Distributor Discussion

tacofries

Hi Everyone,

Got a good response to my last thread where a discussion was had on the Dragons' Den. It got me thinking that maybe it would be good to try and get a bit of a discussion going on some other business aspects.

Purely from a general discussion point of view, does anyone have any experience in dealing with distributors or have you ever actually been a distributor yourself? If so, what are your thoughts on dealing with them? It would be great to hear from both sides of the fence so if you yourself has ever actually been a distributor, then it would be great to hear your opinions also.

Some points that I would love to hear a bit about are:

how to ensure that a distributor is credible before you do business with them.

the sort of criteria/terms would you put in the contract of distribution

how to limit the risks involved with distributors, this may include financial, marketing or sales risks

advantages/disadvantages of distributors

how to motivate them

The idea is to keep this thread pretty light-hearted and to let it be a place where we can all hopefully learn a bit from each other. This could be a complete fail of a thread but we'll just play it out and see what happens!

Thanks in advance,

pedroeibar1

I'll start the ball rolling

tacofries wrote: »

how to ensure that a distributor is credible before you do business with them.

They can be researched via firms such as D & B. Experian, Graydon, etc. Some business information firms are market-specific (e.g. D&B is good in the USA, but would not be my first choice for many other markets.) Trade associations for your sector can also be useful. Depending on the jobs/product element Enterprise Ireland could be very helpful and has schemes / assistance if you meet their criteria.

tacofries wrote: »

the sort of criteria/terms would you put in the contract of distribution

That really is a matter for negotiation between you and the ‘distributor’. You decide was is critical for you and use that as a core, with lots of other Ts&Cs that can be negotiated. It would be foolish to have just one distributor for an entire country like the US (unless they had huge 'reach', but a single one could be good in for e.g. S Africa. It depends on many factors, size of market, etc. You need the duration to be long enough to make it attractive for both, but short enough (with an 'out') if you are unhappy with performance.

tacofries wrote: »

how to limit the risks involved with distributors, this may include financial, marketing or sales risks

Obviously you need to ensure that your credit terms are watertight (e.g. retention of title, how to cost promotions, volume discounts, etc.) and in keeping with the norms for that particular market. For example, credit periods vary by sector and market, so you need to be aware of them. E.G. Food product has 30 days max, but consumer durables could be 60 (or even 120 in Italy). If your sales are big enough €€ and B2B, credit risk could be covered by credit risk insurance (CRI). You mentioned factoring for your project in an earlier thread, sometimes this has CRI in-built i.e. non-recourse factoring.

tacofries wrote: »

advantages/disadvantages of distributors

Both hinge and depend hugely on the product, its price, the market, etc.

tacofries wrote: »

how to motivate them

Money .:)

duploelabs

Food could be a lot more than just 30 days. 6-8 weeks after EOM

pedroeibar1

duploelabs wrote: »

Food could be a lot more than just 30 days. 6-8 weeks after EOM

That is a very valid point Duplo – it could, but it shouldn’t. Credit terms should take into account sector/market/product norms. In general food has a short shelf life, so its credit terms should be in sync with the product life cycle. Joe Bloggs sells your food product this week, he should pay for it next week. Period, otherwise he is taking you for a ride by using your money for other things. Less worrying if a solvent company takes a few days longer, but if it were a smaller entity, your risk of a bad debt would rise exponentially. However, if you are supplying widgets to Joe, and he has to incorporate them into his product and then sell it, obviously credit terms will need to be longer.
Markets differ – traditionally late payment of invoices is far more frequent with Irish buyers than with foreign customers and (although I’m now a bit removed from it) I’ve heard delays continue to increase.
It is a departure from the OP, but it is down to effective credit control / credit management, which. IMO, has become somewhat lax in recent times due to the present market environment and suppliers are taking chances (going out on a limb?) to maintain turnover.
If longer credit terms are being sought/taken, the supplier effectively is transitioning to being the banker to the buyer. At a time when interest rates are in low single figures this has a lesser impact, but an eye has to be kept to the future – what happens when rates rise (and I believe they will) and the supplier is trying to fund a debtors’ book that is OTT and his buyers are sitting on his invoices for months? It is impossible to get a ‘biggy’ to accept shorter credit terms. Cashflow, cashflow, cashflow. How many balance sheets in big firms are window dressed by delaying payment to suppliers?
It is hard for a start-up to dictate terms, but 45 days EOM is just too long for almost all direct-to-retail sales of food products in this (Irish) market. Effective credit control is 30 days from invoice. And sit on the account, manage it to get paid within terms.
Any fool can sell product, it takes a combination of good sales technique and good credit control to have profitable business. What is the point of concluding a sales contract with (for e.g.) Tesco on X terms when they then announce on whim (or to avoid a profits warning) that they are extending their credit terms to X + Y days ? Or taking a discount to run a promotion? Too many ‘young’ companies confuse sales turnover with growth and profit. (Yeah, I know about production profitability, etc., but really, if you cannot get paid what it cost and collect what is owed (and if you get a bad rep as a payer with suppliers) you will last long in business.
I’ve seen Boots, Halfords and Debenhams (to name just a few) contribute in a significant way to insolvencies because of an arbitrary decision to unilaterally increase credit periods. Just look at the Hall of Shame https://www.fpb.org/your-voice/hall-of-shame

tacofries

So Pedro, you mention sales/cost promotions and volume discounts, I take it that it is better to have how all of those type of aspects will operate in the contract right from the word go? It does definitely appear that quite a bit of consultancy will be needed in order to draw up a proper contract that has all the dots crossed.

Do you think a clause should be put in the contract that dictates who is responsible for ensuring that nobody is infringing on our IP? This may mean that whoever has this responsibility has to commit the necessary finances and manpower. Maybe that would be to much to ask of a distributor?

Would it be reasonable to put a stipulation in the contract that a certain amount of units MUST be ordered within the first 6-9 months. If not, then the distributor must pay us a lump sum to the value of say 75% of that minimum amount? My thought in this is that if a new hot product comes to the market, whether this is in the same product category as our products or not, there is a chance that we could be forgotten about by the distributor as he tries to jump on the latest trend.

Do you think the firms that do credit checks, like D&B that you mentioned, are trustworthy? Are there any other ways of ensuring that the distributors are good at not only paying up but also attracting large volumes of sales, are easy to work with, stick to the contract etc? I would imagine that one simple way would be to look at how well the products that they are currently selling are doing.

I ran a distribution company for about 4 years, it was a side project but I had a few different products listed in different types of retailers and did quite a bit of volume until the trends changed and my main product was no longer selling.

Some important perspective is what a distributor needs in order to get listed in the end retailer, because these things need to be kept in mind by the manufacturer when approaching distributors. And aside from distributors you can go direct to wholesalers who will also do your distribution for you. Many of these guys aren't in the business of wanting to educate you on their operations and in some cases knowing the power they have will be very difficult to deal with.

Retailers prefer Multiple SKU's, so going to a distributor with only one SKU of one product is not ideal.
They want marketing $$$ and promotional $$$ especially in the beginning. The major retailers will demand special offers more then once a year so this needs to be passed onto the distributor from the manufacturer.
They want display units - the buyers in the retailers are always on the look out for new product lines, and they will create space in the stores for them as opposed to stealing shelf space from existing products. So you need nice displays, and generally they want these for free.
If you can negotiate 30 days of credit you are doing very very well. The retailer is almost never giving that to the distributor, they will hit distributors at the start with 90 days. Established distributors will have better terms and may be able to pass on better terms, but it is default negotiation to start at 60 or 90 days for credit terms. Hard negotiation is needed at every turn.
I did manage to negotiate a deal for payment upon pick up of a product and have the retailer pick the product up at the factory, which is really a dream scenario for myself and the manufacturer, but the product was extremely popular with massive sales elsewhere and we were exclusively distributing so I had a lot of bargaining power which is usually a rarity. But it was the reason I would only accept products from manufacturers that were unique/patented/exclusive.

With wholesalers, you are looking at initial listing fees (it can also be the case with distributors as retailers will look for it) I had a deal lined up for a product with the biggest depot wholesaler in the UK. They wanted 5K to list each SKU, but they had over 100,000 UK businesses buying their stock from their 80 or so distribution hubs so the volume will pay for it over time. But its a big investment for a new product early on along with all the stock on tick.

Distributor's generally want 30% margin. It seems a lot but when it breaks down with all their costs it makes sense. Logistics, staff, overheads etc.
If however you can find a distributor its much more preferable in my opinion to use one as it takes all the pain out of selling your product and not having to deal with retail buyers who can be very difficult and constantly changing job. In my opinion its best to factor in a distribution cost when initially pricing your products.

pedroeibar1

We don’t know what you are producing, so it is impossible to be specific. Also, and in no way meant as negative, a fault common to almost all newcos I’ve encountered is they have an unrealistic and overoptimistic view of the importance and potential of their product.

tacofries wrote: »

So Pedro, you mention sales/cost promotions and volume discounts, I take it that it is better to have how all of those type of aspects will operate in the contract right from the word go? It does definitely appear that quite a bit of consultancy will be needed in order to draw up a proper contract that has all the dots crossed.

Your solicitor will have a boilerplate distribution agreement - you need to look at that and then see if your ‘important bits’ are included; if not, get him to advise what can be added.

tacofries wrote: »

Do you think a clause should be put in the contract that dictates who is responsible for ensuring that nobody is infringing on our IP? This may mean that whoever has this responsibility has to commit the necessary finances and manpower. Maybe that would be to much to ask of a distributor?

Your IP is your IP, so yours to defend/protect.

tacofries wrote: »

Would it be reasonable to put a stipulation in the contract that a certain amount of units MUST be ordered within the first 6-9 months. If not, then the distributor must pay us a lump sum to the value of say 75% of that minimum amount? My thought in this is that if a new hot product comes to the market, whether this is in the same product category as our products or not, there is a chance that we could be forgotten about by the distributor as he tries to jump on the latest trend.

That is not realistic as outlined – it also works two ways, where the distributor might want to have a go at you for consequential loss should you fail to deliver

tacofries wrote: »

Do you think the firms that do credit checks, like D&B that you mentioned, are trustworthy? Are there any other ways of ensuring that the distributors are good at not only paying up but also attracting large volumes of sales, are easy to work with, stick to the contract etc? I would imagine that one simple way would be to look at how well the products that they are currently selling are doin

Credit information is based on hard data – financials, debts that have been passed over to be collected, court judgements, etc. The quality of the information depends on the jurisdiction and more importantly the age of the info. You have to do your own research, remember, info. companies want to sell you stuff, it is your responsibility to make sure you get paid!

tacofries

El Rifle, thanks for the insight from the other side! It is good to hear what it is like from a distributors point of view. Obviously seems important to ensure your margins have sufficient room to take a beating from any sales promotions. 30% does seem quite a lot. At that margin you would imagine that a manufacturer would be better of seeking a licensing deal with a 7% royalty in order to avoid all of the marketing and IP hassle etc.

Thanks for the answers Pedro, I suppose the main thing I am worried about is that our product may not be important enough if a new trend comes along, hence why I mentioned trying to put a few clauses in the contract!

tacofries

tacofries wrote: »

El Rifle, thanks for the insight from the other side! It is good to hear what it is like from a distributors point of view. Obviously seems important to ensure your margins have sufficient room to take a beating from any sales promotions. 30% does seem quite a lot. At that margin you would imagine that a manufacturer would be better of seeking a licensing deal with a 7% royalty in order to avoid all of the marketing and IP hassle etc.

Thanks for the answers Pedro, I suppose the main thing I am worried about is that our product may not be important enough if a new trend comes along, hence why I mentioned trying to put a few clauses in the contract!

If you only have 1 product, then a licensing deal really is the optimal way to go in my opinion. People often make the mistake that a product is a business, where really it takes a long time and a lot of success for one SKU to become a proper business that can support everything around it. If you can get a licensing deal, bank that and move onto the next product!