Food For Thought – Appointing a distributor

We regularly advise our clients in regard to long term distribution agreements and creating distribution networks. The appointment of a distributor is a key decision for the success of a business or product line. 

An experienced distributor with industry expertise, established trade connections and local knowledge can make a significant contribution to a products’ market share, reputation and standing. The identity of your proposed distributor will be as important as the wording of the distribution agreement. You should carefully investigate the distributor’s reputation, business activities and financial position. This article sets out some of the key issues to consider before appointing a distributor.

Appointing a distributor may seem like a straightforward proposition. However, it is not uncommon to see the terms “agent” and “distributor” be confused. A distributor buys goods on its own account for resale meaning there is no contract created between you and the end customer. If your intended appointment includes payment of commission, being introduced to prospective clients and/or a third party concluding sales on your behalf, then you are appointing a commercial agent rather than a distributor. A distributor takes more risk than an agent. However, a distributor’s mark-up and profit margin is likely to be higher than the commission you would pay to an agent.

What level of territorial exclusivity are you granting? Obviously, complete exclusivity is an excellent way to motivate a distributor. However, granting exclusive rights will stop you from appointing additional distributors within a territory or from making direct sales. As such, it is important to ensure that the exclusivity is conditional on meeting appropriate sales targets. If you want to make direct sales into a territory then a sole distributor appointment will allow you to do this. Similarly, you can also appoint non-exclusive distributors, allowing both you and your distributors to sell to any customers, located in any territory.

How experienced is your proposed distributor? Are you confident that they have a full understanding of local laws? Do they have all necessary licences, approvals and consents? In the context of Brexit, have they got experience of importing from outside the EU? Do they have appropriate experience dealing with customs clearances? Are all the logistics in place for your products to reach the relevant territory? All this needs to be considered from the very start – the last thing you want is for the distribution arrangement to fail from the outset.

Have you reviewed the financial standing of your proposed distributor? This is an obvious part of your due diligence but you need to be sure that the distributor can pay for your products and has the financial standing to perform its contractual obligations.

Has your potential distributor developed a robust marketing and sales strategy? It is vital that the distributor knows how it will achieve consistent growth and market penetration. Whether the strategy is reliant on social media, direct marketing, traditional advertising, sales pitches or trade shows – you need to be on board with the plan. It is also important to properly understand whether any intellectual property rights will be created as part of the distributor’s promotional activities. If this is happening you will want to retain control over your brand reputation and ensure that you the new intellectual property rights that are associated with your products. If the proposed distributor is using your marketing materials then consider whether a simple translation will properly communicate your unique selling proposition (it may be the case that translation consultants are needed to help shape your core message into your target markets).

One final point to note is that you need to ensure that your business plan and activities do not breach competition law. When appointing a distributor within the UK or EU, there are certain things you absolutely cannot do (for example, set the prices at which your distributor sells the products). Further, certain activities like granting territorial or customer exclusivity, or operating a selective distribution network are only permissible if the criteria contained in the Vertical Agreements Block Exemption Regulations are met. This is a complicated area of law the failure to comply with which can lead to contracts being invalid, regulatory investigations and sanctions (including significant fines), damages claims from those affected, as well sanctions against individual directors.

An alternative is to create a selective distribution network whereby any number of distributors can join the network provided they meet a set of minimum criteria. In a selective distribution you are able to place some restrictions on to whom distributors can sell your products. The criteria for joining the network is often focused around customer experience (e.g. retail environment, sales and aftersales support etc.) making it a common means of distributing luxury or highly technical products.

What other products are sold by your proposed distributor? This is a difficult balance. Although it is great to find a distributor who has contacts and experience in the relevant industry or sector, if the distributor is selling competing products there is no way of being sure that existing product lines wont hinder your success.

This article is from the winter 2020 issue of Food for Thought, our newsletter for those working within the food and drink industries. For further information please contact Paul Palik or a member of Birketts’ Food Team. To download the latest issue, please visit the newsletter section of our website.