How to get the most out of your distribution relationships.
The brand is good. Well, yes and no. Yes, if the brand owner is happy to leave matters to chance. But if the brand owner is concerned not to leave matters to chance, how can the performance of distributors be maximised?
The starting point when looking to maximise your distributor’s performance is to determine what has been granted to the distributor in terms of territory, product lines and customers, and the extent of such grant.
The extent will vary. In some cases the distributor will have been appointed on an exclusive basis. In the absence of any other words in the agreement or spoken between the parties, this means that it is only the distributor that can promote and market in the particular territory, or the specified product line, or to particular customers. The brand owner cannot. Nor can the brand owner appoint another distributor to compete with the distributor granted exclusivity.
Again, in the absence of anything else in the agreement, it is possible for the appointment of the distributor to be on a sole basis. As a result, the brand owner cannot appoint others to compete with the sole distributor. But the brand owner can do so itself.
It will be evident, however, that often there are other provisions in the agreement that affect the appointment. For example, a provision specifying certain accounts being serviced by the brand owner itself.
Overall, knowing what has been granted to the distributor will set out the parameters within which the brand owner can act without reference to the distributor. For example, if the products for which the distributor is appointed are narrowly defined, the brand owner is under no obligation to give the distributor the right to sell products which fall outside of the definition.
Attention should then turn to the other duties of the distributor. In brief, so far as the brand owner is concerned, there can never be enough duties specified. First and foremost there should be the duty on the distributor to use its best endeavours to sell, promote, and market the products in the territory.
But, it is one thing to specify duties, it is another thing to police the distributor’s performance. Experience shows that a brand owner prepared to police will reap rewards.
As a separate obligation, the agreement with the distributor should specify the minimum marketing to be undertaken by the distributor. Often, this will be expressed as a percentage of the distributor’s turnover of the brand owner’s products. But again, policing the action of the distributor is key. So, it can be expected that the distributorship agreement will contain an obligation on the distributor to obtain the brand owner’s prior approval of the proposed marketing activity.
Alternatively, the distributor could be required to engage in international or regional marketing campaigns determined by the brand owner.
In anticipation that the marketing will be successful, it can be expected that the distributorship agreement will contain minimum purchase requirements on the distributor. Such requirements can be reviewed periodically by the parties. But, whether or not such review results in a change of the minimum purchase requirements, if the distributor fails to reach such requirements, the agreement should set out what are the brand owner’s remedies.
A well drafted distributorship agreement will also contain restrictions on the distributor. The objective of these restrictions is to prevent or deter the distributor from doing anything that may damage the brand. In addition, the distributor should be required to tell the brand owner of the other distributorships and agencies held by the distributor and be obliged to periodically update this information.
Following these steps can turn a great brand into a brilliant brand, which will also benefit the distributor itself.
The antithesis of maximising the performance of a distributor was shown in a recent decision of the High Court. A US brand owner had failed to put in place a formal agreement with its UK distributor. The parties had swapped draft agreements but had not resolved what would be the basis of their relationship.
After a number of years, the brand owner sought to terminate the relationship. It was seeking to benefit from the efforts of the distributor in taking the brand from being an unknown to a good position in the market.
The brand owner alleged various failures by the distributor. These allegations were not accepted by the court as the brand owner could not produce credible evidence. But it was always likely that the brand owner would face a difficult task given the failure to put a formal agreement in place.
In contrast if there had been a formal agreement the brand owner would probably have had an easier ride in alleging breach of clearly specified conditions. As a result, the distributor successfully claimed substantial damages. The choice is yours.
Stephen Sidkin is a founder partner at Fox Williams LLP. He advises clients on commercial law, specialising in commercial agreements, intellectual property licensing, franchising and competition law, and in recent years has specialised in fashion companies.