Advantages and Disadvantages

An Expert's View about Business Administration in China

Last updated: 22 Feb 2011

8.2 Advantages and Disadvantages of Different Distribution Modes


8.2.1  Supplying Goods Directly to Retailers
Advantages:

•Mainland retailers are developing in the direction of large-scale networks with multiple outlets. By supplying goods directly to these large retailers, especially retail chains, it is possible for the supplier to achieve the aim of expanding the coverage, increasing the exposure, capturing the market and boosting the brand-name of its merchandise within a relatively short time.
Disadvantages:

•As retail outlets draw large numbers of consumers, retailers are in a leading and dominant position. Suppliers usually have to pay all kinds of charges of considerable amounts (e.g. advertising fee, promotion fee, entry fee and management fee etc) both before gaining market access and during the course of sale, which substantially raises their operating costs and squeezes their profit margins.

•Retailers (both foreign-invested and domestic) all sell on credit, with payments made at least 45-60 days, or even 90 days, after delivery. This increases the operating cost, tightens the cash flow and affects the fund control of suppliers. In the case of some enterprises which are burdened by cash and credit overdrafts, they stand great risks supplying to retailers they do not know all that well.

8.2.2  Appointing Agents/Distributors

•Entering the market by appointing agents/distributors, especially large agents and distributors with extensive distribution networks, is a good option for small Hong Kong companies without a sound knowledge of the mainland market.

•Since large agents/distributors generally have long-term cooperation relationship with retailers, it is easier for new products to find their way into the market through agents/distributors.

•Compared with supplying goods directly to retailers, distributing goods through agents/distributors usually takes less time and covers a wider market reach.

•Riding on the high volume of other goods handled by the large agents/distributors, the entry fees and logistics expenses can be reduced.

•Dealing with only a few regional agents/distributors can give the supplier better control over its funds.

Disadvantages:

•Since the supplier must allow its agents/distributors some profit margins, the price competitiveness of its products will inevitably be undermined.

•Since agents/distributors have a lot of products to handle, they will not be able to give as much attention to individual products as suppliers do. This may affect sales as well as the collection and handling of consumer feedback.

•Mainland agents/distributors have a relatively poor sense of service and the quality of their staff is uneven. This may also affect sales.

•Some mainland enterprises do not always abide by contract terms, which may bring about credit risk.

8.2.3  Setting Up Own Retail Stores

Advantages:

•Dealing with end users directly facilitates the provision of more professional and customised services to customers and helps promote sales.

•It is conducive to discovering and grasping real market demand.

•Direct recovery of cash helps steer clear of credit risks and improves the effectiveness of fund utilisation.

•It is good for building and promoting brand image (such as through specialty stores), which will add to the value of both brands and products.

•Profit margin is relatively big.

Disadvantages:

•Suitable locations are hard to find as competition intensifies.

•Stores have to be opened one by one, making it difficult for market coverage to grow quickly within a short time, which means that it takes a long time to break even.

•Good public relations are essential.

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Posted: 21 February 2011, last updated 22 February 2011

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