One of the questions that is often asked is what is the minimum supply value for which it is worth opening a new international market.
A producer knows the margins and the sales volumes necessary to be profitable, but when starting doing a business in another country some elements are not predictable like:
- Will the distributor be able to sell the minimum sales volumes agreed upon?
- Can there be unexpected customs taxes?
- Could there be any increases in transport costs (for example, in recent times the shipping cost by ship from China to Europe has quadrupled within three months)?
- Could it be necessary to spend more than expected on legal and administrative expenses for managing new foreign clients?
In this article, we will not analyze the case in which a company makes small supplies abroad using online platforms such as Alibaba or Amazon Business. We will examine the “next step”, which is the search for a local distributor to expand the sales and the brand knowledge in a new market.
We already anticipate that there is no minimum amount for which it is worth trying to enter a new market or not. It depends on the type of sector, product, foreign partners you are looking for, etc.
However, we will see some elements to consider when entering a new market.
What trade agreements there are between our country and the one we are entering?
In my opinion, the first element to consider when thinking about entering a new market is the type of trade agreements between our state and the one in which it has to export.
For a company that starts exporting for the first time, it is better to avoid countries that do not have well-defined commercial agreements with ours.
It is necessary to investigate if there are obstacles to the goods we want to sell.
The barriers can be of different types, but we can group them into two subgroups:
1) Monetary barriers ( such as import duties and taxes)
2) Non-monetary barriers (such as product approvals, permits to operate in the territory, etc.)
In most cases, when we talk about trade between countries, we talk about tariffs as the main problem that blocks export or import growth in a market.
However, the most complicated problem to deal with is the non-monetary barriers. Particularly in some countries, obtaining permits to operate locally or to homologate products can take several months, even years.
In some industries obtaining permits can be exceptionally long and complex.
Also, be careful when you read that there is a free trade agreement between two countries. It is not certain that duties are zero in all sectors. Frequently, duties are kept on certain types of goods. Furthermore, the fact that there is a free trade agreement does not imply that there is also a customs union. The customs and homologation union are usually one of the last steps for the integration of economies of different countries.
If you are at the first export experience, it is good to start from the closest countries with which you know there is good integration between your countries. For example, if you are based in the European Union, you should start exporting to another country of the EU.
This factor has a profound effect on the minimum value of the transaction you will want to make. If to enter a new market in which you should make major changes to your product to validate it, the barriers to entry are remarkably high so the minimum transaction must be of a certain size.
Distributor, agent, or permanent establishment?
We talked in this article about the differences between agents and distributors. In general, the agent is a valid option to sell products with high margins, or with one-shot sales, especially in the B2B sectors. While in most other cases, a distributor with a long-term perspective is usually the most effective option.
The choice of the business partner affects the minimum amount to start doing business abroad.
If you want to launch your brand in collaboration with a local distributor with high marketing investments. You have to take into account multi-year agreements, perhaps even granting territorial exclusivity to the distributor. With this in mind, it is difficult to reach agreements of this type with the distributor thinking of selling a few thousand euros in value of the goods.
It is necessary to be clear between producer and distributor regarding the objectives and mutual expectations already in the early stages.
If you are a manufacturer and want to enter a new market with strength and are looking for a distributor who wants to invest a lot in the brand and marketing, make it clear immediately. Distributors do not always have an interest in pushing a new brand on the market, or they may not have the opportunity because they have a reduced network of stores or contacts.
The opposite can also happen, for example, large distributors contacting small manufacturing companies that do not have the production capacity to copy the high sales of a new large foreign market.
In Globartis, we have purposely added the value filter (in euros) to clarify what are the expectations for the deal between the parties.
Attention to logistics
An aspect that, in many cases, is underestimated when a new market opens is logistics.
Nowadays it is possible to send anything to any part of the world, the problem is cost and time.
Shipping to some markets can be complex and expensive. Also, customs problems may arise.
In some cases, the value of the supply strongly depends on the logistic factor. To have competitive shipping costs, it is necessary to send minimum quantities of goods.
When establishing the value of the minimum deal it is necessary to carefully evaluate the logistics aspects. In general, if you are at the first export experience it is safer to make an Ex-Works contract, in this case, the buyer (distributor) assumes the responsibility of the transport with the consequent risks.
Conclusion
Depending on the good and the sector, the minimum value of supplies for which it may be worth opening a new market varies.
When exporting to a new market for the first time, collateral costs must be carefully considered. They can often be higher than expected. Keep a margin of safety when dealing with a new international distributor. If you have no experience of exporting in a market, try to delegate the responsibility of logistics (including customs) to the distributor. You will have lower profits, but also lower risks.
Always be clear with the distributor about your expectations and vice versa.
The choice to enter a new market should not be based on the short term. Both the producer and the distributor can decide to operate at a loss for a few years to invest to develop a brand. However, if this has to happen, it is good that it happens with the awareness of the choice and not for having made a mistake in the reckoning.
Globartis Research
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