Consider these key elements before international expansion
By: Stephanie Ramirez
Going global isn’t easy. It’s complicated, and it comes with hurdles, especially as businesses are also navigating the normal growing pains of scaling up. Additionally, every country has its own local laws, cultural norms, forms of currency and payment, unique business practices and language differences.
According to the World Federation of Direct Selling Associations (WFDSA), the global retail sales from direct selling have increased from about $184 billion to approximately $192 billion in 2018. The results from the global survey for 2019 have not yet been released. Health and wellness products continue to make up the largest product category, coming in at 33 percent of total channel sales.
Canada-based direct selling attorney Robert Kreklewetz, a partner with Miller Kreklewetz LLP, says Canada is often the first point of international expansion for most U.S. businesses. Though not the largest direct selling market by any means, adds Kreklewetz, expanding into Canada offers some advantages.
“In terms of everything you need to know and the trials and tribulations of going international, Canada’s the easiest place to start,” he says. “There are many commonalities between the U.S. and Canada such as the language we speak and how both countries are regulated.”
Kreklewetz explains that Canada has its own version of many U.S. regulatory agencies, from the Food and Drug Administration (Health Canada) and the IRS (Canada Revenue Agency) to Customs and Border Control (Canada Border Services Agency).
“Canada has a very similar regulatory framework as the U.S. so everything that a U.S. company would expect in terms of legal issues in the U.S.,” says Kreklewetz, “will be the same legal issues in Canada. It’s a very similar governmental authority with a different name.”
Preparing for Expansion
Kreklewetz recommends companies consider three major areas when exploring international expansion, particularly in Canada. He advises clients to group their business aspects into categories or “buckets” so as not to be too overwhelmed or lose sight of what’s most important.
What is a company trying to sell? How do we get it into the new country, and what are the logistics of importation? If it’s a consumable, are there things in the product that may or may not be compliant in accordance with a new country’s health and safety guidelines? Is the packaging and labeling compliant?
“All of these things need to be considered before even starting the process,” adds Kreklewetz. “There’s no point in having the conversation about expansion if they are going to be prohibited from actually selling their products in Canada.”
Structure and Taxation
How are you going to operate, and how will you structure the business? Will you set up an entity in the new country or maintain a U.S. holding company? What will you do to minimize taxes and can you be profitable?
“Direct selling companies, as altruistic as many of them are, are fundamentally interested in earning a profit,” says Kreklewetz. “The last thing they’d want is to enter the Canadian market only to find out that the way they’ve done it has primed them for double taxation in Canada.”
The Canadian competition act is similar to the FTC regulatory framework in the United States and, according to Kecklewetz, is very concerned with pyramid selling schemes. Canada has the competition bureau to police pyramid selling, he adds.
“We advise a review of the U.S. compensation plan and 99% of the time, it will require Canadian-izing those documents to make sure that they meet Canadian federal provincial regulatory requirements from the direct selling perspective,” says Keckewetz.
Payments and Commissions
Another area that is often undervalued by company leaders when expanding internationally is payments and commissions, according to attorney-turned-technologist Wendy Yurgo, president and CEO of Metrics Global, a global payment solutions provider.
She says that discussing payment strategies today is no longer a conversation about money but purely a conversion about technology.
“Finance no longer drives payments—IT drives payments,” adds Yurgo. “Finance used to drive payments, and it was all about a better rate, but now when we sit down with a client there are 15 people from IT and one person from finance. It’s no longer about the cost, although that’s a factor; it’s about the technology.”
According to a Forrester Research paper where 398 companies were surveyed, 63 percent of the respondents name payments as a hindrance to expanding into new geographic markets.
Yurgo says larger companies that have already expanded internationally many times are very fragmented and have multiple payment gateways and payment providers (In some cases she has seen as many as 22 gateways). To Yurgo’s point, the Forrester Research paper also showed 82 percent of companies doing business outside the U.S. said they had six or more payment providers.
“The pain points these companies are dealing with are innumerable and expensive,” Yurgo adds. “There is newer technology that allows companies to conduct business in multiple countries through a single payment gateway.”
Take Your Time
Yurgo’s advice to companies looking to expand internationally also is to take baby steps. First, explore the economic and political environment of a country before considering expanding there. Understand what is driving the expansion—a pragmatic business decision or a passionate distributor. One first step, although not ideal with the locals, may be to sell products in U.S. currency and figure out the logistical kinks, says Yurgo. Even better is to use a U.S.-based multi-currency platform where you sell in local currency and settle back in U.S. dollars, she adds.
Yurgo alludes that there are many countries where fraud is rampant, so working with a company that has expertise in your chosen markets as well as the fraud tools and monitoring systems will help companies transact business safely.
“The payment processing aspect of international expansion needs to be a major factor in consideration of where you’re expanding,” Yurgo adds, emphatically. “Take baby steps moving into an international market. Less investment. Less risk. Test the market first, and then take the bigger step of moving deeper into a market.”
Optimizing Distributor Perception & Customer Service
Jeff Mack, a former international expansion consultant for Asian markets—specifically Japan—now president of Velovita, a new direct selling startup, says where companies tend to make the most mistakes when expanding internationally is in customer service.
“Companies need to provide at least a modicum of customer service as early as makes financial sense,” Mack says. “There at least needs to be a bilingual person on the ground or in their home office call center to handle these issues. They don’t want their leaders doing customer service.”
Another area that companies need to research prior to jumping in is who they will use for commission payments, he says.
“Invariably, U.S. companies, when expanding to international markets, use commission payment solutions that are common to the U.S., but they just don’t work really well abroad,” says Mack. “Distributors are only going to be frustrated for so long, not being able to get their commissions, in a timely manner before they quit.”
Mack concludes that the pandemic may actually prove positive for anyone expanding into Japan right now. That’s because, culturally, the Japanese prefer face-to-face business transactions, and COVID-19 has forced them to do business virtually.
As the world becomes more connected, there are more opportunities for companies in any corner of the world to discover new markets where they can expand both their reach and their profit margins. However, it should not be considered an afterthought, according to these experts.
There are critical elements to be considered before diving in, but it is well worth it.
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Reading this article took me back to my days at Origami Owl and the countless hours of meetings in whether to expand, how best to execute, does IT have the bandwidth for this project etc. The experts nailed it on every count!