Exclusive distribution is a type of distribution where the company ties up exclusively with a distributor. If you have read the article on difference between wholesalers, retailers and distributors, then you will note that the work of a distributor is to reach the retailers and wholesalers and sell the products to end customers through them.
Mass market companies like Unilever and P&G appoint many distributors so that their products reach end customers. However, luxury companies like Rolex, Lamborghini, Mercedes, or BMW will appoint only a handful of distributors in a defined region and enter an exclusive distribution model.
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Exclusive Distribution Definition
Exclusive distribution is a type of distribution wherein a distributor and a manufacturer authorizes only one specific distributor to carry out distribution within a marked territory. Such an agreement makes the distributor the sole authorized entity to sell the manufacturer’s product in the defined market.
At the same time, even the exclusive distributors have to enter the agreement that they will only sell the products of the manufacturers exclusively and will not sell those of the competition. This way, the market is an open ground for the manufacturer and the sole distributor and they have complete control over the distribution strategies of the product.
An exclusive Distribution agreement can be an effective way to ensure that your products reach the right market at the right time. It allows you to control the marketing efforts of your product, as well as its availability and distribution.
Which Companies Distribute Exclusively?
Exclusive Distribution is used for products or services which are high-quality or high-value products that required trained manpower to sell the products. Any mass-market product is generally adapted to consumer needs and may not have a lot of differentiation. However, technical products are differentiated products and therefore the principal distributor should know all about the products.
Companies distribute exclusively in the following industries
- Luxury Goods: High-end Fashion, luxury watches, jewelry
- High-end Electronics: Premium and niche products like high-end Audio equipment, specialized cameras, professional-equipments.
- Automotive Industry: Luxury car brands, Premium tractors or agricultural brands, exclusive merchandise sellers.
- Spirits and Wine Industry: Premium or rare whiskeys, wines or liquor.
- Cosmetics: Cosmetics and fragrances as well as premium range beauty products.
Why is Exclusive Distribution Important?
Exclusive distribution strategy is important for a few reasons:
- An exclusive distribution agreement allows you to build a brand image in a particular geographical location or area, which can help you grow your business and increase sales over time.
- An exclusive distribution strategy gives you more control over how your product is sold, which can make it easier for you to maintain quality control over production and ensure that all products reach their customers safely and on time.
- An exclusive distribution strategy allows you to negotiate terms with other companies in order to bring more value to consumers and make sure they get what they want out of their purchases (e.g., discounts on buying multiple items at once).
What is an Exclusive Distribution Agreement?
Exclusive distribution agreements are generally entered between a manufacturer and a distributor and the agreement has all the terms and conditions agreed upon by both parties.
These agreements should have the following details
- The territory covered by the distributor
- Products that are to be distributed
- Duration of agreement
- Exclusivity of Distributor
- Terms of Purchase and Payments
- Price Agreement
- Marketing and Promotional Expense agreement
- Dispute resolution process
- Escalation Matrix from distributor and manufacturer
As these are complex agreements, it is important that an attorney review the whole process.
Exclusive Distribution Examples
Rolex watches wants a distributor in Region A. Now, Rolex knows that it cannot have showrooms everywhere in Region A because it will dilute brand equity. So ROLEX appoints an exclusive distributor for Region A. This exclusive distributor starts his own exclusive ROLEX shops and also sells luxury brands through only the cream outlets of Region A.
Now, Rolex is satisfied with this concept of exclusive distribution and repeats it when it wants to enter Region B. Rolex might use the same distributor as Region A or it might give the exclusive distribution to another dealer. However, because Rolex does not want to dilute the brand equity, it will not enter in the region directly and won’t hire too many distributors so that it has the “premium” and “exclusive” positioning of the brand.
A similar model is observed in many different industries. Even in the industrial machinery segment, many times exclusive distribution is given to other distributors who are good at selling and have good relations in the local market, and who can focus on selling the brand more than the competitors.
Such exclusive distributors might cover a large region or a small region. Nonetheless, within their appointed territory, no one else but them can distribute the product for the brand they have tied up with. These distributors can in turn bill the product to other smaller distributors, wholesalers, and retail shops.
Exclusive Distribution Advantages
There are 6 main advantages of distributing exclusively. They are
- Focus: Exclusive distribution helps in keeping the focus simple for the firm. The brand need not worry of losing its own distributor to the competitor. The brand has a trustworthy alliance and hence it is more focused on winning over competition rather than deciding on its distribution base.
- Control: Because the exclusive distributor is himself dependent on the company, the company is very much in control. Besides distribution, the company can concentrate on marketing and advertising activities to increase the pull of the brand.
- Availability: A key characteristic of Exclusive distributors is that they are financially capable of stocking huge amounts of inventory. As a result, the material is easily reachable to retailers and wholesalers, and thereby distribution is increased.
- Financial advantages: The brand’s cash crunch is averted as the distributor is expected to have good cash in hand and is expected to carry the inventory and provide payments. As a result, the risk is mainly on distributor rather than the company and company’s finances are safe. This is off course if the distributor they have chosen is ethical and financially stable.
- Market Penetration: Because the company does not need to cover its own back and does not need to spend manpower in finding, convincing and maintaining the distribution channel, the company can completely concentrate on building the brand and doing promotional activities so that its penetration in the market becomes much better.
- Localization: One of the major advantages of exclusive distribution is localization. If a company is entering a foreign country, there are many things that the company won’t know. At such time, entering an exclusive agreement with a local distributor who is trustworthy is excellent for the firm because the local distributor will have relations with existing retailers and wholesalers. As a result, he can cement the brand in his market.
Disadvantages of Exclusive Distribution Strategy
- Trust – As can be seen in the advantages above, we mentioned the word “Trust” several times. There is a reason for this. Your business will be successful in distribution only if the exclusive distributors are trustworthy. Otherwise, he might take marketing and advertising budgets from use and use it to fill his own pockets rather than helping the brand rise.
- Dependency – If your brand is new or is not as popular as a Rolex or a BMW, then you will find that there is a dependency created on the exclusive distributor. Brands like Rolex and BMW can sell regardless of what type of distributor is selling them. Besides that, known brands have a line of distributors ready to tie up with the company. However, unknown brands becomes highly dependent on their exclusive distributors and will have to do as the distributor advices.
- Disputes cause huge losses – When considering regular distribution, a dispute with one distributor means that the single distributor wont perform but the distribution will go one through some other distributor. However, if there is a dispute with your exclusive distributors then you might lose the whole market. These distributors might have very good relations in local market so it becomes difficult for another distributor to create the same relations. Thus, in exclusive distribution, if there is a major dispute then it means huge losses might be incurred, not only in terms of money but in terms of time lost too.
- Choosing the distributor’s exclusive rights – It is very important that you choose the right distributor who is well-aligned with your brand and is aggressive with regard to the sale and marketing strategy of your brand. Otherwise, you might miss chance of tying up with even better distributors because your exclusive ones are not ready to budge.
As can be seen, there are several pros and cons of exclusive distribution and till date there are many companies which utilize exclusive distribution to good affect. However, it must be said that this type of distribution is good upto the point that the product is in average demand. Once the product has mass demand, then exclusive distribution becomes difficult and you enter different types of agreements with different distributors.
Exclusive Distribution has the following challenges
- Limited market reach: A single distributor will reach only selected outlets.
- Over Dependency: The company becomes dependent on a single distributor, which is a threat to its business in a territory.
- Lack of Control: The company has no control over prices and the exclusive distributor has a major influence on prices.
- Limited Choices: An exclusive ties up with exclusive outlets and channels which limits the product choices available to the customer in the market.
- Geographic Expansion: As the company enters new territory or wants to grow its own presence in a geography, its exclusivity agreement might hinder the process.
The Future of Exclusive Distribution
Exclusive distribution will become less common in the future because more and more products and brands are launching in the market and the manufacturers have to be present in a huge geography at desirable prices. With brands like Amazon and Walmart launching their own private label brands, exclusive product manufacturers themselves are reducing. Hence, it would only be the super-premium brands that will use this strategy in the market. The way that exclusive distribution will work in the future is
- Focus on Customer Experience: Unique and personalized experiences will become very important to engage with customers.
- Omnichannel marketing: A single marketing channel will not convert premium customers. Hence, a combination of physical stores, online platforms, social media, and other channels will have to be used to get better conversions when distributing exclusively. Example: Hermes as a brand has a presence in multiple marketing channels.
- Strategic Partnerships: Multiple levels of agreements might exist between manufacturers and distributors to support the strengths of all parties involved. Cross-industry alliances will increase when the channel is similar but the products are different.
- Sustainability: Sustainability will be a key to the future of exclusive distribution. As brands look forward to becoming more sustainable, there will be limited distributors who will be able to responsibly manage the products and supply chains with environmentally friendly practices.
Market dynamics, technological advancements, consumer adaption to new technology as well as government regulations will determine the future of exclusive distribution.
Examples of companies that use exclusive distribution – Samsung, Apple, Gucci, Lamborghini, Mercedes, BMW etc.
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