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Common distribution models in the Russian market: Pros and Cons
The core idea of our innovative business model is cooperation and efficiency. In fact I have rethought agencies, free market distribution, exclusive distributor and classic local subsidiary. Let’s briefly discuss all of them, taking as an example the Russian market as the one setting trends in the whole region.
Scheme 1. “free market” distribution model for building materials and furniture
Scheme 2. “Exclusive distributor” distribution model for building materials and furniture
Scheme 3. “Subsidiary” distribution model for building materials and furniture
1) High hidden costs e.g. lost time
2) Brand damage
3) Market loss
2) Brand damage
3) Market loss
Pros:
Cons:
Risks:
1) Low direct costs
2) Low operations
3) Quickest enter and quickest exit
4) Management in homeland
2) Low operations
3) Quickest enter and quickest exit
4) Management in homeland
1) Full reliance on local sellers
2) No control
2) No control
1) Wrong partner
2) Time loss
3) Inefficient Distribution
2) Time loss
3) Inefficient Distribution
Pros:
Cons:
Risks:
1) Low/middle direct costs
2) Low operations
4) Management in homeland
5) Good control
2) Low operations
4) Management in homeland
5) Good control
1) Full reliance on the exclusive importer
2) Lack of transparency and influence
3) High end pricing
4) Enter and exit are complicated
2) Lack of transparency and influence
3) High end pricing
4) Enter and exit are complicated
1) Time spent
2) Wrong partners
2) Wrong partners
Pros:
Cons:
Risks:
1) No direct costs
2) Low operations
3) Quickest enter and quickest exit
4) Management in homeland
2) Low operations
3) Quickest enter and quickest exit
4) Management in homeland
1) Lack of transparency
2) Narrow competence
2) Narrow competence
1) Wrong team
2) Huge Loss if no success
2) Huge Loss if no success
Pros:
Cons:
Risks:
1) Full control, transparency and influence
2) Fully integrated business
3) Highest Investment potential
4) Ability to share and build competence
5) Optimal pricing
2) Fully integrated business
3) Highest Investment potential
4) Ability to share and build competence
5) Optimal pricing
1) Big costs
2) High operations
3) Enter and exit are most complicated
4) Local management
2) High operations
3) Enter and exit are most complicated
4) Local management
Well, this is the most common starting point for market entry and development in the region. However, only few companies manage to succeed spending years to find local partners and make them sell target turnover.
Briefly, full reliance on local sellers and simultaneously their lack of competence incl. in creating demand for new products creates risks which almost eliminate all Pros of the system, given that the product fits the market and the In-House team is totally fit: speaks Russian well, takes into account the meaning of trustful relations and other local peculiarities. Unfortunately, the reality is often the opposite.
Briefly, full reliance on local sellers and simultaneously their lack of competence incl. in creating demand for new products creates risks which almost eliminate all Pros of the system, given that the product fits the market and the In-House team is totally fit: speaks Russian well, takes into account the meaning of trustful relations and other local peculiarities. Unfortunately, the reality is often the opposite.
Furthermore, the most common environment for such relations is competition between sellers, which is usually seen as a driver for optimization and growth. Unlike in many other markets, in the Russian market in the middle and above it usually creates demotivation.
Unfortunately, this distribution strategy mostly leads to turnover breakdown at some point. Sometimes local misuse of the TM, failure intended or not to fulfil obligations to End-customers and B2B clients and others ruin the business and deter future activities.
There are exceptions: an appropriate motivating business model could be OEM partnerships.
Unfortunately, this distribution strategy mostly leads to turnover breakdown at some point. Sometimes local misuse of the TM, failure intended or not to fulfil obligations to End-customers and B2B clients and others ruin the business and deter future activities.
There are exceptions: an appropriate motivating business model could be OEM partnerships.
However, in reality there is a core conflict in relations between the producer and the distributor: marge vs. quantity. The distributor’s exclusive control, no transparency and interest to get a higher marge usually leads to inefficient pricing, which doesn’t let the product get a significant share in the long run. Sometimes combined with low competence in the middle and above markets, low investment potential, poor integration with the producer the business is said to lose to competition. Spending some years with a wrong partner cost a lot, closing the contract can also be a challenge.
By going in this direction, some companies had a really good start, statistically much better than those with a “free market” strategy. Generally, the strategy allows both producer and the distributor be motivated to invest and to develop the market in cooperation. The distributor acts in accordance to local ways of doing business, is able to set up local strategy, operations and team dedicated to push the brand in the market. The product flow is under control, which means that unauthorized sales are not possible, which is important to control competition (the paradox of controlled competition to motivate partners for growth is a separate topic).
While this business model is definitely one of the most successful in the market, e.g. gives an opportunity to develop lacking competence both in homeland and locally, there is a huge risk of loss for newcomers. Resource-heavy is everything from the beginning; the most “expensive” in the run is to get a right stable management and team able to integrate into the global business and to find a right strategy in the middle and above markets. Worth mentioning, the competitive pressure is also getting more and more tense every year as compared to early 2000’’ when the market was skyrocketing.
The agent or agency usually has a professional contacts network and sales experience in the market and their task is to get new prospects to the producer. Very important is to determine, with which kind of actual distribution model this is going to be combined. If it comes along with the “free market” it bears all cons and risks of the model. On top of that, most of the producers do not have needed competence to be successful. In reality, agents quickly lose motivation as the prospects do not convert into contracts and even rarely convert into significant turnover.
The second most common business model in the market is “Exclusive Distributor”. It means all imports and the use of the TM belongs to the exclusive importer.
The subsidiary distribution model is one of the most common generally in other Russian markets too, the majority of the local market leaders among foreign brands are operating this way.
The first most of foreign building materials and furniture producers do is trying to find local clients while their business units are staying in homeland. Meaning management, logistics, sales and marketing are being performed by the team in-house from abroad.
Free market
Exclusive distributor
Subsidiary
Subsidiary
A much less common model to develop the business in the Russian market is Sales Agent or Agency. The producer’s business units still stay in the homeland, while a sales function of getting new prospects is getting delegated to the local partner-sales agent.
I would like to say that the strategic choice of the right distribution model is one of the most important to succeed in the market. At this point, the idea of the “ideal” model for newcomers and those who had trouble growing came to my mind. Our one-window agency and the particular service “sales representation” combines the best of each model and ensures getting needed competence in-house and locally to grow in Russia.
By exploring our sales and marketing know-how, having transparent partner relations, using the vast existing professional network and staying small with no direct legal entities drastically saves time and money.
Max Kondurov 10/01/25
Conclusion
Scheme 4. “Agency” distribution model for building materials and furniture
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