DISTRIBUTION CHANNELS: AGENT Vs DISTRIBUTOR
Marketing managers have a lot to consider when designing or selecting the distribution channel. The right choice can lead to a considerable advantage over competitors; on the other hand, inappropriate partners and wrong distribution structures can be extremely difficult to change without compromising the brand. The main issues to be considered while deciding what the right distribution channel are:
- What level of distribution the company wants to achieve: intensive, selective or exclusive distribution?
- How much control and flexibility is required or sought over the channel. A greater level of control will decrease the company flexibility (e.g. creating an in-house sales department will increase control over sales strategy while decreasing the flexibility)
- How much is the company able to invest in building the distribution channel?
This article focuses on the functions of agent and distributor. Although the terms “agent” and “distributor” are used interchangeably in the commercial world, there are many practical and legal differences between the two.
Agency Agreement
In general terms, an agent’s function is to provide a service to the supplier, either introducing new customers, or concluding contracts on the supplier’s behalf.
Directive 89/653 art 1.2 reads: ‘commercial agent’ shall mean a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of another person […].
Highlights of the Agency Contract:
- Agents have the authority to enter into contracts on behalf of the principal. The principal, not the agent, will bear the risk of bad debts;
- Agents usually work on commission on long lasting collaboration; sporadic collaborations don’t require the Agency Agreement.
- Agents may work with a number of principal, unless competition issues arises*
What you need to know when appointing an agent
- Geographical exclusivity? Every agent wants to cover the widest possible area. From the principal point of view it may not be a good idea to jump into an agreement without knowing if it is actually worth it. The best way to go is starting with a limited area and expanding if needed.
- Make sure that sales targets are in place: this clause allows the supplier to trigger the termination of the agreement for “under-performance”.
- Follow up regularly It is always a good idea to keep regular meetings with the agent and discuss target, sales and figures so that there is no surprise at the end of the semester.
- Marketing and training The principal should give the agent the chance to sell the product in the best possible way providing the appropriate material, documentation and training.
- Non competition It is common practice to introduce a non competition clause in the contract to protect the principal from unlawful competition.
- Cross Cultural awareness Especially when working with agents in a different country, cross cultural awareness is very important to avoid difficult situations.
The Directive 653/89 is a Minimum Directive whose objective is to create uniform trade conditions within the EU zone while ensuring a minimum level of protection for commercial agents.
Member States can, and often do, apply higher standards than those minimum requirements. It is advisable, when entering into an agreement contract, to check how each Member State has enforced the directive to be compliant with it.
Distribution Agreement
The distribution agreement is sought especially for selective or exclusive distribution. The highlights of the distribution agreement are very similar to the agency agreement: exclusive or non-exclusive, non-compete obligations, minimum performance obligations, reporting obligations, marketing rights and so on…
In the distribution agreement however, competition law may apply.
Bit of Competition law
Distribution agreements fall into the category of vertical agreements and are subject to Competition Law. Issues may surge due to restrictions contained in vertical agreements depending on the degree of market power of the parties and on the extent to which those undertakings face competition from other suppliers of goods or services (Regulation No 2790/1999).
As a general rule, the distribution agreement is covered by the Block Exemption Regulation if both the supplier and the buyer of the goods or services do not have a market share exceeding 30%.
However, there are few hard core restrictions, among others:
- Suppliers are not allowed to fix the minimum price at which distributors can resell their products, the recommended maximum price is normally acceptable.
- Distributors must remain free to decide where and to whom they sell. Restrictions on actively approaching customers inside another distributor’s exclusive territory are usually permitted
