Les Lockwood says he was among the internationally experienced managers brought in by the company’s venture capital investors three years ago.

‘The breakthrough market turned out to be quite left field,’ he recalls. ‘The product was originally aimed at the semi-conductor industry, but we achieved our breakthrough in the flat panel [TV] industry in [South] Korea, where our lasers are now used by LG and Samsung.’

That breakthrough was achieved with the help of Powerlase’s distributor in the country, which Lockwood located thanks to contacts from ‘a former life’. He adds that UK consulates in China and Japan have also been useful in helping to source distributors.

‘Governmental sources often get knocked, but in my experience they’ve provided excellent networking contacts,’ he states.

The small print of a distribution deal

Successes like those of Comment and Powerlase don’t happen without a lot of work behind the scenes. Richardson says Comment’s distribution contracts allow the company, on Sanrio’s behalf, to retain strict control over how the products are sold and marketed, while Lockwood stresses the importance of ensuring customers abroad receive excellent after-sales service. In both cases, there’s far more to it than simply selling the product to a middleman, then forgetting about it.

Andrew Johnston, an associate at law firm Eversheds, says a lot can go wrong with a distribution deal. ‘Sometimes legal disputes arise through poor performance or it can be due to a distributor infringing the brand, or setting up a competing business,’ says Johnston. ‘On other occasions there are disputes around credit: trying to recover stock that’s not been paid for from a liquidator can be very difficult.’

There are other pitfalls, Johnston adds. In the case of agency agreements (see box) compensation is payable to the agent under EU law if you decide to terminate the agreement – even if this termination does not breach the contract.

‘The basis for this is that the agent should be recompensed to the extent that it increased the principal’s customer base,’ explains Johnston. ‘It isn’t the most intelligible piece of legislation, and it was quite a shock when it was introduced in the UK.’
Other legal hurdles include making sure that you don’t fall foul of competition law when crafting an exclusive deal, and ensuring that your trademarks are protected in every region where you distribute your products.

Maintain good relations with distributors

For Lockwood, the key to a successful deal is to treat your distributor as an integral part of your business rather than a subordinate entity.

‘The people I’ve seen fail are the ones who try to play one distributor off against another. That doesn’t work – it may work for your first order but it will not build your business,’ he counsels.

‘You should be brutally honest about what you expect, but also let them know you see it as a long-term partnership.’

That raises the question of what happens if continuing success in a region makes it viable to go direct. ‘In the long term, as you grow your business, you’ll probably want to have a direct presence,’ Lockwood concedes. ‘We’ve made the decision that we want to continue to involve our distributor. In Korea, we’ve gone direct but made our distributor part of our support network.’

Richardson says that finding partners who can build your brand effectively is more important than shifting as many units as possible. ‘If you get it right, you’ll end up shifting lots of units. But if you focus on maximising sales first, you’re going at it from the wrong angle. We want to ensure there’s always a small undersupply of the products rather than an oversupply.’

Click here for a guide to different distribution models.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.