Distribution in the USA

Kylie Hargreaves

Senior Trade Commissioner

Austrade, Los Angeles

September 2004

FINDING THE RIGHT PATH

1. The US Market

2. Distribution Options

3. Choosing the Right Channel

4. Staying Committed

5. Getting Help

THE USA IS THE WORLD'S LARGEST MARKET

Land Mass 9.3 million sq kms

Population 290 million

GDP US$ 10,500+ billion (3%+growth)

GDP Per Capita US$ 39, 922

# of States 50 + District of Colombia

# of Supermarkets 41,932

# of Toy Stores 17, 866

# of airports 14, 801

Land Mass 7.7 million sq kms

Population 20 million

GDP US$ 530+ billion (3.5%+growth)

GDP Per Capita US$ 26, 537

# of States 6 + 3 Territories

# of Supermarkets 3,775

# of Toy Stores 763

# of airports 444

SO THERE IS A MARKET FOR YOUR PRODUCT BUT…..

“THE WORLDS BIGGEST MARKET” ALSO MEANS

COMPETITIVE FRAGMENTED COMPLICATED

CHOOSING A CHANNEL TO MARKET

EVERY DISTRIBUTION OPTION IMAGINABLE EXISTS IN THE US

Importers

Distributors

Wholesalers

Retailers

Brokers

Manufacturer’s Rep

Sales Agent

Consumers

Selling Agencies

Fulfilment Houses

EXPECT TO DOUBLE YOUR LANDED PRICE BEFORE YOU GET TO THE CONSUMER IF YOU USE TRADITIONAL MODELS

Importer

Distributor

Wholesaler

Retailer

Margin of 30 – 150%

Margin of 25 – 80%

2 – 10% of sales

Mark-Up 100– 250%

Lands: US$10.00

Buys: US$14.00

Buys: US$19.60Sell 1000 units @ 5%

Buys: US$20.60

Sells @ 150% mark-up - US$30.90

SO THINK CREATIVELY!

E-Commerce - websites B2C or B2B, Ebay, Auctions/Portals Home Shopping – Catalogues, Infomercials, TV Shopping Networks Direct to Retail – some US retail stores will buy direct Private Label Fulfilment Warehousing – combines importer/wholesaler role Licensing – IP sale, Manufacturing Under License, Franchising Set up a local office – local presence, 1 800 number etc Share set-up costs with a complimentary Australian Joint Venture or Subsidiary

WITH SO MANY OPTIONS, HOW DO YOU FIND THE RIGHT CHANNEL?

CHOOSING THE RIGHT DISTRIBUTION CHANNEL WILL DEPEND ON

SEVERAL KEY FACTORS

What do your target consumers look like?

Where do they live?

Where and how do they buy similar products?

What price position is your product taking?

What storage and warehousing requirements does your product or buyer have?

What level of management time, money and commitment can you give to the US market?

What level of control do you need over the pricing, brand & promotion of your product

How flexible can you be in terms of delivery timeframes, scaling supply up or changing your product and packaging.

What level of promotional or after-sales support does your product require?

SOME EXAMPLES

E- SALES - REMOTE, WELL USED TECHNIQUE IN THE USA

Lower entry cost via website / direct mail Can be done from Australia or a Fulfilment House, easy to test the market Immediate wide distribution Low mark ups Easier delivery using logistical service provider, however Difficult to build a brand through this approach alone Payment issues & Guarantee/Returns need to be addressed

CATALOGUES - AGAIN WELL USED TECHNIQUE IN THE USA

Lower entry cost via Fulfilment House Immediate wide distribution & established relevant client base Marketing Costs covered by the Catalogue Company Lower mark ups Payment tends to be dependant on sales (may have consignment terms) May have “vendor” requirements such as UPC, Proof of Insurance,

Carton/Packaging specification

FULFILLMENT HOUSE / CONTRACT WAREHOUSE

You retain ownership of the products Typically a combined role – importer/logistics, as well as accounts +

after-sales support Lower cost logistical structure for Australian companies Payment tends to be dependant on volume of sales, retainer or per

business service transaction Pick,pack and ship per your instruction Can sell to other wholesalers, distributors or consumers, as required

SALES AGENTS, MANUFACTURERS REPS or BROKERS

Act as a Sales Force finding new accounts and trying to expand sales to existing accounts

Act across different geographic and market segments Do not purchase product, take ownership or warehouse product Will often provide market insight and advice which can be valuable in

your marketing strategies Tend to carry a range of complimentary products from other suppliers Will need strong support, training & marketing collateral from you and

regular “incentivisation” to stay top of mind Payment is usually on commission but some retainers are common

WHOLESALERS (around 400 000 in US)

Sell primarily to other wholesalers, distributors or retailers – not to consumers

Purchase only in large quantities Provide “full-service:- purchase, warehouse, break-down, sell,

transport and extend credit / accounts etc Often include “rack jobbers” – companies whose role it is to keep

shelves stacked in high-volume outlets Retailers may require you deal with their wholesaler

LARGE VOLUME DISTRIBUTORS

Purchases goods from a US location (eg. Importer)

Often have their own sales force,although many simply manage inventories/logistics for their large corporate accounts (eg. Macys)

Have authority over prices, terms and promotion in their territories

Could be national or regional - sometimes this is legally required (wine)

Supply via the distributor is often demanded by the retailer

Wider distribution coverage at lower cost

OPENING AN OFFICE IN THE USA

Provides maximum control over market strategy, sales force, brand etc

Communicates a “local presence” which can be a strong competitive advantage

Takes commitment and resources ($200K - $500K per year)

Deal with legal, tax, immigration and funding issues

Thinking about the sorts of questions posed today will quickly help you identify 1 –2 potential distribution options for targeting.

OTHER ISSUES TO CONSIDER

REGULATIONS

RETAIL ENVIRONMENT

PRICING ISSUES

LEGAL PROTECTION

REGULATORY ENVIRONMENT

FEDERAL REGULATIONS AFFECTING CHANNEL OPTIONS eg.– Food & Drug Administration Regulations (FDA Agent, Importer of Record)– Environmental Protection (Hazmat etc)– Buy America Act (US Corp required)– Import Licenses

STATE REGULATIONS eg.– Prohibited Items (eg kangaroo in California)– Controlled items (eg. Liquor in Utah)– Consumer Safety Requirements (eg. Lead Content in Toys)

INDUSTRIAL STANDARDS eg.–- Building Codes–Electrical Standards

SUPPLY CAPABILITYA MONTH’S ORDER COULD EQUAL AN AUSTRALIAN SUPPLIER’S ANNUAL PRODUCTION

Eg. BRISTOL FARMS (13 stores) = each store has a turn over of between US$20 – 50 million

CRATE ‘n BARREL (115 stores, 15 million catalogues) = US$865 million

BLOOMINGDALES (30 Dept stores) = US$1.7 billion

TRADER JOE’s (215 stores) = US$2.5 billion

RETAIL ENVIRONMENT

RETAIL ENVIRONMENT

SMALL RETAILERS ( 1 – 15 stores)

Egs. Fred Segal, Henri Bendel, Sax 5th Ave

TYPICALLY:- Do not import directly Domestic freight is prepaid by the supplier, then billed back to the retailer on the invoice. Key documentation required is a packing slip and/or invoice. Shipping instructions may include a specified freight company for larger shipments or Assume UPS (United Parcel Service) for smaller shipments and direct-to-store shipments. Other issues: Returns, CODs Ship passed cancel date - the order may or may not be cancelled.

MEDIUM SIZED RETAILERS ( 15 – 200 stores)

Eg. Wild Oats,Trader Joes, Crate n Barrel

TYPICALLY:- Do not import directly (although this is changing – Trader Joes) Domestic freight is paid by the retailer who also designates the Freight company Key documentation required is a packing slip, bill of landing and invoice.Other issues: carton or pallet guidelines & EDI capabilities Ship passed cancel date - the order may be cancelled or fees may be automatically deducted from payment

LARGE RETAILERS ( 200+ stores)

Bloomindales, Nordstrom, Robinson – May, Bath & Body Works,

TYPICALLY:- Generally prefer not to import direct Domestic freight is paid by the retailer who also designates the Freight company Key documentation required via EDI systems (packing slip, bill of landing and invoice).Other Requirements: Specific shipping guidelines including packaging/labeling, carton or pallet sizes Failure to meet Delivery Requirements: order may be cancelled, supplier pays for back ordered items, fees may be automatically deducted from payment

MASSIVE RETAILERSEg. WalMart, Safeway, Bath & Body Works, Costco

TYPICALLY:- May import direct to reduce margins Domestic freight is paid by the retailer who also designates the Freight company Key documentation required via EDI systems (packing slip, bill of landing and invoice).Other Requirements: Specific shipping guidelines including packaging/labeling, carton or pallet sizes Failure to meet Delivery Requirements: order may be cancelled, supplier pays for back ordered items, fees may be automatically deducted from payment

PRICING ISSUES

WHEN WORKING OUT YOUR DISTRIBUTION PRICING MODELS REMEMBER TO

Price in US$ If you can, quote FOB – US DOMESTIC TERMS BE AWARE – FOB has a different meaning in the US (inland carrier). If you can’t quote US style, quote CIF or CFR

Other elements you need to consider in your pricing models include:-  – “Translation” costs – US English, measurements, paper size (8.5” x 11”) – Vendor Requirements – UPC (bar codes), EDI Capability, carton sizes etc– Customs Duties & Customs Broker’s Fees– Transportation from port of entry to importer’s warehouse or inland carrier – Margins/mark-ups along the distribution chain – Commissions or incentives for sales reps – “Slotting Fees” – Insurance Costs

 

AS WELL AS THE LEGAL COST OF DOING BUSINESS IN THE US

THE RIGHT PROTECTION

LEGAL ADVICE IN THE US IS A NORMAL COST OF BUSINESS

- Trademark or Patent Protection – protecting your brand or IP

- Due Diligence on potential partners – background checks

- Product Liability Advice & Insurance - the liability of a manufacturer or other entity in the chain of distribution for personal injury, property damage or economic loss caused by the sale or use of a product

- Contract Advice – JV’s, MUL, Fulfilment Warehousing but also Sales Rep’s & Distributor agreements

CONTRACT ADVICE

Some of the key things to consider in a distribution or sales agreement are:

Territory

Exclusive or non exclusive distributorship

Non-competition clause

Minimum purchase or sales obligations of distributor

Promotional support to be provided

Commissions

Prior approval for advertising or promo materials

Terms of sale, prices, discounts, price changes, payments etc

Product liability and insurance

Terms of contract – termination, performance clauses etc

AUSTRALIAN ADVICE IS NOT ADEQUATE

CULTURAL TIPS

AMERICANS ARE OFTEN VERY DIS-SIMILAR TO AUSTRALIANS Business is king – work out the details of the deal first, worry about the people

second.

Time is money – so don’t waste my money, be well prepared – samples, packaging and sales sheets. Know your ROI calculations, pricing and logistics.

Being Direct is a Virtue – ask for what you want, say what you mean, do as you say, and just get on with it. May come across as egocentric, “demanding” and less consensus oriented than others.

Who are you better than? – Know your competitive advantage over specific US suppliers, as well as your domestic or international track record.

Don’t be Negative – Australian tendencies to be sarcastic, down-play their achievements or “sugar-coat” messages can often clash with the American “can do” attitude and tendency to absorb information at face-value.

Be persistent – “pestering” is expected, stay in trade fairs, visit regularly, call often but don’t expect a response until 7 – 12 contacts later.

STAY COMMITTED

MORE THAN 8000 AUSTRALIAN COMPANIES ARE SUCCEEDING IN THE US

BHP

Bovis Lend Lease

State Departments for Regional Development

US & Australian Industry Associations

US & Australian Chambers of Commerce

Trade Exhibition Organizers

Institute of Export

Banks & Accountants

Custom’s Agents & Freight Forwarders

Sea Freight Council of NSW

Export Insurance Agencies (eg.EFIC & Gerling NCM)

Australian & US Customs

Small Business Assistance Programs & Austrade EMDG schemes

TradeStart

AUSTRADE

DON’T THINK YOU HAVE TO DO THIS BY YOURSELF

AUSTRADE: Helping you find your niche and hitting it hard.

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• 7 Offices + 3 more soon• 54 Austrade staff & 16 co-located staff from other agencies

CALL AUSTRADE ON : 13 28 78

KYLIE HARGREAVES

SENIOR TRADE COMMISSIONER

AUSTRADE LOS ANGELES

TEL: + 1 310 229 4830

FAX: + 1 310 277 2258

EMAIL: Kylie.Hargreaves@austrade.gov.au