Acquiring a Distribution Channel

Xplore Technologies (NASDAQ: XPLR), based in Austin, Texas, is a manufacturing company that produces rugged tablets for businesses in a range of industries. Recently, Xplore acquired another tablet manufacturer, Motion Computing. On the surface this looks like any other  horizontal merger/acquisition. “A horizontal merger takes place when two companies offering similar, or compatible, products or services to the same market combine under single ownership. If the companies sell similar products, the combined sales give you a greater share of the market.” (Linton, 2016)

 

Commonly the rationale for mergers or acquisitions would be synergies, EBITDA growth, revenue growth, cost minimisation etc. However, in a recent article with Xplores’ Chief Marketing Officer, Peter Poulin, another reason for the acquisition was announced. He cited the major strength of the acquisition was Motions’ international distribution channels. Further detail on Motions’ international channels is contained in the article below.

http://www.arnnet.com.au/article/599707/xplore-technologies-experiments-markets-deepen-channel-engagement-australia/

In 1987, Anderson and Coughlan identified the difficult decisions firms face when deciding how to introduce a product to an international market. The two models being a company owned distribution channel (Direct) or outsourcing to independent distributors (Indirect). (Anderson & Coughlan, 1987)

Direct Distribution

Direct selling eliminates the costs of sales commissions and discounts necessary to generate business. It also allows you personal contact with the consumer and the ability to better answer questions and provide more customer service than a wholesaler or retailer who is not as vested in your success as you are. Wholesalers can get you into more retailers than you might be able to sign by yourself, while retailers can deliver more customers, especially if they have multiple locations. Disadvantages of direct sales include increased staff, software and shipping costs and higher marketing costs to reach consumers.(Ashe-Edmunds).

Indirect Distribution

Indirect distribution involves the addition of wholesalers and retailers to the distribution channel which usually results in profit margins being reduced for the manufacturer. The indirect model is generally a lower risk model for manufacturers to enter new markets. Upfront capital costs are minimised and products are normally able to access larger numbers of consumers through existing wholesaler and retail channels. A downside of this low risk option is the manufacturer loses a significant amount of control over the marketing and broader sales function when selling is outsourced.

distribution_types

The internet has enabled all manufacturers to participate in some form of direct distribution with only a relatively small investment in a website required. However, due to the huge range of options available to consumers online it is difficult for most manufacturers to differentiate their offering and gain the level of desired sales through online sales alone. Dell is one company that has succeeded in direct marketing for several decades. “Dell started out as a direct seller, first using a mail-order system, and then taking advantage of the Internet to develop an online sales platform. Well before use of the Internet went mainstream, Dell had begun integrating online order status updates and technical support into their customer-facing operations.” (Mars, 2011) Dell has since moved to a mixed distribution model, leveraging their online presence as well as retail channels. The following Dell corporate video discusses Dells’ direct marketing strategy.

 

In the Xplore Technologies case above it is clear the high value management attributed to the distribution networks that Motion Computing had established. When deciding on the optimal method to increase sales into the Australian and Asian markets, Xplore could have used a direct method by employing in-house sales representatives. However, the contractual arrangements and relationships with wholesalers and retailers that Motion had in place obviously provided Xplore with comfort that their sales targets would be achieved by utilising this strategy.

Since the acquisition, Xplores’ share price has continued to track down, so it appears investors don’t view the acquisition as a positive, or could it be that they don’t understand the value of distribution channels when marketing an organisations product.

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References
Armitage, B. (2016). Funding Circle. The complete guide to growing your business internationally. Part 2: Distribution Channels. https://www.fundingcircle.com/blog/2013/08/the-complete-guide-to-growing-your-business-internationally-part-2-distribution-channels/. Date Accessed: 15 May 2016
Ashe-Edmunds, S. What is a Direct Channel of Distribution? Demand Media. http://yourbusiness.azcentral.com/direct-channel-distribution-13217.html. Date Accessed: 15 May 2016.
 

Anderson, E & Coughlan, A. (1987). International Market Entry and Expansion Via Independent or Integrated Channels of Distribution. Journal of Marketing Vol.51 No.1 Jan 1987. American Marketing Association.

Linton, I. (2016). What Is a Horizontal Merger and a Vertical Merger? Demand Media. Hearst Newspapers. http://smallbusiness.chron.com/horizontal-merger-vertical-merger-60981.html. Date Accessed: 15 May 2016.

Mars. (2011). Case Study:Dell – Distribution and supply chain innovation. Mars Discovery District. https://www.marsdd.com/mars-library/case-study-dell-distribution-and-supply-chain-innovation/. Date Accessed:15 May 2016.

 

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