Locating and Entering an Interesting Retail Chains Market Overseas

Published in The Exporter's Guide DIY-Hardware (Issue 2) Israeli Export Institute, Chapter 12
Author: Ari Manor , CEO, ZOOZ

Is there a way to ensure that a product line developed in Israel will succeed on the shelves of international retail chains? Probably not. There is always some uncertainty, and a touch of luck is surely needed. However, correct planning and adhering to several simple rules can certainly help. This article presents some principles and processes that greatly improve the chances of success. 

A. Getting on the shelf - the product approach 

Let's assume that you developed an idea for a unique product, and that you are now interested in marketing it in foreign chains. Your chances of success would usually be slim, for two major reasons: 

1. A technical reason - buyers are not interested in one product or another, but rather in product lines. A buyer wants to see how "your shelf" will look, what types and sizes of products it will include and in what order, with what packaging and manuals, at what pricing and what revenues is it expected to yield. A buyer is measured by turnover per shelf space, and expects you to have a complete solution regarding your shelf. If you approach him with a single product, or even several products without a planogram (an exact plan of a shelf), you will probably be regarded as an amateur and be turned away.

2. A fundamental reason - most chances are that your product, even if it is based on a brilliant idea, has no demand. If there are no similar products in retail chains abroad, buyers will usually refrain from taking a chance on a new thing. If similar products exist, "your" shelf is already taken up by three other manufacturers (at three price levels), and the buyer will refuse to replace a trusted veteran supplier with you. Even if one or more buyers agree to represent your product line in their chains, it is feasible that the entire range has little consumer demand, making the entire story not worthwhile.

The technical reason may be overcome with proper advance preparation, including investing in planning and developing a full product line, packaging and planograms, and only later presenting it to buyers abroad. It is vital to use the services of a graphic designer who has experience in developing packaging for foreign markets and in presenting product lines.

The fundamental fundamental reason is usually not easy to overcome. Most new product ideas do not have enough demand to justify their development. Therefore, the product approach, focused on the product ("What a great idea!"...), rather than on market forces - usually leads to failure, often after considerable R&D and marketing resource investments.

For similar reasons, the manufacturing approach, focused on operating the existing production line around the clock, does not justify the development of new products for foreign retail chains. Even when it seems to increase efficiency and financial savings, production in Israel will still be more expensive than in countries such as China, and the developed products will have no demand.

The market approach, however, may be more prolific for introducing the product to the retail chain shelf.

B. Entering the shelf - the market approach

Whether you have a certain production capacity, or ideas for a unique product line, according to the market approach you should first identify an interesting market:

• Set a desired revenue goal - if you don't decide on a target, you will never reach it. It is important to define a clear and time-framed goal, which would be attractive relative to your current revenues and aspirations. For example - global sales of 10 million dollars per year, beginning in the fifth year of development of the new product line. Consider a 10% profit rate for regular products, and 25% or more for unique and innovative products for the first two-three years (until compatible products appear).
• Identify a sufficiently large market - in most cases, even if you succeed tremendously, your sales would constitute but a few percent of the global sales of a given market. Only a few firms are able to sell more than 5% of the entire world market. They are usually world leaders that were able to build a super-brand, with many years of massive advertising efforts (for instance - Stanley, Black & Decker, Gillette, etc.). Therefore, in the case of an Israeli company that owns no super-brands, one should look for a market 20 or more times bigger than your sales goal (so that you may take up 5% or less of that market). For example, if your sales goal is 10 million dollars in five years, find a market with sales of at least 200 million dollars, or which you believe would reach that size within five years (for example - a new market that you think will grow). 
  
  In order to evaluate the current market size, you may use existing databases. For example - the U.S. government publishes very detailed sales data by market. Information specialists could help you do that. You may also use sales data of large foreign retail chains. For example, if you know the average item sales per store (in several chains), and the price of the items, you may calculate a general estimate of all global sales. If you are in contact with buyers in retail chains abroad, they could provide you with such data. If you do not - you can use consultants that have such contacts. In addition, the detailed financial reports of public chains are a possible source of information (often available online on their websites).
  
  Two rules of thumb to bear in mind, which apply to many cases:
  i. The size of the global market (including the U.S.) is twice the size of the U.S. market alone.
  ii. The suppliers' revenues are usually a third of the retail chains' revenues (in other words - the price on the shelf is three times that at the factory gates).
  
• Make sure the market you enter is growing - assuming you want to sell the product line you develop for many years to come, you should focus on a market exhibiting constant growth. Otherwise, you might end up swimming against the currents. For instance - it is uncertain whether the pocket calculator market will grow (perhaps the calculator functions of future mobile phones will suffice). On the other hand, it is obvious that amateur gardening and outdoor activities in general will grow in the coming decades (due to the aging of the Western world population, causing an increase in private garden owners and leisure time).
  
• Examine whether the market competition is reasonable - entering a crowded and highly competitive market is inadvisable. You may visit a relevant international conference and count the number of displays with similar products to the line you are thinking of. If many Chinese are making similar products - you've probably missed the boat. You should have a window of opportunity in three general cases:
  
  i. The invention of a totally new field, which does not exist in several chains, and there is positive feedback from buyers in these types of chains, requesting to develop such a product line for them. In such a case you will probably be the first in the market. Chances of leading the market for long are not great, as success will breed tough and veteran competitors. In any case, you have a good chance of being a major player in the field. For example, the first manufacturer to produce folding plastic picnic tables, which entered the camping equipment chains is doing well even today. Inventing a new field is not necessarily developing a whole new product or answering a new need. Sometimes it is enough to develop an existing product made of materials that are different to what is currently available (e.g. plastic instead of metal), and using the unique characteristics of the new material (for example - low cost).
  
  ii. Identifying a preliminary market with very few manufacturers, where buyers ask for a line similar to the existing one, since they do not have enough suppliers (or are dissatisfied with existing suppliers). The emphasis in this case is on a small number of competitors (which could change in a year or two!). The window of opportunity is very short-lived, so it is vital to respond quickly and forcefully. If you make it, you will mark your territory in the field, and be one of the regular players.
  
  iii. Fighting a sleepy giant - you have developed a line of products for a market controlled by an unrivaled ruler, where other competitors are small and transitory. The window of opportunity in this case is until the giant wakes up. If, for instance, its sales are half a billion dollars a year, you may be able to reach 10 million dollars a year before even being noticed. Later, if you gain its attention, it might decide to buy you or from you, which is definitely for the best. A good example is ZAG, which rivaled Stanley with many product lines and several dozen million dollar sales, until being bought by the giant. Kapro was also able to develop an innovative leveling tool product line, and sell 10 million dollars a year, including developing products for Stanley for a while.
  
• Check if your production capacity is appropriate - if you do not have enough capital to start new product lines, make sure you can at least manufacture the core of the new products. You may use subcontractors, but be sure to have control over essential production and assembly capacities in order to achieve the strict quality standards of foreign chains. In addition, if you have a soft spot for the above-mentioned manufacturing approach, a product line manufactured with your existing production facilities may carry your factory ahead, help reduce costs and take advantage of the technical abilities of your employees. 

C. Innovation and design as keys to success

Retail chains abroad keep product lines in three price levels: cheap (good), medium (better) and expensive (best). The high-end product lines are usually super-brands, based on many years of advertising (see above), and are therefore out of the scope of a typical Israeli manufacturer. The low-end product lines are usually made in low paying countries (e.g. China or India), and are difficult to compete with for Israelis. Israeli competitors that are able to offer price competition do so as global firms with manufacturing facilities overseas (for example, Bagir - with factories in Portugal, China, Turkey, etc.), or through a large scale advantage, focusing on constantly increasing efficiency and cost reductions (for example - Keter, which only enters large enough markets in order to justify the construction of designated, field-specific production facilities, with incomes large enough to cover marketing and management costs).

The natural position for most Israeli manufacturers aspiring to penetrate foreign retail chains is a medium price range product line. These are high quality product lines, not supported by a super-brand, yet offering some added value (as compared to low-end products), usually through crafty design and an element of innovation. Therefore, even if you identify a large enough market with growth prospects and reasonable competition, and which fits your production capacity - you still have to add innovative elements and original benefits to the product line you will develop, and to maintain a high level of industrial design and packaging. This is the only way you will be able to hold a space on the shelf for a substantial amount of time.

In order to achieve a high level design one may use the services of experienced and renowned Israeli designers. There are several outstanding design agencies in Israel that produced successful product lines for companies such as Keter and ZAG. They could also provide valuable advice on developing and marketing the product line. Though they come at a cost, they offer very good value for money compared to designers of similar stature abroad, and their fee usually turns out quite worthwhile. It is important to remember that in the retail market, package design is not less and sometimes more important than the actual product design. In many cases changing the package has turned a weak product into a successful one. It takes an experienced designer to make a successful package that attracts clients. Much more so in Europe, where each text has to appear in eight languages, so the use of images to demonstrate product advantages is of the essence. 

D. Government support for developing product lines

Israel offers a variety of support schemes for aspiring exporters or existing exporters wishing to launch a new product line. While the more well-known programs assist in funding the development and marketing costs, some very good programs offer assistance in finding and funding consultants. In contrast to large scale government programs, such as "business guidance", these programs are much more focused and targeted, with consultants specializing in various aspects of international retail sales, innovation and design.

1. International retail sales - The ProductNet program provides the manufacturer with a team of experts on international retail sales that have extensive contacts with foreign buyers. The team guides and manages all stages of the program - locating a promising market suitable for the factory's capacities, characterizing the appropriate product line, conducting a legal and patent analysis and plan, development of innovations and competitive advantages, testing with overseas buyers, designing products and packaging, launching, and initial sales. The consultants in the program are CEOs and CMOs of Israeli firms experienced in international retail sales, with a proven track record of successful product lines sold at chains such as Home Depot, Wal-Mart, Office Depot, etc. The ProductNet program is managed by ZOOZ, and is subsidized by various government programs, including Nitzoz (promoting innovation), Market Guidance (for novice exporters) and Tnufa (by the Chief Government Scientist).

2. Innovation - The Ministry of Trade and Commerce offers the Nitzoz program, which provides the manufacturer with an innovation expert that can assist, among other things, with the development and screening of ideas for new products. The work under Nitzoz is usually in in-house workshops for a team consisting of your marketing and R&D personnel. The program funds up to 75% of the consultant's fees. For further details you may contact the author of this article, or visit the program's Hebrew website at: http://www.moit.gov.il/tamas_level2.asp?sid=635

3. Design - The Ministry of Trade and Commerce's Designing Guidance program offers you the services of an experienced industrial designer from a well known Israeli design studio, able to assist you in developing and designing a new product line. This program also offers up to 75% funding.  For futher details click here (Hebrew only link).


E. GatorClamps by Tefenplast

To conclude this article we bring you the story of an Israeli company that developed an original product line using the above mentioned principles.

In mid 2001 Tefenplast Ltd., a manufacturer of plastic injection products, up until then a subcontractor for ZAG, Kapro and other firms, decided to develop its own product line. For this purpose it hired the services of an independent consultant.

In order to locate an interesting market the consultant, Garry Favel, turned to his contacts from distributers and buyers abroad, asking what they were lacking and what business opportunities existed. One German buyer told Garry that the plastic clamp market's profit margins were high, and only two leading suppliers for DIY chains existed (one German, the other from the U.S.A.), and that the buyer considered them to be problematic, and would therefore appreciate competing offers.

Garry carefully analyzed the market, researching the market size and demands from other buyers. His conclusion was that it was indeed an interesting market: the global market for plastic clamps was already a 200 million dollar market; it was growing and was a relatively new market. There were indeed only two global competitors, and it fit within Tefenplast's production capabilities (Multi-stage plastic injection process). He presented his findings to the owners of the plant, and achieved their support to move forward.

At that stage it was decided to participate in Innovation Workshops through the Nitzoz program, thus enjoying the program's funding. The innovation workshops, facilitated by ZOOZ, joined together the factory's owners, production manager, Garry, and several outside experts: carpenters and industrial designers. Numerous ideas were generated and screened, including feedback from overseas buyers, and a plan for developing the product line was finally established.

Some of the innovations were designated for the first generation product line, but the plan already comprised of next generation innovations, a point that was taken into consideration when designing the first product line and developing marketing materials.

Tefenplast hired industrial designers (Studio ZAG) for designing the clamps, and graphic designers (Studio Design & Shoot, Gal Friedman) for designing the logo, packaging, booth and marketing material. Both are highly experienced designers in the field.

The first product line was launched in the 2002 Cologne exhibition in Germany. At this fair the German buyer and other buyers ordered clamps at a value of several hundred thousand dollars. The first shipments were sent only in August, due to some production delays. Pictures from the first exhibition appear below. Notice the maturity of the presented product line and the high level of product and packaging design.

Following the development of the GatorClamps product line, Nir Ben Aharion, the coordinator of the Ministry of Trade and Commerce Nitzoz program, , suggested that we should team up with Garry in assisting other firms in a similar manner. This was actually the way the ProductNet program started, but that's a whole other story.