We understand who a distributor is, what he does and how he earns. The main points you need to know about the activities of distributors.
In modern business, there are many concepts that are often heard, but sometimes you don’t think about the essence of which. However, in general, terms, understanding what exactly they mean may be important not so much for increasing general erudition, but for practical purposes. After all, the meanings are hidden behind a particular word, the sets of functions, and processes can one day bring tangible benefits to the entrepreneur himself. One such word related to the development of the commercial sector is “distributor”. Who is this?
Who is a distributor? Definition
In the everyday sense, when using the word “distributor”, they can simply mean a reseller, intermediary, or sales agent, but this is not entirely true. In fact, a distributor is a seller-distributor and at the same time a “presenter” who introduces the consumer to the goods of a certain manufacturer and has a direct relationship with him. This is either an organization (legal entity) or an individual entrepreneur who is engaged in the direct purchase of wholesale batches of products from manufacturers, in order to then sell it on the market of a particular region.
The key feature of the distribution is that such an official intermediary is given the right to distribute goods in a certain territory at the manufacturer’s price, that is, without any extra charges. The income of the distributor is formed due to discounts for the purchase of goods, established by the manufacturer.
The manufacturer, whose goods are represented by the distributor, can be both domestic and foreign, and the sale itself is carried out both personally by the distributor for end consumers, and through intermediaries and agents or a dealer network.
As you already understood, the task of a distributor is not just to simply sell. The distributor needs to present the product in the local market in the most favorable light, promote it, and ensure further demand – this is exactly what manufacturers need. Therefore, in addition to sales, distributors can participate in exhibitions and presentations, and hold seminars, shows, and business meetings. In a word, do everything to make the product gain a foothold in a particular market, and become recognizable and sellable. In this regard, to become a distributor, ideally, you need to have both promotional resources and certain experience and skills, especially in the field of sales, communications, and the art of communicating with people.
Also, in order to more clearly understand who a distributor is, we advise you to read the article on our portal about the differences between a distributor and a dealer.
Distributor work scheme
In fact, speaking in general, the work of a distributor has three key points: the choice and conclusion of cooperation with the manufacturer, the purchase of goods, its sale, and expansion of the sales market.
- Conclusion of an agreement with the manufacturer. Both parties, the manufacturer and the distributor, are interested in the presence of the rules of the game, so the contract specifies all the details of purchases, sales, and distribution of products. We will talk more about the contract later in the text.
- Purchase of goods from the manufacturer. The distributor begins by purchasing the product from the manufacturer. Usually, the most lucrative contracts are with foreign firms, but this is not necessarily the case. Goods are purchased in large quantities at a wholesale or special discount price.
- Realization of goods. To sell a product, a distributor can use completely different methods, for example, by creating their own points of sale or building a dealer network. The manufacturer, if he has such opportunities, also does not look at this from the outside, and can provide assistance, from providing free advertising materials to set a general vector for development and product promotion.
- Increasing sales and expanding distribution channels. When the product is sold, it remains to continue to sell it even more and invest the income received in the search and development of new distribution channels. If a certain level of development is reached, the distributor creates its own representative offices in other regions.
Some types and examples of distributors
- Distributors of large foreign companies. Any major popular foreign brand in Russia has its own distributors. For example, Apple distributors are Merlion, DiHous, and OCS. Accordingly, Russian companies that supply their products for export abroad may also have distributors. For example, quite recently, news from Kazakhstan flashed in the news feed, where the distributor of the Russian AvtoVAZ has changed. Instead of Bipek Auto, it was Orion Distribution, headquartered in Almaty. By the way, the news mentions that the agreement with the previous distributor was terminated due to its failure to comply with the conditions for the industrial assembly of cars, which was transferred to the competitor’s site.
- Broad and multi-brand distributors. Let’s take exactly the same companies listed above, and referring to the information about them, we find out that they are all multi-brand and wide-profile distributors. For example, Merlion specializes in IT, household appliances, stationery, and office furniture, ranking high in the Forbes ranking. The portfolio of the house includes over 100 brands of global manufacturers of digital and household appliances, and the partner network includes more than 1000 companies in Russia and the CIS countries. Of course, such distributors have many years of experience behind them, dozens of supply channels, and hundreds of different services for dealers, vendors, and customers related to technology, business, sales, finance, logistics, and more. And this means that they are more than just distributors in some simplified sense of the word.
- Exclusive Distributors. An exclusive distributor is an organization or an individual entrepreneur who has received the exclusive right to distribute goods in a fixed territory. In this scheme, the product supplier can sell his product in a given region only through his exclusive distributor, and nothing else. The distributor, accordingly, is obliged to purchase goods for sale in his region only from this supplier. As a rule, exclusive distributors appear for goods new to the region that were not previously sold in it. As random examples, when querying in search engines, there was an American brand of crawler mini-loaders-excavators Ditch Witch, which has an exclusive distributor in Russia and the CIS and an exclusive distributor of the German cosmetic brand KEEN.
- General distributors. A general distributor is an organization that imports goods into another country and independently organize marketing activities. For example, the Russian company InterAnalit LLC is the general distributor of Shimadzu Сorp. – Japanese manufacturer of analytical, X-ray, and testing equipment for laboratories.
How to become a distributor: basic steps
1. Choose a line of business
First, you need to understand what types of products you would like to work within principle. Let’s say you can distribute food, electronics, household goods, or cosmetics. Usually, in this area, you don’t start from scratch, without the slightest idea of \u200b\u200bwhat niche you have to work in. Behind the shoulders of future distributors of anything experienced in a particular area.
2. Analyze the market
Next, you need to understand which products and companies already exist on the market, which of them are the most successful, and in which niches the supply is still insufficient, and the demand is not completely satisfied.
3. Find a manufacturing company
Most likely, you will need to find a new company that has an interest in promoting its product. Different methods are used to find cooperating manufacturers. For example, you can study catalogs on the web, leave preliminary applications on the official websites of manufacturers, visit industry exhibitions, forums, and so on.
4. Provide a material base
It is not enough just to find a manufacturer, you also need to find a common language with him. And in order to find a common language with him, you need to convince him that your cooperation will be mutually beneficial and will bring the product to new markets. Your material base will become a weighty argument: when working as a distributor, you cannot do without investments at the start. For activities with large firms, at least the presence of an individual entrepreneur or the status of a legal entity (for example, LLC) is required, it is desirable to have an office, warehouses, personnel, and vehicles – acquired or leased. All details and amounts of investments depend on the specific situation. You can save money on some assets, for example, an office is not always strictly necessary, and some employees (for example, lawyers and accountants) do not have to be hired on staff, since outsourcing can be dispensed with.
When it comes to cooperation with a large company, just capital investments and the fact of having resources may not be enough. To enter into cooperation, it is often necessary to have a good business reputation, a proven client base, as well as ample opportunities for promotion.
5. Make a commercial offer
At the stage of searching and negotiating with various companies, you will probably have to send out a commercial offer more than once. The commercial offer must contain:
- information about the company and the scope of its activities;
- planned region slaves and coverage of the territory;
- company staff;
- the size of the available client base;
- financial performance, company dynamics;
- availability of other assets, vehicles, etc.
And, of course, in addition to the template part, each specific supplier needs to outline plans for the sale of his products: how you will do it, what goals and indicators you plan to achieve, how you will work with competitors, and other points.
6. Negotiate with the manufacturer
In the event that the manufacturer is interested in your offer, you will have a meeting with representatives of the company. During the meeting, both parties get to know each other better. A potential distributor needs not only to correctly present himself and tell about all the benefits but also to clarify all the blind spots regarding the work of the manufacturer. Namely:
- understand the logistics and conditions for the supply of goods;
- understand whether the company has other partners in the territory you are interested in and whether there will be intersections with them.
- how the marketing strategy of the company is built;
- Are there any restrictions on purchase volumes and minimum orders?
- Are there any additional requirements for the sale of goods?
The negotiation stage can drag on for a long time, it can take months to get to know each other and clarify all the details. When negotiating with foreign suppliers, long flights are possible, and of course, you will need knowledge of foreign languages. Additionally, you may need a presentation, a detailed financial calculation or a full-fledged business plan, references from other companies in your portfolio (if any), and so on.
7. Conclude an agreement
The final stage is the signing of a distribution agreement, which will result in granting your company the status of an official distributor. It prescribes all the possible nuances about the purchase of goods, their sale, and promotion.
The conclusion of an agreement between a manufacturing company and a distributor is a big step that affects the development and economic growth of the company. The contract or distribution agreement establishes areas of responsibility and regulates all parties to the relationship. Its main message is that the distributor undertakes to purchase goods from the manufacturer in his own name and sell them in the defined region. And the manufacturer, in turn, guarantees not to supply the goods to this region for sale directly or through third parties.
Since the laws of the Russian Federation do not provide for the form of a distribution agreement, in practice, depending on the specific case and type of product, it may also have elements of a supply agreement, an agency agreement, a sale and purchase agreement, transportation, and others. But the task of the contract, in any case, remains the same and consists of the sale of products. Since it is installed for a long time, therefore, it must be worked out very carefully and down to the smallest detail.
The main provisions specified in the distribution agreement:
- Rights and obligations of the parties. In particular, regarding the distributor, you can specify the requirements and obligations for the volume of purchases, conditions for transportation, warehousing, and storage (which must comply with the standards for humidity, temperature, lighting, and other factors), and requirements for the qualifications of employees. If the contract is concluded with a foreign company, the duties of the distributor may also include customs clearance of goods, organization of service centers, consultations with dealers in their country, and other issues /
In turn, the supplier also has both rights and obligations. The first might be the right to impose a ban on a distributor buying similar products from competitors, the right to set annual supply volumes, the right to create pre-production orders, the right to set reporting procedures, and so on. Among the duties may be the provision of information about the characteristics of the goods, the provision of promotional materials, and other points.
- Product Terms. Here, the rules for the use of a trademark are prescribed, and a description and a list of products that the distributor will sell are given. It is also necessary to prescribe the rules for returning illiquid goods to the manufacturer.
- Order, terms, and volumes of purchases. In this paragraph, it is necessary to prescribe the procedure for the transfer of goods, which can be transferred on full or partial prepayment, or “for sale”. Indicate how exactly the products are delivered – whole at once or in batches and in what time frame.
- Pricing procedure. Here the procedure for setting prices is indicated and a link is given to the appendix to the contract, where prices for the distributor are indicated. The limits of responsibility are immediately prescribed, usually, the distributor does not have the right to set his own prices.
- Conditions for the development of a distribution network. The contract must accurately indicate the scope of the distributor’s capabilities when creating a distribution network. With whom he has the right to enter into cooperation, and with whom not. Whether it is necessary to coordinate with the manufacturer contracts with dealers or retailers, or not.
- Liability for breach of contract. For everything that can be violated in the contract (by both the supplier and the distributor), responsibility must be borne. For example, delivery dates and payment terms may be violated, product quality standards are not met, and so on.
- Other provisions. These are all other terms of cooperation. For example, manufacturers sometimes arrange a trial period for new intermediaries.
All details that are not included in the contract, especially those that may subsequently have to be changed more than once, for example, numbers and prices, can be indicated in an appendix to it.
It can also be the boundaries of the sale of goods, the procedure for granting purchase discounts, the provision on non-competing goods placed by the distributor, minimum sales and inventory, and price lists.
After the contract is signed, the distributor receives a certificate certifying his right to the official representation of the company. The document is stamped and signed by the general director of the manufacturer.
How to become an exclusive distributor
As mentioned above, the distribution right can be exclusive. The exclusive status promises a distributor many advantages. With it, you can engage in brand promotion without fear of competitors coming with exactly the same product to the exclusive territory. No one will dump and irritate the distributor, preventing him from earning.
But finding a manufacturing company that will agree to an exclusive partner is not so easy. Popular brands have already established contacts with many intermediaries, there are established relationships and sales, and for the sake of new incomprehensible prospects, no one will abandon the established channels. With such companies, you as a distributor can only become “one of them”, entering the competitive field of a certain degree of rigidity.
Therefore, it is best to search for a supplier far outside your region, for example, abroad. And find a manufacturer whose products are not represented in Russia at all.
Naturally, if you managed to find a new manufacturer and negotiate with him, a provision on the exclusivity of the distributor is included in the contract. Or, in other words, the intermediary is given exclusive rights to sell the company’s goods in a specified area. It is also worth remembering that, at the same time, the rights to protect a trademark from counterfeiting in this region can be transferred.
Such exclusive agreements must not violate antitrust laws. In order not to violate federal law FZ No. 135 “On Protection of Competition”, it is necessary that there be suppliers on the market selling a similar or replacement product, and the share of the manufacturer giving the exclusive right and the distributor in this market, according to Article 12 of this law, should not exceed 20%.
Finally, it is worth saying that the exclusive status is not eternal. In fact, he will act as long as it is beneficial for the manufacturer, and until he is going to look for additional distributors. However, the document can specify compensatory measures in case of breaking the exclusive relationship.
Distribution types and channels
What are the distributor’s sales channels? Yes, in fact, any, depending on the capabilities and scope of activities and the terms of the contract with the manufacturer. Today, with the development of online commerce, and the emergence of marketplaces, finding sales channels has become much easier than before. However, the basics remain the same. Depending on the structure of the trade chain, channels can be:
- Direct, when trade is carried out directly from the distributor to the final consumer without the help of third parties. In its purest form, direct distribution is called this type of trade, when the distributor is also fully responsible for logistics (DSD – Direct Sales & Delivery). If third parties are used for logistics, then this is already a combined distribution (DS3 – Direct Sales & 3-rd Party Delivery).
- Indirect (3PD – 3-rd Party Distribution), when trade and logistics are carried out using third-party resources and are conducted through one, two or more links of intermediaries. Accordingly, if there is one or two links between the intermediary and the end consumer, for example, a retail chain or a retail chain and a wholesaler, this will be considered a short channel. If, for example, a small wholesaler is added to the link, then it will be a long channel.
Direct distribution channels make sense when a rather rare niche product is traded, the number of consumers of which in a given region is not large enough to resort to the services of intermediaries. In this case, trading can be done through your own offline or online stores, message boards or even social networks. It can be some industrial equipment, machine tools, or specialized devices.
Indirect distribution channels are chosen if the number of consumers in the market is large and they are widely distributed geographically. As a rule, these are small consumer goods and goods of a relatively low price segment. When choosing a channel, assortment plays an important role. If we are talking about only one type of goods, it is best to contact wholesale intermediaries to interact with retailers. But if we are talking about a wide range, you can carry out combined deliveries directly to retail stores.
Also, the distributor, if it does not contradict the terms of the agreement with the manufacturer, can earn by combining direct and indirect sales channels.
Benefits, risks, and challenges of distributorship
In the activity of distributors, as in any other, there are benefits and difficulties. The first ones include:
- income. Actually, the purpose of activity and cooperation with the manufacturer is the growth of sales and profit. The more efficiently the supply chain is built, the more both parties will earn.
- The possibility of any format of activity. Distributorship can be of very different scales, ranging, in fact, from simple repurchase to large-scale networks with hundreds of dealers and hundreds of brands in the trading portfolio.
- Mostly remote work. Most business processes today are carried out because of the computer. Since, in fact, the distributor organizes the resale of goods to another distributor, there is no need to constantly be at the enterprise or in the office.
- Nothing needs to be produced. The distributor only needs to sell and popularize the product on the market, he is completely freed from production tasks. On the other hand, it is extremely important to have sales skills, to be able to communicate effectively with people.
As difficulties and frequent mistakes, which you should be aware of even before the start of the activity, we can distinguish:
- Wrong choice of market entry concept. A distributor may choose an inadequate channel or marketing strategy, for example, if a product requiring direct sales is released to the mass market. A lot depends here on the concept of the product, which can, as it were, set the template for its implementation.
- Weak analysis of the market and own capabilities. You can lose money and come to financial ruin if you incorrectly weigh your own capabilities: logistics, marketing, personnel, general material, and so on.
- Competition. You can be unprepared for competition in different ways. Even a thorough analysis of the risks and possible actions of competitors will not help you fully insure against all adversity. In some niches, in order to establish yourself in the market, you will have to work for many years to gain recognition from other players.
- Manufacturer conflicts. Relations with the manufacturing company may not be built in the best way. A distributor, for example, may feel overprotective with penalties for every little thing or be reluctant to replace an illiquid product.
- Change in the manufacturer’s marketing policy/rebranding. Since the manufacturer remains the main beneficiary, the success of the business largely depends on its decisions. And they can sometimes go against the interests of the distributor. For example, a manufacturer can rename its product, simultaneously start selling goods bypassing an intermediary, or completely abandon distributorship. In this regard, as the company develops, it is desirable to expand its product portfolio with other brands.