The “exclusivity” in commercial distribution: good or bad?


Are you planning to entrust the distribution of your products in a new export market to a local distributor? The latter will probably ask you for the exclusivity of your products, so as to ensure that no other distributor can harm his efforts, compete with him.

But beware, as a manufacturer, it is to your advantage to ensure that sales will be there. The granting of exclusivity is certainly not appropriate in all cases and, if you choose to confer it, it must be framed, to your advantage.

Here are some things to think about that can help you position yourself:

1/ The size and resources of your distributors

Many distributors require exclusivity for an entire country, or even a very large geographical region or continent. But do these distributors have real and efficient contacts, customers, sufficient personnel and the financial resources necessary to adequately and effectively cover all of this territory? A distributor requesting exclusivity for all of the United States, while doing business only in the American Southeast, will have the effect of delaying your penetration of the American market, at least in the short and medium term.

A Mexican distributor, for example, may also seem like an ideal person for the Latin American market as a whole. But, if it is established and only sells in Mexico or Central America, it will not be able to have the efficiency that an excellent Chilean distributor would have, in Chile. It therefore becomes essential to do your due diligence as to the real means, contacts, experience and capacity available to the distributor, and to try to use it according to its true strengths, without falling into the trap of greediness that it shows.

2/ Split exclusivity over a geographical area

The exclusivity granted can also be split into different specific markets, within a given territory. If you manufacture ingredients for food products in a given territory, you can split the markets by user industry, for example (flour for industrial biscuits and cakes, flour for artisan bakers). Similarly you can also divide the area according to customers. By giving exclusivity to potential customers with whom you have no entry, but who have long-term development potential. So many different markets where different distributors could be involved, with better chances of success in the short and medium term.

3/ Time of penetration Versus Sales Cycle  

New market penetration time is the difference between when your product will begin to be introduced to the market to customers who are unfamiliar with your product or solution. And when sufficient sales will be generated to make the distribution operation profitable.

One of the common mistakes is often to overestimate or underestimate the penetration time.

For example, in the case of a technical industrial solution, involving long sales cycles, by underestimating the penetration time, and by requiring short exclusivity or even no exclusivity, you will require distributors to invest their time without have a return on investment, since they will have to deploy great energy to make your product or solution known, and to market it, without reaping the benefits since they will not be able to be the only ones to distribute once the product has been launched.

The risk is that you simply won’t find us distributors, or not necessarily the right ones, since the deal will not be interesting for them.

Conversely, if your product is a commodity (differentiation by price and payment terms), provided that your offer is positioned in relation to offers already existing on the market, the sales cycle will in principle be shorter than a more technical solution or product. Also, in this case, it will be necessary to be careful not to give too long an exclusivity to a distributor in order to remain agile in terms of distribution.

4/ Exclusivity and merit

If sales performance is not there, an exclusivity must end, in addition to the possibility of terminating the agreement. It is therefore strongly recommended to provide for minimum purchase obligations from your distributor.

It should ideally commit not to an overall annual turnover for the entire territory, but rather territory by territory, market by market. And spread your desired revenue over the course of the year (ex: x$€ per quarter, with incremental sales over a 2-year contract period), so that if things don’t go your way hoped, you will have the opportunity to correct the situation, discuss it with the distributor or downright reduce the territory, the market, to drop the exclusivity or even to terminate the contract.

As stated in the previous paragraph, you have to take into account the normal sales cycle in your field and the fact that for any introduction of a new product in a market, the results will be gradual, but in all respects should nevertheless be good, even excellent. , if you have really selected an excellent distributor.

5/ Anticipate market developments

Many manufacturers have the reflex to think that giving the exclusivity of a whole country or a whole region does not matter because the country or region was not part of their strategic plan for developing markets. export and that you just have to be opportunistic, seize the opportunity.

But beware, many exporters will tell you that a region that they had not originally considered becomes, after careful consideration and the passage of time, a market of interest. Very few exporters and even institutions were talking about selling in Turkey or Vietnam just a few years ago. Even China has transformed itself into an economy of consumers (nearly half of the world’s purchases of luxury goods) and no longer simply of under-manufacturing for foreign companies. So be aware that the concessions you make to a distributor who has not yet proven himself, in a territory or market that is too large, could cost you dearly and considerably slow down your expansion.

An exclusive distributor, inefficient or simply not having the capacities, the contacts and what it takes to adequately develop the entire market or territory, will certainly slow down your development. Such a distributor will also force you after a while to act, and sooner or later you will want to put it aside altogether.

6/ The difficulties of parting with a distributor

But be careful, you don’t get rid of and you don’t put a distributor on the service line so easily. In fact, the laws and case law of many countries give distributors access to recourse before the courts. Let us think in particular of France with its new Macron law. In many jurisdictions, to try to avoid a long trial, you will have to give a long notice before terminating or not renewing the agreement, which can range from a few months to more than a year. You also expose yourself to the payment of compensation.

Legal checks are therefore strongly recommended, even before you travel abroad to negotiate, so as to have the arguments to put forward in front of your distributor in advance, but also to be aware of the hidden dangers of the legislation.

7/ Manage exclusivities on the same territory from a legal point of view

Pay attention to the laws of certain countries or regions in matters and competition which will have an impact on this famous exclusivity granted to a distributor. The European Union and the United States, for example, have competition laws that you will need to take into account in managing the exclusivities you grant to distributors in these territories. You can yourself prevent yourself from selling there directly, which your distributor wishes, but cannot normally refuse to sell to a distributor in this territory (e.g. exclusivity granted for France to the French distributor, but a Spanish distributor having a contact to sell in France being authorized to do so). Indeed, the European Union provides for provisions aimed at countering anti-competitive practices and ensuring the free movement of goods between member countries, to the greater benefit of consumers. It would also be problematic to refuse to sell to a distributor in Texas, knowing that the products will be sold by him in New York, on the pretext that you have an exclusive distributor there.

In these territories and several others, the exclusivity you give must therefore be well defined in your contract, to fall within the acceptable guidelines of these laws and regulations. You will therefore force yourself not to sell in this territory, which would be normal except perhaps to certain house customers that you have retained.

But between distributors, to avoid that they take you hostage between the two (ex: your exclusive and successful German distributor who threatens to let you down if you continue to sell from time to time to the Italian distributor who has some customers in Germany) , you could, for example, limit their right to open a place of business or to do storage outside their territory. However, you will not be able to totally block cross-territory, will remain a reality with which you will have to deal.

These questions are becoming more and more complex, as are negotiations with distributors, as customers are global in scale and have operations centers in several countries, and as advertising and commerce are carried out on the Internet. It is therefore necessary, in any negotiation with any distributor, to think beyond this distributor, this country, and to envisage a global strategy in which the various distributors will register as expansion partners in the international markets of your company.

8/ Conclusion 

As  a  conclusion, remember that your distributor, who will buy and resell your products in his market, will be an important ally in your international success, but could also represent a burden, or even compromise your chances of breaking into the market. . Distribution agreements must therefore be well thought out, well prepared before the start of negotiations, and negotiated closely!

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