For companies that work in manufacturing, how the goods are sold is just as important as the quality of the goods themselves. While some companies are structured to the point where they sell their own goods to consumers directly, most companies use distributors, or partner companies that take over the point of sale.
For example, consider a clothing company that sells its product in multiple department stores or a tire manufacturer that sells tires through a mechanic or oil-change shop. Distributor agreements put the responsibilities of marketing and sales on the distributing company and allow the manufacturing company to focus its resources on production and supply of its goods.
All About Sole Distributor Agreements
Distributors are often companies that use a network of connections and logistical tools to distribute and sell goods for a variety of companies. Some distributors may focus on a type of good — for example, women’s clothing, tires or electronics — while other distributors may focus on a region, country or market, dabbling in different types of goods and services and using their focused regional skills to make their sales. Most distributors are always looking for new customers but also dedicate important time to rebuilding and refreshing relationships with long-term customers as well.
There are many different ways to settle into these kinds of arrangements. A sole distributorship agreement or sole distributor contract occurs when the supplier or manufacturer uses only one distributing company in a certain territory. This does not prevent the manufacturer from selling its own goods directly in this region using its own accounts; it simply limits the distributors with which the supplier is working to a single company. Often, this type of agreement expects the distributor to work solely with them and not distribute or sell for competitors with the same type of goods.
An exclusive distributor agreement is similar except an exclusive distributor becomes the only point of sale for those goods in that particular territory. The manufacturer will not sell the goods on its own and will not use other distributor companies. On the other end of the scale, a selective distribution agreement limits a company to a small collection of distributors that will be used in a region, and a nonexclusive distributor agreement puts no limitations on either side with regard to distribution and sales. All of these have their own advantages and disadvantages when it comes to business.
What’s in a Sole Distribution Agreement?
Any sole or exclusive distribution agreement is set up to favor the distributor, as it will now be the sole provider of these goods in its dedicated markets and won’t have to face competition from other distribution companies in the region. This can be especially hazardous to new or small businesses that are then at the mercy of the distributor, with no idea how their products will actually sell and no guarantees of profit or service. It’s especially important to ensure the distribution contract covers the potential risks as well as the rewards.
A sole distribution agreement will spell out the area or markets in which the contract is applicable as well as an understanding of the products to be sold and any associated language about them for advertisements or online listings. The agreement should include rules about margins and returns for both the distributor and the manufacturer as well as any expectations for financial support or backing on either side.
The contract should also address whether the supplier intends to continue to make its own sales as well as using the single distribution channel or whether the distributor has exclusive rights over all sales within the region defined. Logistics are also an important part of the contract, as this is a resource most distribution companies have that manufacturers and suppliers lack.
Advantages and Disadvantages to Distribution Agreements
When it comes to distribution agreements in general, companies have plenty of factors to weigh when making their decision. Using an independent distributor company can open up opportunities for a manufacturer. Most established distribution companies have their own logistics support, making the transportation and distribution of the physical goods simpler and cheaper.
An intermediate distributor will also take on much of the responsibility of marketing, promotions and sales. These business responsibilities are then handled by a company that is an expert in these fields and that knows the markets rather than the manufacturer, which may not have such expertise. However, distributors are expensive and will result in a markup to the overall price on the goods.
They also often work with many different companies, some of which could be direct competitors, and will prioritize their efforts based on which products are the most lucrative. One of the most important factors to consider is that working with an intermediate distributor places another entity between the manufacturer and the customer, which can have an effect on customer feedback, service and communication.
Competition and Customer Feedback
The competition aspect can be somewhat managed by carefully crafting a distribution agreement that can benefit both parties. Moving toward a sole or exclusive distributor usually means that both sides can form a better working relationship to focus on the products and on making sales, which will benefit both the distributor and supplier.
With both sides similarly invested in the success of the product, better performance can be expected. However, this sort of agreement can be work intensive, and expectations on both sides will be high.
The issue of customer feedback can be managed by an agreement that creates a cross-functional team between the two companies to offer customer support and technical service as well as manage vital customer information databases like online reviews, surveys and feedback. It’s important to the supplier to get this information, as it can and should affect the development of future products as well as the management of existing product lines.
When Sole Distribution Agreements Work
Sole distribution agreements work when they manage to benefit both parties involved. For the distributor, there is a distinct advantage to being the only producer of particular goods, especially when those goods are successful and carry a high profit margin. There’s also the obvious advantage of being able to control the message sent by advertising and marketing as well as the advantage of not having to deal with other distributors who may be competing for volume and sales in the same region. In cases where these factors are true, most distributors will happily agree to exclusive distribution.
For the manufacturers, the main benefit is being able to bring in expertise at the point of sale so that they can instead focus their resources internally. Exclusive distribution contracts help secure a long-term distributor and help immediately make the distribution company invested. Most sole or exclusive distributors take away the risk involved with stocking large amounts of goods, which frees up valuable space and cash for the supplier to focus on its own efforts.
Sole distribution agreements are more likely to work with companies that have a more specialized or unique product. They’re less likely to have the resources to look into sales and distribution management on their own, and it offers a special opportunity to a distribution channel that manages to pick up the product line. Companies that mass produce goods are more likely to use selective or nonexclusive distribution agreements to manage their logistics.
Examples of Sole and Exclusive Distribution
Since both sole and exclusive distribution agreements give one company control over the sales of a product, they tend to project an aura of exclusivity around a product or line. Thus, many of the most obvious examples of sole distribution are higher-margin products.
- High-end car manufacturers like BMW, Lamborghini and Mercedes will assign only a few select distributors in a given region. Each distribution team will receive specific training on how to market the brand and how to interact with potential customers.
- High-end electronics manufacturers like Apple often use exclusive distribution to ensure their products are sold by people who will be able to best explain them and set them up. Thus, their distribution is limited to Apple Stores and certain electronics companies like Verizon or Best Buy where they can best ensure their technology will be made accessible to the consumers in a way that encourages sales.
- Fashion-elite companies like Gucci and Rolex also use sole distribution to control the markets in which their goods are sold and to maintain their brand’s image of prestige and luxury. Their distributor must be aware of local markets, areas where elite shoppers are common and how to manage perception.
Are Exclusive Distribution Contracts Legal?
Since sole and exclusive distribution contracts cut down on competition for both the supplier and the distributor, there are always concerns from both sides that the agreement could steer into unhappy legal territory. Anti-trust laws — those that deal with agreements, contracts and market competition in order to avoid monopolies and other arrangements that hurt consumers — vary from nation to nation, and while it’s important to be absolutely clear on the laws in your country or countries of operation, the general concept remains the same across the board.
These types of distribution agreements remain legal mainly because the business agreement occurs between noncompetitors: the manufacturer and the distributor. However, while these agreements in themselves are not illegal, they can inadvertently become so when they begin to influence the market landscape in ways that will create monopolies or diminish competition. For example, agreements that attempt to manipulate or force the market landscape through price fixing, limited production or charging different prices discriminately will almost always be considered illegal by anti-trust courts.
In addition, manufacturers need to be aware of their own market position because while some distribution agreements may be perfectly legal in theory, they can become illegal if they are used to hold up an existing monopoly on market share — for example, when a company can behave independently of other competitors in the market and outside of market pressures due to its existing agreements. If a company with the majority of market share sets up an exclusive distribution agreement with the company that owns the 10 most lucrative distributors, it is effectively closing off the ability for other companies to compete. In this case, while the standard exclusive distribution contract may be legal, the situation puts the company at risk of legal and financial action.
Important Distribution Considerations
Overall, a company has a number of factors to consider when making decisions on distribution, starting from the simple question of whether or not to employ an intermediate distribution company.
From there, the company needs to look at its markets, its pricing and its position and decide whether the benefits of a sole or exclusive distribution agreement makes sense for the products it produces and the business it runs.
A good contract that gives both sides benefits and continues to evolve over time creates the best opportunity for good business.