This post is part three of a 3-part blog series. Follow the links to read part 1 of the series (on how EMEA executives are re-thinking their regional market portfolios) and part 2 (on how companies are re-shaping their value proposition in emerging markets).

Our latest Senior Executive Roundtable in London revealed three key challenges that heads of EMEA at large multinational companies will face in 2016. So far, we’ve written about how they are re-thinking which markets they want to play in and with what products they need in order to win in these markets as local competition accelerates.

The final trend amongst multinationals has been around structuring the local partnerships that would allow the right product to get to the right customer in the markets they’ve prioritized. For the most part, multinationals continue to work through distributors in most of their EMEA markets, and even where they have a direct sales team, they continue to use distributors for customer segments that are hard to reach, geographically dispersed, or difficult to serve in a scalable, localized way.

As multinationals increased their presences in emerging markets, they tended to go hybrid or even direct to manage the sales process more tightly, collect critical market insight and control their brand better. However, slowing growth and currency volatility have reversed or slowed down some of these plans, as cost pressures mean multinationals cannot afford to set up large local sales teams and instead will continue to rely heavily on distributors to win in increasingly challenging local environments across the region. This is changing how they are approaching their channel strategy and has been reflected in 2016 plans for a large number of companies we work with. We’ve seen several types of changes:

1. Passing more risk on to the distributor

In non-strategic markets, where profitability is priority but currency volatility is high, multinationals are increasingly passing that risk on to local partners and reducing their direct exposure to the market. This strategy works in the short-term and for low-importance markets, but it means that multinationals are taking the risk that their partner may not deliver the intended results. In extreme cases, as we’ve seen in Ukraine this year, partners saddled with additional financial responsibility can go bust in a hostile economic environment.

2. Strengthening partnerships with existing distributors

In strategic markets where multinationals have very few local partners or where they are looking to win market share, companies are taking the opposite approach and sharing the burden of currency depreciation or lack of credit with their local distributors. This is costly, but can increase distributor loyalty and give multinationals much greater leverage in negotiations with local partners. It also opens an opportunity to influence how the partner runs the business and push through qualitative changes in their operations that can take the business to the next level. We’ve seen this in markets like Russia where companies need to maintain existing relationships and want to position their partners to outperform competitors by becoming much more sophisticated.

3. Restructuring existing relationships

This runs the gamut from cutting out excessive distributor layers (especially when reaching local consumers in dispersed geographies), dropping partners who are underperforming and replacing them with new ones, and acquiring distributors in taking advantage of low valuations and favorable exchange rates in a range of emerging markets this year. Generally, companies are looking to increase the efficiency of their route-to-market and cut costs out of their channel that they can either pass on to end customers or retain to compensate for profit erosion from currency volatility. While these are normal business activities, we’ve seen a substantial acceleration in companies undertaking such processes as part of their 2016 plans.

4. Looking for new types of channels

E-commerce, already an important new route-to-market for many multinationals, is becoming especially prominent now as it offers relatively low-cost, low-commitment access to additional consumers. Growth in internet connectivity means multinationals increasingly need a sophisticated e-commerce strategy for markets such as Turkey, Russia, and parts of the Middle East, and the current economic environment is accelerating multinational companies’ plans to make selective investments in building these sophisticated e-commerce strategies.

In conclusion, multinationals are looking less at making fundamental changes to their route-to-market, and more at optimizing and making the most of their existing partnerships. This process favors companies with structured processes for assessing new partners and setting up the right monitoring, incentive and support mechanisms for their partners, and firms that can strike the right balance between indirect and direct structures for each individual market.

To learn more about FSG’s EMEA Senior Executive Roundtable, please listen to our podcast. Not a client? Contact us to learn more.