Setting-up as a distributor

The UK is a well developed and wealthy market, and manufacturers all over the world are looking for UK distributors in order to access it. That’s a massive opportunity for importers, wholesalers and retailers.

As you have access to the trade part of this site, the chances are you already have premises, salespeople, customers, and what’s more, expertise to put at the service of a foreign manufacturer/supplier, and you can make a good margin selling their product alongside yours. But if you’re going to become a distributor, you’ll need to dot your i’s and cross your t’s, or you could be making a big mistake.

The first thing you need to be clear about is whether you will act as an agent or a distributor. Legally, these are two quite separate relationships. An agent acts on behalf of the supplier, but it’s the supplier who remains the principal in any transaction – the purchaser has a contract with the supplier, not with you. On the other hand the distributor becomes the principal – and takes over responsibility for the product. (However, if you’re selling to consumers, remember that whatever your contract, the Sale of Goods Act and other consumer legislation still applies.)

A distributor also has fewer rights than an agent. In the UK, distributors are generally not entitled to compensation on the termination of the agreement – whereas an agent is entitled to such compensation.

However, as a distributor you will be able to set your own prices – agents generally don’t have the same freedom. Indeed, legislation protects your pricing discretion, since it’s generally considered a breach of competition law if the supplier attempts to influence the distributor’s pricing.

While there is a specific law of agency, distributor relationships are governed by the contract between supplier and distributor, so it’s important that the contract is well written and covers all the necessary topics. For instance, the duration of the agreement and arrangements for its termination – by either side – need to be stipulated.

Will the relationship be exclusive? An exclusive distributorship means that not only can the supplier not sell to other distributors in the UK, he can’t sell directly to UK customers. On the other hand a ‘sole distributorship’ basis allows the supplier to sell direct, though it still excludes any other distributor’s appointment. The difference between the two is important. Of course you might also be willing to take on a non-exclusive distributorship – but in this case, you may find another distributor fighting you hard on price, or investing more in promotion than you’re willing to do.

A contract might also mention your obligation to promote the product, and a minimum performance obligation. That’s particularly the case if the agreement is exclusive – any supplier wants to be sure that if you are the only channel to the UK market, you do your job properly, as it will be costly and disruptive to appoint another distributor.

Ensure that the contract sets the term on which the goods are to be sold to you by the supplier – including the currency in which they will be priced. If the goods are priced in Euros, then you’ll be taking a currency risk in importing which you may need to hedge. You should also ensure that the method of payment is specified. Some distributors ask for security such as letters of credit.

You might also want to think about stock levels, whether in the context of the contract or of your business as a whole. The supplier may not be obliged to buy back stock, unless specified otherwise in the contract – even if he terminates the agreement without notice. So you could be left with a lot of spare stock that you’ve already paid for, but can’t sell. In some other EU countries, such as Germany, distributors have rights in this situation – but the law in the UK doesn’t offer you this protection.

There are also some issues which apply to any importer. For instance, language is an issue whenever you’re importing from a non English-speaking country. Point of sale information and marketing literature need to be translated, and you may also need to translate on-pack information such as ingredient listings. Will your supplier help you meet the costs? And if you create your own packaging and advertising for the product, who will own the intellectual property or copyright – you or the supplier?

These are all issues that apply specifically to distributorship agreements. However, you’ll also need to address issues about importing that apply to all importers. Import duties are an obvious issue, though these won’t apply if you’re importing within the EU; however, you will still have to apply VAT. (There are also a few specific goods import of which is restricted even within the EU; check with the DTI’s Import Licensing Branch.) Other countries have different rules. Some countries have preferential tariffs – for instance, these apply to many former Eastern Bloc countries that are expected to join the EU in due course. Tariffs often apply to trading blocs, such as the European Economic Area (EEA) or European Fair Trade Association (EFTA), rather than to individual countries on their own.

‘Origin rules’ are applied to ascertain the real origin of goods – which may not always be the same as the country from which you obtain the goods directly. If you are trying to get a lower tariff for the goods you import, then ‘preferential rules’ apply, and they are strict – make sure you know exactly what you are doing here or your costs could rocket as high duties are applied. To qualify, products must either have been completely produced in the country from which you are importing, or must have been significantly processed in that country. For some products, there may be a requirement for a certain percentage of components to have been sourced from that country or trading bloc. This is a specialist area, and the rules vary from item to item, so if you have not imported before it may be useful to take advice from an expert.

You are also responsible for correctly identifying the goods imported according to the categories laid down in the HS Harmonised Commodity Description and Coding System – an internationally agreed classification. Different types of goods may have different tariffs applied, and these tariffs might vary from country to country, so the system is not simple once you move outside the EU.

Remember to check out any import regulations that might apply to specific goods. These controls may not always be applied by Customs & Excise, but by another government department. You’ll find intra-EU trade much simpler than trade with other countries.

One way round some of the difficulties of importing – not least, the paperwork – is to use an import agent. But that will cost money, and frankly, if you’re at the stage of becoming a distributor, you probably should take advantage of direct importing to cut out the middleman and make a decent profit margin. In very basic, day to day business terms, that means training up at least two of your staff to deal with the paperwork (if you only train one, and he or she leaves, you’ll be stuck) – and ensuring that you’ve budgeted for the time they will need to do it.

While the contract itself, and import regulations, are the two main areas you need to address, there are a number of other business issues. First, currency is likely to be a major issue for many businesses, particularly those that have not imported previously. If you need to pay your supplier in a foreign currency, you will need to check with your bank to assess what is the best (and cheapest) way of doing so. It may not be a good idea to open a foreign currency account if you are only going to have to make quarterly transfers to a single supplier. On the other hand if you have distributorships for two or three EU companies (or more) and you’re making more frequent payments, then a Euro account could be useful. But at that stage you will also need to consider cash and treasury management issues. For instance, if you need to use cash held in the Euro account within the UK, is it easily transferable? Are you losing out on higher rates of interest you could achieve on a sterling account?

By the way, don’t forget that Euros are an acceptable payment medium for some companies outside the EU, as well – for instance in the Baltic republics (Estonia, Lithuania, Latvia).

You might also want to look into the possibility of hedging if the distributorship will represent a large part of your business, and if the payment periods are extended. If you’re putting goods on the shelves and pricing them now, but only settling the bill next month, there’s a lot can happen to (say) the pound to Euro exchange rate in that time – and that could mean you make a loss if you’re not careful. One way round this is to use bank facilities to hedge – that is, fixing the exchange rate that you’ll pay, by using a forward foreign exchange contract. It will have a cost, of course, but at least that cost is predictable, so there will be no unpleasant surprises.

You’ll also need to arrange insurance for goods in transit. Don’t forget, when you do this, that ideally you’ll need to cover the transport cost and lost profit margin as well as the value of the goods themselves. Add on at least ten percent to cover that. You might be covered by existing policies – but most likely you’re not, so as with any other insurance, check it out before you need it.

That’s the legalities covered. But a distributorship is about more than legal niceties, contracts, and paperwork. You’ll also need to make it work on a business level and even on a personal level. That means introducing the people at both ends of the process – whether that’s by phone or in person – and ensuring that they understand the systems used for dispatch and receipt of goods within both companies. It may mean trying to find people within your company who speak your supplier’s language – though you are likely to find many staff abroad speak good English.

You need to be quite clear about what the distributorship adds to your business. A common pitfall is to take on a product that fills a gap in your product range, only to find out that the brand values are quite different – a ‘cheap and nasty’ product in a ‘quality and value’ range will stick out like a sore thumb and ultimately prove unsuccessful. You may need to do a little analysis of your own business before you make the decision to take on a supplier.

If you’ve met your supplier at a trade fair you have probably already established a personal relationship with some of the personnel, probably at quite a high level. But the depth of the relationship will affect your efficiency as a distributor. For instance, if your marketing person keeps in touch with the marketing department at your supplier, you’ll have advance notice of any special offers, promotions, advertising campaigns or new marketing messages – and that will help you market more effectively. It may also reduce your costs substantially!

Don’t forget the relationship should be two-way. Your supplier will rely on you to spot any problems with the marketing materials or pricing position in the UK market. Everyone has heard of products with inappropriate names, such as the Rolls Royce Silver Mist – lovely name, but it didn’t sell in Germany where ‘Mist’ means a richly odorous by-product of horses.

You need to understand your supplier’s brand and product values and promotional packages – but you also need to be able to adapt those to the UK market. That adaptation, after all, and your market knowledge, access and expertise, is why you’re getting the profit margin and the supplier isn’t dealing directly.

Maybe this sounds a bit too much right at the moment. You’re happy just to accept a distributorship and to start selling the product through your existing sales channels. But you should definitely have a plan to develop the relationship. If the distributorship is for a single product, does your supplier have other products or product ranges that you’d ultimately like to sell? What is their strategy – are they growing? Can you help them grow? Might there even be room for a joint venture in future?

Because the best distributorships are not just those that help you increase your sales in the short term. They are those that develop, from year to year, to benefit both the supplier and the distributor, and that continue to grow over the long term.

CONTACTS

DTI – Import Licensing Branch

Tel: 01642 364333.