Coming into my role in 1986 to oversee the international marketing, Sterling had begun exporting sub-assemblies to the U.K. Sterling is now utilizing Julius Blumberg to expand sales into the US. Our sales within both markets are currently not living up to what the International Marketing Committee believes to be our true potential. Regarding sales within the US, Sterling needs to leverage the knowledge and information gained from doing business through Julius Blumberg to establish a direct line of sales within the country. Simply being in a catalog of another company is not meeting expectations. We need to leverage the aggressive, direct sales methods we saw succeed; given that Blumberg does not feel comfortable with this line of marketing, we should look to establish a subsidiary within the country to gain direct oversight over the operations. With close proximity of major urban centers to our Canadian offices, I feel that this can be accomplished with minimal risk. Noting that the increase in lawyers and incorporations year over year is 10x that of Canada the possible returns outweigh the overall risk involved in seeking a more direct expansion into the US market. Looking at the current environment in the UK, I see a different situation and path. The UK represents Sterling’s best potential market in Europe given its legal requirements for seals and its 2.5x yearly increase in lawyers and incorporations compared to Canada. Unfortunately, with a VAT of 15%, manufacturing within the UK will decrease overall margins.
Continuing to manufacturer within Canada at our current facilities will alleviate the VAT and only subject us to the 4.7% tariff. We will also be able to forgo any additional manufacturing facility costs, or at least delay them until we have significant market penetration. I recommend, that we approach a direct partnership with one of the three smaller agents in the UK market; either Jordan, Davis, or London Law. In our approach to potential partners, we should leverage our ability to enter the market ourselves and push them out of the market in our contract negotiations. I would recommend that we do not approach Bolson’s as we will gain more leverage on the lesser three since they would have more to lose by another major producer entering the market (ie they get pushed out of the market completely). This partnership will allow us entry into the UK at minimal overhead costs and put us in a scenario where we can drive how our product is positioned and marketed while leveraging the local market understanding and knowledge of the partnering company. Currently, we have been approached by representatives in additional countries. I highly recommend that before we move into another international market we strengthen our approach and sales penetration in the US and UK. Once successful, I believe that we should begin working towards penetration in the Japanese market. With 82,000+ lawyers and a similar GNP per capita to Canada and the US, Japan may represent our next best opportunity to expand internationally.