When choosing your marketing strategy, you will need to decide which distribution channels you will be using. Will you be cooperating with wholesalers, distributors or agents? Perhaps franchising is a suitable way to market your product? If you opt for distribution, you will need to choose a distribution system. In this article you can read all about exclusive distribution. For selective distribution, read here.
“Note: The below information will be revised following the adoption by the European Commission of the new VBER which will enter into force on 1 June 2022.”
What is exclusive distribution?
In an exclusive distribution system, a distributor is granted an exclusive right to promote and sell products within a geographical area or to certain customer groups. By doing so, a supplier restricts the ability of other buyers to operate in those areas or to those customer groups. Because this restricts competition, such agreements may well be prohibited. A violation of the cartel prohibition can have major consequences for suppliers and their managers.
However, there is an exemption for vertical agreements (EU Regulation 330/2010, revision expected in June 2022). It applies when the supplier allocates a territory or customer group to one distributor or reserves it for itself. This is also referred to as “exclusive distribution”. Exclusive distribution is not to be confused with exclusive purchasing, where it is agreed that the distributor may sell little or no competing products from other suppliers.
In an exclusive distribution system, the supplier may agree with other distributors that they will not actively promote in the exclusively allocated markets.
To qualify for this exception, the distribution agreement and the market conduct of the parties must comply with certain conditions. We describe some of these later in this blog.
When is exclusive distribution a good option?
Exclusive distribution is appropriate if it is necessary to build a brand image or if distributors need to invest in marketing of your products and need some protection against sales by others to recoup their costs. Exclusive distribution is often used for new or complex products or services. Like high-tech products or cars.
What are the advantages and disadvantages of exclusive distribution for a supplier?
For suppliers, an exclusive distribution system is especially attractive if distributors are investing in the marketing of the product, for instance by building brand awareness in a specific region or by training personnel. The exclusivity then protects the distributor from competition from other dealers, which makes them more willing to invest in the product.
The flip side is that exclusive distribution is subject to strict conditions. If those conditions are not met, both supplier and its distributors run the risk of violating the cartel prohibition, with all the consequences that this entails.
What are the advantages and disadvantages of exclusive distribution for distributors?
An exclusive distributor is the only* distributor within his territory or customer base who may actively sell and promote the products. Because he faces less competition, there is less pressure on his sales and he enjoys more commercial space to concentrate on the product and build the market.
Competition authorities usually impose fines initially on the supplier concerned, but it also happens that fines are imposed on distributors. In any case, the distributors are involved in the investigation, which is time-consuming and costly.
An exclusive distribution agreement: what to be careful for?
It is a serious matter to assess whether your distribution agreements and market conduct comply with competition rules. If this test is not carried out, you run a real risk, because very quickly there is a serious infringement of the ban on cartels. High fines can be imposed for this, both on the company and on the management personally.
One of the most important requirements is that there really must be one distributor per territory or customer group*. This can be a problem if there are already other distributors in a market. You may have to terminate your agreement with them. In addition, sales by the distributor’s customers must not be restricted.
Nor may you restrict your distributors’ ability to make “passive” sales to customers within the territory or customer group exclusively allocated to another distributor or reserved for yourself. Roughly speaking, “passive” sales are transactions that occur at the initiative of the buyer. In contrast, ‘active sales’ are sales where the seller approaches the individual customer on their own initiative (for example, by visiting them). These active sales may be restricted in an exclusive distribution system, provided that the other conditions are also met.
Price maintenance and a ban on internet sales are taboo.
To qualify for the exception, it is required that you and your distributors do not have too much market power. This means that the market share may not exceed 30% (each separately and for the distributor, on its purchasing market). If a market share exceeds 30%, the agreements must be assessed on a case-by-case basis to determine whether or not the cartel prohibition applies.
Suppliers, wholesalers, retailers and other purchasers must comply with these conditions if their agreement may have an effect in the Netherlands or elsewhere in Europe. It does not matter which law applies to the distribution agreement. Similar competition rules also apply to activities outside the European Union.
Finally, we draw your attention to the changes per 1 June 2022 following the adoption by European Commission of the new VBER. We will be publishing to inform you about these changes as soon as possible. In the meantime, feel free to contact us for to discuss these changes and the possible implications for your distribution agreements.