Distributors – Good, Bad and Indifferent

Many Companies operate through distributors and stockists. There can be many reasons why a Company chooses this route to market.

Some Suppliers do not have the ability to serve the wide and varied market place, and it makes sense for third parties (Distributors) to offer their products. In others it is used as a strategy to secure business in overseas markets, or places/market sectors that are remote from the Supplier.

So, how do Distributors come about?

Many have been past friends, or friends of friends! Others have come as a result of an Exhibition meeting, answering an advert, or some simple research. A few have been placed by seeking Commercial Attaché services provided by the Government.

What is a Distributor? Ideally, it is a company operating in a sector that is key to the Suppliers target market (or one of the key markets). They will have a vested interest in selling proactively (i.e. not a passive sale), keep stock, and will not sell any competitive products. In many instances, they will sell complimentary products. Their territory will be defined geographically and/or by market sector. The Supplier will have little control over the distributor, but with good management, can exert quite a lot of influence over them.

And for a Supplier considering whether Distributors are for them, what are the pitfalls, and what are the alternatives?

The main pitfall is that the Distributor is a separate legal entity, and will always be the deciding factor over the success or failure of the sales potential.

Alternatives can be a stockist, an agent, a joint venture, an acquisition, a subsidiary, a franchise or a license agreement. Each will need proper legal preparations and up front due diligence. And cross border arrangements will need consideration of the legalities in both the Suppliers country, as well as the target country.

A stockist is a fairly static and passive partner. They may also stock competitive products alongside yours, and have no real vested interest in making yours successful.

An agent will work on your behalf, and take a cut of profits. However, the supplier will have little control over how he/she operates, and cannot dictate the priorities or strategy.

A joint venture is where two ‘complimentary’ businesses join force, add capital and time to a ‘new entity’ with its own identity and direction. Here the supplier will have an element of strategic influence, normally commensurate with the share holding of the entity. Drawbacks here are that this can be costly, and good management will be needed to avoid the partnership becoming hostile as the business grows.

An acquisition is where the supplier has bought an existing business in order to further their own aim. This can be a quick route to establishing a ‘subsidiary’ company, and the supplier will now have full control. Drawback is that this is likely to be the most costly scenario, but can be highly lucrative.

A franchise can be applicable, particularly where the business model, or delivery model can be easily replicated across many areas and demographic divides. The drawback is that many of these fail due to the lack of commercial nous of the franchisor, franchisee, or both.

A licensing agreement can be lucrative, where the manufacturing rights can be granted to a partner company against an original fee and an ongoing royalty against sales. Drawback is that you may lose the close control over quality, unless the partner applies diligence to their processes equal or better than you apply in your own activity.

Leave a Reply

Your email address will not be published. Required fields are marked *