As companies seek to enter Brazil for the first time, or expand into new segments or geographies within the country, executives will need to answer a key question: which channel structure will be best for sales growth and profitability? In order to help clients answer this question, FrontierView has developed a new report to help clients identify the right distribution model for their specific business; learn how to leverage e-commerce; build sound processes to find, vet, and manage channel partners; and plan for future channel transitions.

Over the next few weeks we will be publishing a series of blog posts, each of which will address specific challenges that multinationals face in each step of the channel design and channel strategy implementation process.

In this post we will focus on the first decision that companies need to make: whether they should implement a direct or indirect distribution model.

What we have found in our research about channel strategy is that companies tend to have a model of choice that is independent of the pros and cons of that model in the context of their specific industry in Brazil. Some companies might choose to go direct because that is how they operate in their home country or in other emerging markets. Others may choose to work through distributors when they enter into a new customer segment because that is how they have always done business in Brazil.

At FrontierView we believe the distribution model-of-choice decision should be informed not by legacy, but rather by the following factors:

  1.  Strategic patience: In other words, the sales growth trajectory that the company wants to attain in Brazil. Companies willing to grow quickly will find that working through distributors will allow them to capture market share in a relatively short period of time as distributors already have all the licenses and permits required to operate, as well as market knowledge and client portfolios, established logistic networks and fully ramped-up sales teams. While reliance on distributors can facilitate growth in the short run, lack of control over the sales process could hinder future growth. In fact, 55 percent of FrontierView clients who sell through distributors in Brazil believe that their partners are not aggressive enough in pursuing new sales opportunities. This should give companies an idea of the challenges they are likely to encounter down the road as the “honeymoon” with their distributors comes to an end.
  2.  Resources and risk appetite: Although a direct distribution model may yield a higher ROI over the long run, the required upfront investment in logistics infrastructure and working capital can be very high, and costs can be hard to control. Therefore, companies should conduct a thorough analysis to determine if expected volumes and margins would support the high investment likely cost overruns of direct distribution in Brazil. Some companies will find that making the case for a direct distribution model in Brazil is a tough sell as there might be competing investments that would yield a higher ROI, such as investments in R&D or product development.
  3. Market knowledge: The high cost of doing business in Brazil makes understanding the operating environment and local market dynamics more important than in other emerging markets. As companies choose between a direct or indirect model they should be very honest about their ability to run sales operations more efficiently than local distributors, as well as their ability to navigate Brazil’s cumbersome customs procedures or comply with the local tax code and government regulations.

Regardless of their model of choice, most multinationals operating in Brazil will end up deploying hybrid distribution models or different strategies according to segment or geography. This is because customer demands from the channel, operating environment considerations and competitors’ channel strategies play a big role in constraining what a multinational can or cannot not do.

A company may choose to work through distributors to avoid bearing the credit risk of selling to local governments with bad payment records, or it might choose to sell directly due to the inability to find local partners with the required capabilities to sell complex solutions. Likewise, some companies will find it very difficult to compete in states where local distributors benefit from tax incentives, or might give up on the idea of having their own distribution infrastructure due to government regulations that would force the company to maintain a warehouse in every state. Finally, what existing players are doing also matters a great deal; if all competitors are selling directly in a specific segment, adding another layer to the supply chain could make the company’s products too expensive or reduce its margins. Additionally, competitors could have non-compete clauses with existing distributors, limiting the entry of new players.

FrontierView has identified several best practices to help clients address some of these constraints. They include strategies to reduce logistics costs when trying to sell directly to small and dispersed accounts, using distributors as brokers when selling into segments where all competitors are going direct, and enhancing value-added services while retaining a fully indirect model.

Check back next week for a discussion on how companies can leverage e-commerce in Brazil.

For more Brazil insights, follow Pablo on Twitter @Pgonzalezalonso