In general, all products whose sales process to the end customer or consumer involves prior storage in the destination country (i.e., maintaining stock) are marketed through distributors to guarantee a regular supply when demanded. This applies to both consumer goods and industrial products.
The exceptions to this rule are consumer goods intended for large retailers (who buy directly from the manufacturer and resell to the consumer public) and machinery and equipment, which are acquired by companies that are themselves manufacturers to incorporate them into their production process (e.g., a manufacturer of insulated electrical cables that acquires a wiring machine).
The process of searching for, selecting, and appointing a distributor is similar to that of a sales agent, which was discussed in issues 12 and 14 of last November and December, to which we refer.
The main characteristic of a distributor is that they regularly purchase products from a foreign company to resell them in the agreed-upon territory. This would be the case of an Italian distributor who buys refrigerators from a Spanish company to sell in Italy or a part of it.
The regularity of his purchases makes him a privileged, and often exclusive, buyer.
Selling through a distributor means outsourcing the marketing of products through a network that is not your own. The alternative is your own network, that is, your sales subsidiary.
Lack of knowledge about a market and its real opportunities makes it advisable to start activities through a distributor, which allows the exporting company to access that market without incurring fixed investment costs.
Subsequently, if sales reach high figures and the market offers stability and continuity, the company may consider creating a commercial subsidiary, taking into account whether the return on investment and the subsidiary's annual expenses improve sales profitability and strengthen the company's image.
Many of the clauses in the distribution contract are the same as in the Commercial Agency Contract (products, territory, sales figures, generic and specific obligations, duration of the contract and causes of termination).
Therefore, we will focus on certain aspects of distribution that must always be considered in the contract, as they are potentially conflictive: (1) marketing policy in the territory, (2) stock and after-sales service, and (3) possible repurchase of stock at the end of the contract.
Regarding the first point, it's important that the contract stipulates that the parties will determine annually which promotional activities they will undertake, their estimated budget, and how the costs of these activities will be divided between the company and the distributor. Assuming that the distributor's resale price already includes these costs can lead to unpleasant surprises, so it's advisable to clearly define this point in the contract.
The distributor must maintain a stock of products and spare parts adequate to meet estimated demand and provide appropriate after-sales service to avoid damaging the manufacturer's image. This point should be regulated.
Finally, the contract must include a buyback option for the manufacturer to repurchase any products in the distributor's possession at the time of contract termination (for whatever reason). This clause is particularly useful when a contract is terminated within the first two years of its term, as the products in stock are usually very recently manufactured, and it is advisable to prevent a disgruntled distributor from reselling them at cost, which could damage the product's image and the prospects of the new distributor. In any case, the clause must include an objective formula that allows for the automatic calculation of buyback prices.
In the European Union, the exclusive distribution contract is regulated by EC Regulation 2790/99, which allows the manufacturer to set maximum resale prices for the distributor and prevent active sales outside the assigned territory.
Some countries have established very protective regulations governing the relationship between foreign companies and local distributors. Therefore, it is always advisable to be familiar with these regulations. The Spanish Trade Offices or a local lawyer can provide information on this matter.
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