Distribution is one of the most popular routes to market and with careful planning it can be very successful. In this short guide we share our top tips to ensure that when it comes to engaging with distributors you are ahead of the game.
- What are your core numbers?
Before you enter into any distribution negotiation or agreements ensure that you know the following:
a. What is the absolute minimum order quantity you can afford to meet and still be profitable? This should be considered both on an order-by-order basis and on an overall basis for a particular period (usually a quarter or year). This helps you ensure that you retain profitability and helps if you need to set order limits (see further in particular on exclusivity at 2 below).
b. When are your peak times for sales? Your agreement may need to include the minimum order volumes you expect the distributor to achieve to reflect seasonal variations.
c. What discounts can you offer on increased quantities?
d. How many units can your production line produce and what is the lead time?
- How involved do you want to be in the territory or market segment? Can you afford to grant exclusivity?
Where distribution is the right model for a particular territory or market segment, you need to decide whether you will want to retain involvement (yourself or with other third parties) in that market (e.g. will you want to make certain direct sales, or use more than one distributor?). If you do want additional involvement, then you need to avoid exclusive appointments. If you are happy to give up a territory or market segment and grant an exclusive arrangement, retaining flexibility around exclusivity (with certain territories or customers within territories (e.g. the right to withdraw exclusivity on notice)) is the best result for you.
You can also use qualification thresholds for exclusivity to good effect. Using minimum order volumes over a particular period (e.g. a quarter or year) as a condition to exclusivity will allow you to terminate the agreement (or at least remove exclusivity) if targets aren’t hit and avoids market/segment blocking by a poorly performing distributor.
- Selecting a distributor
If you haven’t already been approached by distributors wanting to list your product, then trade bodies will have helpful insights into recommended distributors and links with overseas trade bodies for recommended distributors in foreign jurisdictions.
- Considering product exclusivity with your chosen distributor
A distributor who is retailing similar products to your own will already have established channels; however, you may find that they encourage several brands rather than focusing on yours, which could dilute order value. On this basis you should carefully consider whether there is any scope for category (or sub-category) exclusivity with your chosen distributor. Often this will not be possible, and where a distributor has an established presence, your product can benefit more from being positioned alongside more established brands and may gain you exposure which may have otherwise not been possible.
- Create a brand pack
As part of the distribution arrangement, the distributor will have to generate business in the territory. It’s often overlooked, but this might be your brand’s first foray into a territory or segment, so controlling this process is in your interests.
Create a pack of marketing materials and help the distributor where necessary. It is not unheard of for local distributors to get creative with materials to the detriment of the brand, so it is very important to ensure your agreement states that any use of the brand outside of what has been supplied must be approved.
- Going global
If you plan to use a distribution network to expand into new territories, it is essential your distributor complies with local laws as part of the arrangement. This is especially important in relation to labelling (e.g. requirements for ingredients information, allergy warnings, and local recycling requirements). Going hand in hand with this will be the obligation for the distributor to retain responsibility for local advertising compliance. You should have a clear process for the distributor to obtain local law advice from a qualified third-party adviser before advertising is released.
- On your terms
All sales should be made on your standard terms. It helps to keep consistency across the markets and avoids the headache of keeping tabs on what markets are subject to what laws. That said, you may need to get local law advice on the terms to ensure that you are not risking local law compliance issues with your terms; however, any changes should be minimal between different jurisdictions.
Look out for distributors imposing restrictions on you. The most common ask from a distributor will be for minimum supply quantities, or hard obligations to supply against forecasts. You should avoid being bound by such requirements. Not only do these types of provisions place a performance burden on you, but your best control if things don’t work is to shut down supply under the arrangement. This won’t always work if you have granted exclusivity in a market, but even then, it’s usually a good way to start a conversation about the things that aren’t working out for you.
- Damage limitation
Unfortunately errors and faults can occur with any products and if not dealt with swiftly, the damage caused to the brand may be irreversible. It is essential that in your agreement you have a clear process for retaining control of product liability claims and product recalls. If you need to protect your brand and reputation, control of the processes and decisions is critical.
- Have a get-out plan
Ensuring that you have flexibility around termination is important, and the best way to achieve this is to include a right to terminate the agreement on notice. Even if termination is actually a last resort, it gives you commercial leverage when issues arise. Conversely, not having flexibility around termination can give rise to strong commercial leverage arising on the other side. You might agree to a minimum term for the agreement (which shouldn’t be too long) and you might agree to a reasonably long notice period (6 or even 12 months), but these are all usually worth it for having a right to bring the arrangement to an end at will.
For a free initial consultation regarding your setting up, reviewing or terminating distribution agreements and arrangements, please contact Tim Deacon on the contact details below.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.