International activity mode selection

At first, we tried direct export as a way of entering Russian market, as we had an experience when exporting to central Europe. The direct export has the following advantages:

• more control over the export process,

• potentially higher profits,

• closer relationship to the overseas buyer and marketplace.

So, the first year of our Russian expansion we practiced the scheme of direct export But as there are two main players at the market (“Coffee-House” (124 in Moscow, 53 in Saint-Petersburg), “Chokladnica” (118 in Moscow, 23 in Saint-Petersburg)³), their market power increases and there is a possibility of oligopoly in the nearest future, so we became very dependent from these players and this makes a high risk (for example, setting of the purchasing price by buyer). Very similar situation can be observed in the market of superstores. That’s why we shifted our decision to indirect export. This method is more suitable for the specific Russian market and offers several significant advantages:

• Seemingly lower cost and financial risk associated with the intermediaries compared to the attempt to carry out equivalent activities through one’s own staff or by setting up a selling operation in a foreign market are important considerations, particularly when there is uncertainty about size and viability of the market;

• As a perceived lower-cost method, using foreign intermediaries is often viewed as a way to expanding to a wider range of foreign markets.

• The intermediary’s local market knowledge and marketing infrastructure are major advantage for potential exporter with limited experience and knowledge of the market in question⁴.

So, we considered choosing from three possible options:

1. Distributorship;

2. Agent agreement;

3. Consignment agreement.

Due to specialties of the Russian market such as unstable economic situation we need international operation that secures our risks most effectively. We understand that in the situation of any economic instability and following decrease in consuming ability coffee would not be the good of the first necessity. Moreover as we experience lack of knowledge of operating on Russian market, having consignee taking most of the risks can help us to avoid a lot of problems, connected with national specialties.

So, we decided to use consignment agreement, which generally provides us with several advantages:

• using foreign capital;

• avoiding risk of shipment failure;

• minimization the risk of overstocking;

• lack of experience or knowledge in doing business abroad;

• searching for a low risk and simple way to commence its internationalization process and to become acquainted with its demands and challenges;

• too limited resources (all kinds of them) to open a greater number of export countries.

Part II – Scientific Research on consignment operations

First of all we'd like to outline that consignment agreement is a type of intermediary agreement for indirect export and define it’s position among other types of intermediary agreements.

So, basically there are three types of intermediary agreements in export operations:

• Agent agreement

• Distributorship agreement

• Consignment agreement

The terms “foreign agent” and “distributor” are often used loosely and interchangeably, and each sometimes in a generic way as an equivalent of the term “intermediary”, but the distinction is important from a company perspective when seeking the most appropriate intermediary form for exports.

An agent operates on behalf of the exporter in the foreign market, performing a range of functions in seeking to facilitate sales of the exporter’s products and/or services, taking orders, usually on comission/retainer basis, but does not purchase and take title to the products.

A distributor does purchase the exporter’s product, thus not only representing the exporter in the foreign market, but acting as a direct customer and operates independently from exporter⁵.

Agents tend to be favoured of a distributors in situations where market volume is likely to be limited and the exporter is seeking to limit the cost of market development. For slow-moving, expensive products distributors are likely to be less prepared to become involved because of the cost of holding inventories, so that agents may be the more feasible path. For products requiring spare parts and servicing support, such as with machinery and equipment, distributors tend to be the favoured route.

The choice of agent versus distributor, apart from the type of broad considerations noted above, is undoubtedly affected by company-specific concerns, the nature of its preceding international experience, including commitments entered into and outcomes from past activity and approaches it has received⁶.

Let’s now consider consignment agreement. We would like to start talking about consignment agreement with provision the most essential definitions concerning this international operation:

• “Consignee” refers to the customer who receives the Consignment Stock subject to the terms of the Consignment Agreement.

• “Consignor” refers to the manufacturer whose products are the subject of the Consignment Agreement.

• “Consignment Agreement” refers to the agreement that should be drawn up on the basis of the information covered in this Checklist.

• “Consignment Stock” refers to the manufacturer’s products that are the subject of the Consignment Agreement.

The definition of a consignment sale is one in which the owner, the consignor, transfer possession of merchandise to a consignee. When the consignee sells the merchandise to a third party, the consignee becomes obligated to pay the consignor from the proceeds of the sale of the merchandise. The consignee receives a fee or commission for making the sale.

There are several types of consignment:

1. Simple or direct consignment. In this case consignee has a right to return to consignor all the goods unsold from warehouse before the certain date. There is no guarantee of stable sales of the stock during the certain period of time at the certain territory.

2. Partly returnable consignment is used to increase the stability of sales and responsibility of consignor for goods release. In this case consignee takes the responsibility to buy not less than agreed amount of unreleased goods by the end of fixed period.

3. Irrevocable consignment. Consignee looses the right of returning unsold product and by the end of agreed period of time all of the good should be bought from the consignor (owner of the product).

The ways of the rewarding of the consignee are similar to the commission operations: it can be whether a fixed price, mentioned in agreement as a percentage of sales volume or the difference between consignor’s price and the price of release.

It is important to remember that the type of consignment doesn’t solve the problem of assured sales of product at the market. It is evident that if consignee doesn’t manage to sell the product partners analyze this situation, trying to reveal possible reasons of fail. Even in different situations reasons are often the same – low competitiveness, which could be explained by such factors as high price level, set by consignor, poor design etc.

Unfortunately, not always conditions for sales could be easily improved. At the same time there is no willingness to break up business relationships with consignee: in such cases consignor agrees to the return of the goods even under the terms of irrevocable consignment.

In whole return is reasonable, when discount, needed for realization of the good is higher than double sum of expenses for its return and customs payment.