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What is Selective Distribution?
Often used by luxury brands looking to control the quality of outlets stocking their products; a selective distribution agreement allows suppliers to appoint particular distributors according to their specific needs. These agreements frequently place restrictions on distributors to sell only to other approved distributors or directly to the ultimate consumer, influencing the prevalence of a product on the market.
For suppliers, this can involve insisting certain criteria are met prior to appointment of a distributor. These criteria are wide-ranging and can include service provision requirements, distributor sales personnel training or specific presentation of products, among many others.
This type of distribution is not to be confused with forms of exclusive distribution (where, for example, a supplier appoints only one distributor within a certain territory).
Is Selective Distribution appropriate for my business?
As you might expect, restricting freedom in the marketplace in this way has stringent competition law implications which must be considered prior to opting for this type of arrangement.
Employing high-end distributors may add value to goods and increase competition. However, selective distribution also has the potential to reduce it, simply by limiting the number of distributors. Selective distribution may also result in foreclosure of the market to some suppliers or buyers or may be considered an obstruction to consumers purchasing goods freely. Owing to this competition element, only particular product types are deemed suitable for selective distribution and its use must be justified under competition law.
If you are supplying “designer” goods or high value items such as electrical goods, cosmetics or pharmaceutical products then selective distribution is more likely to be considered reasonable. Products which require an enhanced level of customer service, advice prior to purchase, or support after a sale are also likely to suit this type of arrangement, as suppliers can include obligations on distributors to provide this service in line with their customers’ expectations or requirements.
Which factors should I consider?
Advantages
For suppliers, a significant benefit is increased control. This may include stipulating how goods are marketed or the geographical location of resale. This control may allow suppliers to:
- Control who their customer base is, leading to a better understanding of their needs, ultimately increasing customer satisfaction
- Base pricing strategies on this better knowledge of who customers are and therefore increase effectiveness
- Determine how distributors handle their products and deal with their customers, enabling further enhancement of a high-quality brand image
- Require their product only to be sold in high-end retail outlets to retain a desired brand image.
Selective distribution may also create business certainty as you may choose only to contract with the most lucrative outlets. Having fewer distributors may also mean that you can establish better communication and build more productive working relationships. Market coverage advantages may also be enjoyed when comparing to exclusive arrangements.
For distributors, selective distribution can also bring benefits. Although not exclusive, you are likely to be offering a product for sale which cannot be readily found elsewhere. This may draw in consumers who might have otherwise gone to a competitor. The exclusivity of the products may also assist with your own marketing strategy, for example, if the intention is to build a luxury or high-end brand.
Limitations
Market penetration is likely to be lower; this may or may not be a disadvantage depending on your business. For suppliers intending to place a new product into a competitive or saturated market, selective distribution may not offer a sufficient level of market penetration to do so successfully.
Another factor to consider is that, due to the high value of the arrangements and the obligations placed on distributors, selective distribution agreements can lead to costly disputes when things go wrong.
What are the next steps?
Before entering into a selective distribution arrangement, you should carry out extensive market research and consider your options very carefully. Particular care needs to be taken to capture agreed terms in a comprehensive written agreement. For further guidance, please contact David Thompson, Partner in our Commercial team.
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