The distribution agreement - the heart of supplier-distributor cooperation

8 May 2024

In today's globalised world, it is common for companies to sell their products abroad. If a company wants to pursue this, it has to decide how it wants to organise distribution. They often work with independent distributors who sell the products in their own name and for their own account in a specific territory.

The manufacturer or supplier thus transfers the distribution risk to the independent distributor. At the same time, the supplier can use a suitable contract to integrate the independent distributor into the distribution network to the extent that is desirable for the supplier.

Main elements of the distribution agreement

The centrepiece of the cooperation between the supplier and the independent distributor is the distribution agreement, under which the manufacturer or supplier grants a distributor the right to advertise, distribute and sell the manufacturer's or supplier's goods in a specific territory.

Distribution agreements essentially consist of two elements:

1. A longterm contractual relationship that regulates the rights and obligations of the supplier and the distributor. This includes in particular:

   • The supplier's obligation to sell and the distributor's obligation to buy the products
   • Advertising and promotion measures by the distributor
   • Sales targets and minimum purchases by the distributor
   • Minimum expenditure by the distributor for advertising and any cost sharing by the supplier
   • Reporting obligations of the distributor regarding sales figures, stock information and advertising expenditure incurred
   • Quality standards for transport, warehousing and product traceability
   • Training by the supplier
   • Product recalls
   • Use of the supplier's trademark rights by the distributor
   • Limitation of liability of the supplier
   • Termination and the consequences of termination
      

2. The terms and conditions of the individual purchase contracts for the products to be concluded under the distribution agreement. These include in particular:

   • The specifications of the products
   • Purchase prices and terms of payment
   • Purchase forecasts
   • Order process
   • Minimum order quantities
   • Terms of delivery
   • Inspection of the products by the distributor
   • Representations and warranties
   • Complaint handling

Types of distribution agreements

1. Exclusive distribution

The exclusive distribution agreement is of great importance in practice. This occurs when the supplier grants a distributor the exclusive right to distribute the products in a specific territory. The supplier undertakes to ensure that no other dealer actively distributes the products in the defined territory. This exclusive distribution right of the distributor is mirrored by the distributor's obligation to promote the products. The distributor must advertise and sell them. As he is granted exclusivity, he is also prepared to make (high) investments in the sale of the products in the specific market.

As a rule, exclusive distribution agreements stipulate minimum purchase obligations for the distributor. The contract may stipulate that if these requirements are not met by the distributor for a certain period of time, the supplier can temporarily or permanently withdraw exclusivity or terminate the distribution agreement.

2. Selective distribution system

With the selective distribution system, the manufacturer wants to ensure that products do not leave the distribution network for a certain territory, which consists of the distributor and its authorised retailers as well as possible other authorised distributors. The distributor is integrated into the supplier's distribution network in such a way that the supplier undertakes to sell the products directly or indirectly only to distributors or authorized retailers who are selected according to certain objective criteria, and these distributors or authorized retailers in turn undertake not to sell the products in question to distributors or retailers who are not authorised to distribute in the territory defined by the supplier for the operation of this system.

The selective distribution system is mainly used in the luxury goods segment and for highquality consumer goods, as manufacturers want to avoid their products being sold on discount internet platforms or at discount outlets.

3. General distributor

It is not uncommon for suppliers to decide to work with several distributors within a certain territory without granting any of them exclusive rights and without integrating them too closely into the supplier's distribution network. In these constellations, suppliers regularly do not set any minimum advertising expenditures, order quantities or reporting requirements for distributors.

Distribution agreements in practice

1. Inadequate distribution agreements and inconsistent distribution strategy

In our practice, we regularly see distribution agreements that do not fulfil the requirements of a sound and comprehensive contract. They are rudimentary and exhibit significant gaps. These deficits come to the surface when differences arise between the parties or one of the parties wants to end the collaboration.

In some cases, companies do not pursue a consistent distribution strategy. For example, in addition to distributors with exclusivity rights for certain territories, they also have general distributors who are not subject to any territorial restrictions. This inconsistency harbours potential for conflict.

2. Clarity creates certainty

A clearly formulated contract leaves little room for interpretation. It clearly defines who has to do what, when and how it is to be done and what happens if things do not go as planned. This clarity minimises the risk of misunderstandings and conflicts, which can be expensive and timeconsuming.

3. Trust and professionalism

A sound contract shows your business partners that you work professionally and take their interests seriously. It creates trust and can therefore help to build and maintain long-term business relationships.

To summarise, a clear and comprehensive agreement is essential in international distribution. It offers the parties certainty and promotes trust. Invest the time and effort to draw up a good distribution agreement to develop new markets.

 

We offer solutions for the creation and review of distribution agreements and our experts will be happy to answer any questions you may have.

Contact us and we will be happy to send you our offer for international distribution agreements including a checklist.

You may also be interested in this blog: International Distribution – How can you substantially reduce your risks? - Vischer

 

Author: Lukas Züst