Question
“Can someone advise me on how I can obtain a protected territory?
“My partners and I started a business as wine consultants and agents in the distribution of fine foods. When I asked for a protected territory or exclusive distribution rights, most of the suppliers did not answer our letters or did not want to concede in writing an exclusive or protected territory for 3 to 5 years even though their products weren’t being sold in our region.
“Without this protection, these suppliers can start selling directly to the commercial customers I have been supplying — after I have developed the demand. This has happened four times to me so far: My suppliers started selling directly to other local distributors and retailers at the same cost as I was buying my product as a distributor. Under these conditions, there is no way I can keep my commercial clients.
“I think this is a lack of ethics on [the suppliers’] part, but they do not even answer my letters or return my calls to discuss it.
“Any advice would be welcome, as I am getting discouraged at working to develop a demand for a given product when I can’t harvest the benefit later. Thank you!”
Reader responses
Bill Parkinson, President, e Software Partners Inc., London, Ont.
In a prior company I owned we were always being asked for protected territories. In the beginning we allowed them, but later decided that there would be no such thing as a protected territory. I should point out that we as the supplier never sold against our distributors (VARs in our case), but we would allow others to.
The problem from the supplier’s perspective is that you have no idea if the distributor will actually perform once they have the territory they wanted. This happened to us time and again. We assigned a VAR an exclusive territory and then watched sales dry up. I think that the person looking for an exclusive territory needs to come with a plan that shows that they believe in themselves and are willing to commit to certain minimum sales or even purchase the territory.
The letter you printed doesn’t go into how they requested their territory, but I would suggest that they offer to create a fair marketing and sales plan that sets reasonable revenue goals for the territory and be prepared to lose the territory if they don’t hit those goals in a predefined time frame. They should also agree on a formula for selling the territory back to the supplier should they be wildly successful and the supplier decide they want to go direct. I would also suggest that they discuss with the supplier, the supplier’s long-term sales objectives, because if the supplier’s goals are to have direct sales everywhere then the distributor is simply being used in a rather unethical way to create the territory so it can be stolen later.
Monica Vinje, Co-Founder, Nippon Vision Projects Ltd., London, U.K.
Be careful about the use of exclusive distribution agreements, because they can be declared invalid in front of competition authorities for non-competitive behavior. In Europe, any agreement which is anti-competitive is automatically void (and unenforceable) and heavy fines may become payable as a result of contravention. Exclusive distribution agreements may have an anti-competitive effect in that territorial exclusivity granted to the distributor will preclude the appointment of further competitors in the area, will reduce consumer choice and may lead to a higher level of prices. In the EC, an individual exemption may be applied for from the EC Commission if the restrictions are not excessively anti-competitive and only for vertical markets. The governing jurisdiction for this kind of contract is a point of fundamental importance because of differences in national competition laws.
Even if you manage to get your suppliers to sign an exclusive distribution agreement, both your suppliers and customers will find ways to get around it. There are cases where the market has been developed through this type of agreement, and after a certain number of years, the supplier finds a way to end the agreement. Then, the supplier has a developed market at your expense. I heard of an example where the local distributor of a coffee brand in Austria built up the market there from nothing, then lost his exclusive distribution when the coffee company decided to set up a subsidiary there because the market developed into such a good one. The former distributor was granted the concession for a small city. He was also stuck with a stock of coffee machines that he was not allowed to sell outside of his new region and the coffee company would only re-purchase for half the cost that he had paid to them originally.
Manufacturers can also develop their own Internet site, where consumers (or competitors) can order directly from the manufacturer, undercutting your selling price. Your customers may be approaching your suppliers directly after a presentation or promotion organised and financed by you, as part of their negotiation tactics. You end up looking bad in front of the supplier because you can’t close the deal, and the customer is pressuring the factory to deliver directly to them at a higher price than you can pay. Or a retail outlet may have already appointed a company to be responsible for buying all their products that come from a certain country. Or your customer may tell the supplier that they don’t like you, that they will only buy direct from the supplier. So, in these cases, if you want the customer you have to sweeten the deal or lose him. Sometimes the supplier sells to him directly anyway, even with an exclusive distribution agreement. You have to catch them, but this is hard to do because obviously it’s not easy with many food products or wines, because there is little information on the product to help you with tracing where the product was sourced (for instance, the supplier itself or the supermarket down the street from the supplier making a discount for a bulk purchase).
A distribution agreement from your suppliers in the context of the governing law is still better than nothing and makes it more difficult for them to compete with you. Make sure it contains details about minimum quality parameters, because a good way to get rid of a distributor in a hot-looking market is to consistently send them faulty product!
There are a number of measures you can take to prevent being excluded from the distribution channel. One tactic you can use is to make the manufacturer participate in the financial costs of marketing and promoting of their product and brand. If they participate in these and other costs in the development of the market, then it indicates a deeper commitment to you and reduces your financial risk. If they do not want to participate, then there’s a good chance they may take advantage of your hard work (and your money).
Branding of a product where its manufacture is not under your control is always a risk. You can create a good sustainable market, and an importer from another territory then sells into your market (lateral distribution) or your customer buys the branded product in another territory and imports and sells it directly (parallel market distribution). Another option you have is to develop your own label. At least your work and expense will be in the promotion of your brand and not lost on someone else’s brand. Most producers (even the best ones) are open to private label, because they want to move product and produce more. More often than not, the supplier’s brand of a new fine food product you are introducing is unknown or not strong enough to attract new buyers on that basis anyway. So, if you are going to promote an unknown brand, why not start with your own? You just have to be careful that the manufacturer doesn’t put his label all over the packing crate or other marks that identify the source, because you can bet that your customers will go around you again to get a better deal.
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