An exclusive distribution agreement is a contract between a supplier and a distributor. The distributor agrees to be the sole distributor of the supplier’s products within a specific geographic area. Exclusive distribution agreements are commonly used for distributing high-tech, high-quality products such as automobiles, electronics, pharmaceuticals, designer clothes, and appliances. Companies that frequently enter into these agreements include Lamborghini, Apple, Rolex, and Gucci. For example, Rolex only has five official retailers in the Miami area that are allowed to sell and maintain Rolex watches. Similarly, Lamborghini only has five official show rooms in Florida.
Why Do Companies Enter into Exclusive Distribution Agreements?
Suppliers may enter into exclusive distribution agreements to preserve their brand’s aura of exclusivity. For example, Lamborghini is aware that having dealerships all over a certain region will lower the prestige associated with its brand. It may use an exclusive distributor to ensure that it has one or two well-placed dealerships in the region, controlling the supply of available vehicles and ensuring that Lamborghini showrooms and lots do not become ubiquitous throughout the region.
Suppliers also enter into exclusive distribution agreements to lock down top distributors and maintain a steady presence in local markets. A local distributor can focus on selling a supplier’s products effectively, allowing the supplier to focus on other aspects of its business such as marketing.
Finally, an exclusive distribution agreement gives a supplier piece of mind – a contractual guarantee that its distributor will not assist another supplier in distributing a competing product. With this piece of mind, suppliers can stock up on large quantities of the product and scale up their efficiency. Thus, some of the supplier’s business risks are reduced by entering into an exclusive distribution agreement– but only if it enters into the agreement with an ethical and reputable distributor.
An exclusive distribution agreement also gives a distributor piece of mind – a contractual guarantee that its supplier will not engage a competing distributor in distributing its product.
What Are Common Features of Exclusive Distribution Agreements?
The specific clauses of exclusive distribution agreements will often vary by industry and circumstances. However, most agreements contain clauses defining the geographic location that the agreement covers, minimum purchase requirements, ordering procedures, and the extent of warranties.
Distribution agreements are a great tool to strengthen the commercial relationship between a distributor and a supplier. It is important that companies have a well-written agreement that defines the exact terms of the engagement. A poorly-written agreement can lead to costly, time-consuming disputes that detract from the business dealings of both parties. Talk to an experienced business law attorney today if you wish to explore a distribution agreement—exclusive or otherwise—for your business.