• Eugene F. Zelek, Jr.

WHY CONTROLLING DISTRIBUTION MATTERS




Background: Uncontrolled distribution jeopardizes the supplier’s positioning and segmentation strategies, as well as performance by legitimate resellers of the obligations associated with the brand, such as inventory and service levels or other desirable behavior that helps differentiate the brand and maintain its value. Another common outcome is resale price erosion and corrosive price competition caused by resellers with widely different margin requirements or expectations, as the lower-margin resellers (often the ones selling only online) can undercut the prices charged by those requiring a higher margin (typically traditional resellers).

In the absence of a supplier addressing the problem, the higher-margin resellers drop the supplier’s products as unprofitable or look to the supplier to subsidize their greater selling costs, often by demanding enhanced trade funding. Another common reseller response is to emphasize higher-margin competitive products, including private label. If the supplier is interested in preserving its brand equity and maintaining the appropriate group of resellers for its brand, a common approach is for the supplier to adopt a pricing policy, either covering minimum advertised price (MAP) or minimum resale price (MRP, sometimes also called a “UPP,” or unilateral pricing policy).


However, if the supplier sells to anyone and everyone without restriction, even the best pricing policy will not adequately address price erosion or other types of brand damage, as resellers that simply should not have the supplier’s products sell them in places where they don’t belong. Uncontrolled distribution also can undermine a pricing policy because various resellers don’t care about policy penalties, as they are not supposed to be reselling the products anyway.


Controlling Distribution: Strong brands typically benefit from being at least somewhat picky about where they are sold, not only those with selective distribution in mind (like certain tools, appliances and fashion items), but also those seeking intensive distribution (such as consumer package goods). At the same time, the higher price points and the higher dollar margins that go with such brands make them desirable for discounting, as offering a strong brand for less has considerable appeal for many resellers and their customers.


The best way to tighten up distribution is to allow only authorized resellers to get the supplier’s products, i.e., those that have signed the supplier’s reseller agreement or are subject to various supplier policies. In this way, the supplier sells solely to authorized resellers and, if it uses wholesalers or distributors, they are required to do the same, either by agreement or policy. Alternatively, but not quite as good, the supplier considers each reseller to be authorized, until it says it isn’t, something that is conveyed to wholesalers or distributors by obligating them to comply with a Do-Not-Sell List.


Benefits: Authorization programs can benefit suppliers in a number of ways, including, but not limited to:

  • Consistent with the way the supplier wishes to segment the market, it can manage where and how its products are resold, including using geographic or market restrictions (e.g., controlling website use, such as which and how many resellers can sell on Amazon.com) and prohibiting certain behavior (e.g., no selling for resale and no transshipping).

  • The supplier has direct links to all of those reselling its products—not only the direct-buying resellers that it already can identify, but also the indirect-buying resellers that it probably does not know, but should.

  • A direct link facilitates communication between the supplier and those buying from wholesalers and distributors, so the supplier is less dependent on intermediaries to pass on information, such as new product announcements and merchandising programs.

  • A defined universe is easier to monitor, as outliers become apparent more quickly.

  • Channel conflict can more readily be controlled.

  • Laws that ban certain economic discrimination (like the Robinson-Patman Act in the U.S.) apply only to resellers that compete (i.e., chase the same customer), so, by managing the amount of overlap, better acquisition prices and enhanced promotional benefits can be directed to where they will do the most good, increasing the supplier’s return on marketing investment.

  • An authorization program can (a) better differentiate the authorized from the unauthorized, making it easier to pursue the unauthorized for violating the supplier’s intellectual property rights and (b) bolster the supplier’s position by adding contractual obligations, such as requiring a terminated reseller to stop selling the manufacturer’s products, cease using its intellectual property and sell back acceptable inventory to the supplier to avoid it being dumped on the market.

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