Suppliers review their Distributor
contracts for two reasons: At the start of
a new distributor relationship or when the
current distributor has resigned or failed.
Most exporters simply revise their
standard distributor contract with a new
name and make a few minor adjustments
when entering a new partnership. Export
Solutions frequently reviews distributor
contracts as part of our distributor
identification process. We do not pretend
to be lawyers but our broad conclusion
is that most current distributor contracts
were written to reflect business practices
of the 1990’s versus the business reality
of 2022. Listed below are points for
consideration as you seek to refresh
or renew your distributor contracts.
Contract vs. Letter of Understanding
A basic question: Do you really need
a contract with all distributors in all
countries? Formal contracts make sense
when the manufacturer plans a strategic
launch, supported by investments in trade
and consumer activities. A contract is
mandatory in transferring an established
business from a direct organization to a
third party or from one distributor to
another. A Letter of Understanding
may suffice in cases dealing with an
opportunistic sale or testing a new
product concept. The Letter of
Understanding simply outlines the
roles and responsibilities of each partner,
expected outcome and plan of action,
and ability for each party to exit the
relationship without much complexity.
In some situations, a “Handshake Deal”
is acceptable, particularly if the volumes
are low and the orders are pre-paid. This
may function in some countries, but in
certain markets such as Puerto Rico (Law
75) a relationship with responsibilities
is created with or without a formal
written agreement.
Termination Clauses
Most distributor contacts are rarely
revisited until the possibility (or
probability) of termination becomes likely.
Long term contracts lasting 5 years, with
one year notification periods do not make
business sense for the distributor or
supplier. More realistic is a three year
contract, with escape clauses for either
the manufacturer or distributor to resign
if minimum sales levels are not attained.
Termination notification periods of
6 months to one year can be harmful for
a brand. A better option is a 3 month
notification period, with
succession plans formalized
at point of notification.
Global Retailer Impact
Retailers such as Walmart,
Carrefour, Costco, and Metro
maintain a presence in many
adjacent countries. Their cross
border sourcing activities
create challenges for
distributors, as retailers buying
practices may interfere with
protected territories. New
contracts should address
the role of global retailers and
responsibilities for each partner
to maintain the integrity of
the territory.
Distributor Price Increases
Pricing is a sensitive topic, as some
countries maintain strict laws to
discourage price manipulation. On
the other hand, contracts should include
clauses that prevent distributors from
taking “unauthorized” price increases
without agreement from the brand owner.
I have witnessed brands being damaged
by a distributor price increase that was
independent of any pricing action by
the manufacturer.
Key Issue: Distributor Loss of a Major Principal
There have been several high profile
distributor bankruptcies. These occur
quickly and result in the loss of
receivables by the manufacturer. It’s wise
to insert a clause stating that distributor
should notify you in writing within 7 days
of notification of any loss of principal that
represents 10 percent of their business or
more. Another clause, is the right for you
to terminate the contract within 30 days
upon distributor loss of principal of
20 percent of their business or more.
Promotion Payment Handling
Trade discounts and promotional
incentives are a standard component
of our marketing plans. However, it
is surprising that many distributor
agreements do not mention promotion
payment handling. We suggest adding
clauses mentioning documentation
required, budgeting, over spends,
and right to audit paperwork.
Information Technology Requirements
Most industry participants would be
utterly and completely lost without our
computers. Yet most contracts do not
specify any Information Technology
requirements for our distributors. New
contracts often specify that a distributor
must handle designated EDI transaction
sets, Electronic Funds Transfer, and online
portal to share shipment and financial
information. Data security and back-up
requirements also warrant inclusion.
Warehouse Audit
Warehouse inventory is central to many
of our business practices: Achieving sales
objectives, minimum stock levels, product
returns, new products, sales promotions
etc. Manufacturers should maintain the
right to inspect distributor warehouses
with 72 hour notice. This is particularly
important during distributor change or
suspected diverting.
Minimum Volumes
It is difficult to forecast volume for a
new brand launch due to many variables.
However, it is fair to establish minimum
volume thresholds, particularly for year
two. If the business is not succeeding,
there must be “escapes” for both
manufacturer and distributor to
exit gracefully.
Next Steps
Respectfully, most suppliers and
distributors desire to avoid frequent
contact with their lawyers. The new
business realities of 2022 reveal that
many distributors and manufacturers
are not adequately protected. A review
of existing contract templates to measure
relevance for today’s business practices
is warranted. Export Solutions advocates
a balanced approach favoring
commercial sensibilities.
48
Distributor Contracts: Review and Refresh