Import Management in the New Economy

In 1997, I wrote the now world famous article, “Evaluating Trade Leads”. Little did I know then, that it would reach so many people in so many corners of the world. Now that I have finished congratulating myself, <tongue firmly planted in cheek> perhaps I can focus a bit on this month’s column. Leads was written primarily with exporters in mind and at the apex of the phenomenal expansion and boom economy of the 1990’s in the United States. Just four years later, we are facing a downturn. The original intent of that article then was to focus on the trade lead as empirical as opposed to anecdotal evidence of behavioral patterns amongst trade intermediaries. The current situation dictates an updated look at intermediaries, but this time from the perspective of the U.S. importer.

The principal trade intermediary in the United States is the generic global trading company. This entity has contacts around the world and can facilitate a number of complex global trade transactions. Traditionally, the global trading company acts as a liaison between the manufacturer or service provider and its principal client; the foreign distributor. This is especially true of the smaller trading companies on the export side, many of which now call themselves export management companies to make a clear distinction about their role in international trade. While this distinction is made from a narrow perspective of the self-interest of those involved in this particular activity, it is illustrative of some fundamental changes that affect intermediaries in general. On the import side, the most fundamental intermediary is the importer-distributor. Besides facilitating all aspects of the import transaction, such as clearing Customs’ and paying duties and tariffs and arranging transport, the importer-distributor takes on a slightly more active role in actually selling and distributing the product to smaller distributors in the channel.

The economic slowdown has exposed some real serious problems facing companies who make their money in import-export management in the United States. In the past decade, there have been extraordinary changes in how both industrial and consumer goods are distributed. Nowhere is this more evident than within the United States. The rise of mass merchandising of industrial products, in particular home & garden and building supplies, has really devastated the role of the intermediary. Mass merchandisers with humongous warehouses and de-centralized buying operations are increasingly opting for dealing directly with overseas factories. Smaller retail outlets, in an effort to remain competitive and protect their remaining market share, are increasingly joining national industry buying cooperatives that deal directly with overseas factories. Where does this leave the wholesale distributor? While they have not disappeared entirely, their numbers are shrinking rapidly. The reason is simple: their customers are disappearing.

Consider the following:

	In some industries, such as hardware, there has been a steady decline in major national distributors and smaller wholesale distributors. In the Philadelphia area, there used to be 15-16 active distributors of various hardware products. Now there is just one. Home Depot, Builders’ Square and several smaller but still significant regional chains have all but eliminated the independent hardware store. Almost all of those stores who have survived belong to one of three major national cooperatives.
	Corporate buyers from the mass merchandising industry refuse to deal with agents, brokers or any other kind of intermediaries. They will work with marketing consultants because they believe (rightly or not) that a consultant costs less than a trading company.
	Savvy foreign manufacturers have discovered that it is much easier to manage distribution into the U.S. market by way of a national sales office that coordinates the activities of all intermediaries in the sales channel.
	Individual consumers and corporate purchasing agents have simply gotten smarter. At one time, department stores and five and dime stores were the principal retail outlets available to most individual American consumers. Mail order, television-based shopping networks, the Internet and the ever-present strip mall now provide us with enormous choices and significant competition. A very recent phenomenon is the factory outlet store that is owned and operated, usually in an outlet mall, by the factory itself. Consumers can now buy seconds, bloopers, slightly damaged but still valuable first quality merchandise and over-runs. It was not so long ago that only those directly and intimately involved in the apparel industry had access to such deals. Corporate purchasing agents, once a very secretive group, now openly share information with one another about vendors and their wares. This increase in available information has caused many companies to switch their buying methods in order to drastically reduce the costs of acquiring raw materials and other provisions. With increasing regularity and frequency, individual consumers and corporate buyers are finding new ways to save money by buying directly from the factory or a factory outlet as well as a wide variety of terminal markets that offer auctions.

While it is true that importer-distributors in the United States are struggling, but it is likewise true that many have not given up just yet. Most industrial components, the type necessary to keep a business running without a shutdown, are not readily accessible at the local strip mall or easily available via the Internet. While it requires almost no real experience to sell underwear or deodorant, many industrial products need trained and experienced salespeople to assist customers. Global trading companies turned into importer-distributors have the capability of disseminating large volumes of relevant information to their business partners and clients.

The X factor is the extraordinary boom economy of the U.S. in the 1990’s coupled with a decrease in real barriers to entry to foreign manufacturers. Because the demand has been so great for so long, many foreign companies got spoiled in the 1990’s. Pre-occupied with meeting this demand, many foreign companies found themselves doing business in the largest open marketplace in the world and in reality not knowing how things got done. Now that the slowdown is upon us, many of these same foreign companies are confused about what to do next. There is increased competition from newcomers who want to reap the same benefits available during the boom. Domestic companies, feeling the pain of the dot.com bloodbath as well as price pressure from some of their multinational corporate clients, are competing very hard. Consumers and corporate buyers alike have taken a step back and profit margins are razor thin. There is little room for error.

Making matters worse and slightly more complicated as well is the fact that most of the rest of the world still heavily relies upon inefficient channels of distribution. While the U.S. has forged ahead at warp speed in opening its market to the world and finding new and exciting ways of bringing buyers and sellers together using the newest and most advanced technologies, many of its trading partners have stagnated. Unfortunately, the importer-distributor in the U.S. is an integral part of the inefficient distribution channel because it has a vested interest in maintaining the status quo.

Intermediaries usually reinvent themselves several times in their business life in order to accommodate shifts in trends in global business practices. When the World Wide Web began to rise in prominence in 1995, many pundits predicted that global trading companies would be dead in five years: replaced by the Internet. Six years later and you cannot go online without being overwhelmed by the number of international trade intermediaries doing business in some part of the world via the Internet. Fourteen years ago in 1987, the year most observers cite as the rise to prominence of the fax machine, there began two parallel movements in the U.S. and some other industrialized nations: 1) a trend towards the breakup of gigantic global trading companies and 2) an increase in the number of smaller specialized international business intermediaries. For some 60 years during the 20^th century, global trade intermediaries provided a vast array of services to its client constituencies: the manufacturer and the foreign distributor or the manufacturer and the smaller distributors in the case of import. While many correctly cite these various services as being vital to the growth of international trade, one service above all others stuck out. Up until the rise of the fax machine and the displacement of the telex in the late 1980’s, the trade intermediary financed a significant portion of international trade not done by the multinational corporations. That is to say, that intermediaries assumed the risk of doing business on open account and allowed many companies the opportunity to participate in global commerce. As large global trading companies began to shrink and disappear in the late 1980’s, international business was increasingly done via letter of credit. This was probably the single most important reason why we saw the continued rise of smaller more specialized trade intermediaries who were unwilling and unable to assume risk for import-export transactions.

Importer-distributors now find themselves at a crossroads in this new economy. No longer needed for their financial strength or willingness to assume risk. No longer needed as a repository of product and service information as well as their ability to train sales people. With mass merchandisers buying directly from the factory and forcing smaller stores out of business, their client base is disappearing. With the economic slowdown upon us, it will be very interesting to see just how they will reinvent themselves this time around.

Send mail to webmaster@going-global.com with questions or comments about this web site. Copyright © 2004 JPG Consulting Last modified: June 18, 2005

Send mail to webmaster@going-global.com with questions or comments about this web site.
Copyright © 2004 JPG Consulting
Last modified: June 18, 2005