Luxury jewelry retailer Tiffany & Co. recently released its second quarterly results, notching a better than expected 33% boost in profits, driven by demand in international markets. In terms of growth, Tiffany cited a 46% increase in sales to distributors in emerging markets.
FSG has found that one of the keys to success for high growth companies in emerging markets is taking a “tough love” approach with their distributors.
In terms of “love,” our benchmarking research has found that high growth companies are selling more than 50% of both revenues and volumes through distributors, compared to less than 38% and 36% respectively at average growth companies. High growth companies are also investing significantly more resources in managing their distribution relationships. Measured in terms of full-time equivalents (FTEs), high growth companies are dedicating about five times more resource than low growth companies. We have also found that senior executives at high growth companies are investing substantially more time personally working with distributors than their peers at low growth companies.
In terms of “tough,” high growth companies are much more likely to terminate relationships with distributors. We found that the average tenure for distributors for high growth companies is about 7 years, compared to over 10 years at average growth companies. When we asked companies what percentage of their relationships they have terminated in just the past 2 years, high growth companies told us that on average they had ended 17% of their partnerships, compared with 7% at average growth companies.
Although it may seem counterintuitive, it turns out that despite the significant extra investments that high growth companies are making as part of this tough love approach, their channels are much more profitable than those of low growth companies. Simply put, growing the size of the profit pie means that the distributors’ appetite can be satisfied with a smaller piece.
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