Direct exporting versus indirect exporting

Agents, distributors, export consortia or freight forwarders are some of the direct or indirect methods through which SMEs can chose to export. Each has its own features and advantages depending on the company's type of industry and on its level of development or experience in local and international markets.

Identifying the proper method to start exporting is key to any SME (small and medium enterprise) for achieving successful internationalization. The website Asesores de PYMEs sates that in direct exporting, the company is in charge of establishing contact with overseas clients and of the logistics and overall processing of the transaction.

In contrast, the indirect method focuses on having intermediaries so that they can be the contact with the final client. That is to say, the company focuses on producing the goods and manages the business as it would with local clients and assigns the export process to the intermediary. Both direct and indirect exports have subcategories:

Indirect exports

This method is usually chosen by SMEs that are not yet in a position to commit to a direct export due to the costs and resources involved. This is also used by companies that are already exporting but that chose to go through an intermediary to enter other markets where they do not yet operate.

• Export Consortia: These alliances known as export consortia are formed by SMEs from the same productive sector or that produce complementary goods. According to the Economic Commission for Latin America and the Caribbean (ECLAC), the main services offered by a consortium are as follows: joint marketing and commercialization, training, supply and legal assistance. Prom Peru explains that export consortia serve as a tool for direct market expansion and also as a learning and feedback process to obtain more benefits over the medium and long term. For SMEs that are deciding to export for the first time, this offers and excellent opportunity to gain experience on how to operate and trends in the international market. Some successful examples indicated by ECLAC are the wine and pisco export and production consortia in Chile and the meat exporters in Argentina.

• Freight Forwarders: SUSTA (Southern United States Trade Association) explains that freight forwarders are independent agents that aid and facilitate the shipment of exported goods. They engage in exports and easily manage the procedures and regulations for shipping products overseas. This helps to maintain control over the export process and also to learn about the preferences of foreign clients and learn about the characteristics of the international markets. The exporter pays for the freight forwarder, gaining both expertise and reduced prices from the aggregation of international shipments that a freight forwarder realizes, reducing final freight costs. As an agent for the exporter, the forwarder becomes its port representative. Freight forwarders also assist the business in determining the proper terms of sale, the required licenses or documentation for exporting and help select a term of payment such as cash in advance, open account, payment by sight draft or by letter of credit. Normally, the forwarder receives a commission in exchange for the services provided.

• Selling to an Exporter Client: It is almost an identical procedure to selling a product to any other national client since it requires the involvement of an exporter that buys, exports and sells on its own account. According to ECLAC, this export method is less resource-intensive for the business but it does not provide the same practical experience or control over the transaction overseas. This is an ideal method for SMEs that do not have sufficient financial or human resources but that would like to experiment with internationalization. SUSTA describes that in this option the client is the one who decides what product can be sold overseas and assumes market research and export management activities. The merchant exporter then sells these products to other countries on his own account and assumes all the risks.

Direct exports

When an SME is prepared to make a direct export it must have knowledge of the most appropriate distribution channels. According to PromPeru, some can be agents, distributors, retailers and final consumers.

• Agents: An agent is an intermediary that acts as a "purchase order taker." It shows product samples to prospective clients, delivers the necessary information and processes purchase orders. It is important to keep in mind that the agent does not purchase the merchandise. In general, the agent works for a commission but does not take ownership of the products nor is he liable towards the buyer. Likewise, the agent commonly represents different lines of complementary products that do not compete with each other. According to Asesores de PYMEs they generally operate under a specific term contract, which is renewable depending on the results, and that should define territory, sales terms, compensation method, causes and procedures for contract termination.

• Distributors: Distributors are merchants that buy products from SMEs in their country of origin and sell them in the market where they operate. The general rule is for the distributor to maintain a sufficient stock of products and to take charge of pre and post-sales services, which frees the producer from these tasks. PromPeru specifies that distributors rarely reach the final consumer and generally serve the retail market. As with agents, they complete the offer with other non-competing complementary products and brands. The payment terms and the type of relationship between the exporter and the foreign distributor are governed by an agreement between the parties.

• Retailers: The exporter directly contacts those responsible for purchases in the different retail chains, creating excellent opportunities for these sales. Asesores de PYMEs recommends supporting this type of sale by delivering samples, catalogues and brochures. One of the advantages of this method is that IT tools make it easier to reach a broader public and also avoids unnecessary travel costs. Additionally, the businessman saves on commissions and intermediaries. However, it is important to keep in mind that personal contact with prospective clients continues to be the most effective tool.

• Direct Sales: A company can sell products to final consumers from other countries. This is a suitable alternative for more advanced companies since exporting in this fashion requires great marketing efforts. Additionally, the exporter assumes all product delivery activities, imports at the destination market and provides pre and post sales services, collections services, etc. Another popular direct sales method consists of electronic trade through the creation of an online “store”, where mass dissemination has enormous potential. Additionally, it is possible to achieve a powerful marketing strategy using few resources through social networks, affirms PromPerú.