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.
All of the above need time, effort and resource applied to make them work well, and provide profits. Therefore the strategy needs to be precise.
Frequently distributorships are not well thought through. Often due diligence and ‘digging the foundations’ are not treated with the respect they should be, which is important before any agreements are made. A good set of ‘foundations’ will include setting the ‘ground rules and expectations’ of both parties, both short, medium and long term.
- What business does the Supplier expect the Distributor to secure within 12 months, 3 years and 5 years?
- How will the Distributor achieve this?
- What does the Distributor need to do to make this happen? (Employ more people, create new cost centre, attend exhibitions)
- What does the Supplier have to do to support the Distributor? (training, collateral, sales visits etc)
- What stock commitments should the distributor make?
- An agreed plan of action (by whom, by when etc)
- What preferential terms should the Supplier make available to ensure the distributor is incentivised and is profitable?
- An agreed statement of expectation from both sides.
- A formalised means of reporting and communication from both sides.
- An adoption of the Suppliers minimum Quality procedures and requirements.
- Performance targets & clauses.
- Get out clauses and exit routes.
- An understanding of the financial commitments that each will input.
….. And so on!
If a potential Distributor does not take these discussions seriously, then it is likely that the future will be full of misunderstandings and under achievement. A marriage made in hell.
How does one go about finding a good Distributor?
First, decide what you want:-
- “Our products are sold to Biotech companies and the Nuclear Sector”. Therefore, in any geographical territory, there may be a distributor for each sector.
- “How big should the company be that distributes our products?” (A very LARGE player may in some cases be eliminated from all possible business, so a lower tier supplier may prove better).
- “Should they already be selling complimentary products?”
- “Should the Distributor be expected to employ dedicated staff to look after our product?”
- “Where do we want to grow Geographically?”
Once you have decided upon what the Distributor should be, or look like, the Supplier can then concentrate on researching the market/territory for potential Distributors. However, this can be very expensive and time consuming. Without local knowledge there can be many cost and time consuming ‘blind alleys’. Consultants in the territory with specialist and local knowledge can provide great value for money in the search, selection, due diligence, introduction and negotiation of new Distributorships. Suppliers are often blinkered by their own limitations and perceptions. A consultant will approach the discipline without these constraints, creatively and professionally, and can ensure that the foundations are sound before a deal is done.
Once a deal is done, and business starts to role, Distributor management skills become key for the Supplier in order to exert positive influence. The Supplier must always remember that the team at the Distributor are not the Suppliers employees. They must be treated with respect and an appreciate that the Suppliers objectives may have been ‘watered down’ by the time they have reached the Distributors sales team. Often, if the Distributor is a long way from the Supplier, the local Consultant (as used in the search and selection process) can become a good independent ‘go between’ to ensure that all ongoing Distributor commitments and targets are met. This will further reduce the Suppliers cost and time commitment.
Monthly updates from both sides will ‘lubricate’ the relationship, with a formal update from both sides (ideally no less than quarterly) being essential. Nowadays many web enabled systems can allow real time reporting with multi access, and ensure information transfer without delay.
Key points to ongoing support include:-
- Regular communication
- Sharing of experiences
- Two way support
- Realistic commitments and targets
There is much more to managing Distributors, and I will explore this further in my next article.
Ian Thomas FInstIB
Southern Group Business Advisers http://www.sgba.co.uk
T: 0870 787 7590
Southern Group Business Advisors – practical advice that works from the independent experts.
Ian Thomas provides a consultancy and Sales training business aimed at maximizing market and sales potential for the SME sector, both in the UK and overseas markets. Ian Thomas is fully accredited by, and a fellow of the Institute for Independent Business International (http://www.iib.org.ws)