A company loses control of its overseas distribution and pays a hefty fee to get it back.
You may have found that signing up overseas distributors at trade shows is pretty much painless. Some distributors even pay you in advance. Beware: those easy orders can hurt you.
Scott Montgomery, marketing chief at bike manufacturer Cannondale, in Georgetown, Conn., recalls his struggle to control distribution when he started Cannondale Europe, in 1989. Sales raced to $1.5 million the first year, but margins slipped. The same distributors who placed large orders and paid with letters of credit also resorted to discounting. "When your products are being dumped," says Montgomery, "you lose control of pricing and positioning."
In 1992, to reestablish his authority, he bought out the contracts of his European distributors and agents for an "embarrassingly expensive" price -- about 5% of the reps' annual commissions. Says a wiser Montgomery: "You can do OK with agents and distributors if you protect yourself. You should overstate that you're signing a short-term agreement, otherwise you may still have to pay. It's not like in the United States."
Now Montgomery has set up a sales force, opened an office in the Netherlands, and rented warehouse space. Cannondale Europe's annual sales are approaching $32 million.