Distributorships and Dealerships Law and Legal Definition
Distributors and dealers are participants in a supply channel, the distributor usually a wholesaler who sells to dealers and dealers usually retailers who sell directly to the public. The dealer-distributor terminology is most common in the distribution of machinery and mechanical goods—thus in automobiles, trucks, farm and construction equipment, yard and garden goods (green goods), appliances (white goods), electronics, and also in the sale of industrial equipment. This basic structure has many variants.
Both distributors and dealers actually purchase the goods they sell—the distributor from the manufacturer, the dealer from the distributor. Distributors maintain parts inventories and the dealers provide service functions to the ultimate consumers ("servicing dealers"). Relationships among manufacturers, distributors, and dealers are typically contractual in nature. Distributors and in turn dealers participate in incentive programs offered by the manufacturers—such as subsidized advertising programs, bonuses, and special discounts. Distributors and dealers have rights to use the manufacturer's trademarks and logos—but not as their own.
Distributor and dealer relationships to manufacturers have many features in common with franchises. Indeed, state laws governing franchises may have clauses that directly relate to distributors and dealers. But the franchise concept is fundamentally different from the distributor-dealer model. Traditional distributors and dealers never pay an up-front fee to the manufacturer for the privilege of selling the producer's goods—but may be contractually required to buy some minimum amount of goods. Distributors and dealers may be relatively strong or relatively weak over against the producer, but in all cases they bring something to the table, namely an established market already developed. It is not unusual for strong distributors and dealers to carry the goods of competing manufacturers, although, in most cases, one of the brands will be dominant, the other serving a smaller customer base.
A two-tier distribution system (distributor, dealer) may be the preferred channel used by the manufacturer of one or a whole line of its goods. Using distributorships gives the producer the advantage of dealing with just a few major buyers, the distributors, who then, in turn, take care of selling the product through to the ultimate consumer using dealers. In any kind of major equipment business, substantial capital is involved in carrying and holding merchandise, including parts inventories. Distributorships share the burden by purchasing goods on their own account and freeing up the producer's working capital for the next round in the production cycle. The producer in such a channel participates, nevertheless, down to the retail level, by marketing programs, incentive programs for distributors and dealers, discounts for the consumer, and also by providing technical training programs for distributor and dealer personnel.
The distributor is an independent selling agent who has a contract to sell the products of a manufacturer. The distributor cannot represent him- or herself as the producer but may display the producer's trade name in signage and in the sales situation. Depending on the relative power of the producer, the distributor may be limited to selling only one brand of a product; in practice the strong distributors will have much more freedom. The distributor usually has an exclusive territory which may be part of a metro area or, depending on the product, may be a large territory including more than one state. Distributors pay wholesale prices for the product and then distribute to dealers who pay dealer price.
Variants to this general pattern exist. One such is the contract distributor who purchases a product from a producer, consolidates it with other products thus adding value, and resells the product. A contract distributor differs from a wholesaler in that a wholesaler merely purchases a product, along with other products from different manufacturers, and resells the product with little if any changes.
Being an independent entity, the distributor's operations are not under the direct managerial control of a producer. Producers, however, influence the distributor by providing common methods for display, for inventory management, producing national advertising and symbolism, and offering incentives. Some of these internal matters may be governed by the general contract under which distributors and producers operate.
A dealership is sometimes called a retail distributor. It is similar to a distributorship, except that a dealer usually sells only to the public. Unlike other types of franchisees, including some distributors, a dealer rarely carries a single product line. Even in the auto industry, a major dealer will carry competing products, often on the same site, but these will be differentiated by being each in its own building.
By operating as a dealer for a branded product, the dealership in effect participates, but at second hand, in the producer's total marketing scheme—enjoying national advertising support, receiving training, and taking advantage of incentive programs. By taking part in dealer groups, dealerships also act as a feedback mechanism for the producer conveying insights gained by dealing directly with the customer.
SECURING A DEALERSHIP/DISTRIBUTORSHIP
In order to determine which business opportunity or franchise to invest in, it is important to do careful research. While the advantage of investing in a business opportunity or franchise is that it can be a "turnkey operation," it is crucial to plan and investigate the investment even more thoroughly than with a traditional entrepreneurial effort.
Begin with an assessment of your own skills and goals for the business. Keep these in mind while reviewing franchise possibilities. Start with a thorough reading of the Uniform Franchise Offerings Circular (UFOC) or the business disclosure statement. If the franchising business does not have one, ask why and be concerned about the dependability of the business. Get copies of the company's financial records, as well as details in writing about what exactly is being offered for the purchase price, including training and support. Find out what other distributors exist and, if possible, talk to them about the success of their franchise, the quality of the product/service, and the support of the franchiser. Test the potential of the product/service with family and friends. Ask yourself, "Would I purchase this product/service?"
Another factor in securing a dealer/distributor business is the large initial investment. There are normally two types of fees associated with franchises and business opportunities: the original start-up fee or purchase price, and ongoing fees or product costs. The purchase price may depend on whether the small businessperson is investing in a "turnkey" operation, such as a car dealership, or a less complete franchise. Prospective franchisees should not be afraid to negotiate the purchase price and terms of the business opportunity.
A franchise territory can be exclusive or non-exclusive. There are pros and cons to each type of territory, but be sure you are aware of the status of your prospective business and determine whether you can work in this environment.
It should be noted that both distribution and dealership agreements tend to have a shorter term than a traditional franchise agreement. Distribution and dealership agreements frequently are renewed on an annual basis, by mutual agreement. A traditional franchise agreement normally covers a minimum of five years.
BENEFITS AND COSTS OF DEALERSHIPS AND DISTRIBUTORSHIPS
There are differences in operating a distributorship and a dealership. A distributorship normally costs more than a dealership and requires leadership capability and a better knowledge of basic business skills. It will most likely have a larger territory than a dealership and may even extend to more than one location. A dealership tends to be local and requires less start-up capital. A dealer can focus his/her efforts on the management and success of one location. The dealer works closely with a distributor so it pays him or her to nurture that relationship as well. In the final analysis, the distributorship can be more lucrative; but it will require different skills and higher investments.
The chief benefit of participation in such a two-tiered channel comes from the brand equity of the products carried—and the support the brands may have from the producer. The relationship, however, is mutual. Well-supported brands will tend to be higher priced. The pressure to stock at high levels will be greater and conformity with the producer's programs will be enforced. In turn a well-run distributorship will ensure selection of excellent dealers who, in turn, by commanding strong locations and providing good service to consumers, contribute substantially to the brand's image.
Producer-distributor-dealer relationships have built-in conflicts as well—the smooth resolution of which is central to profitable long-term operations. Conflicts often take opposite forms: producers may wish to "push" more product into the channel than the channel really wants; at other times, especially when a product really takes off, the channel can't get enough product to meet demand. Effective participants in this channel pay a good deal of attention to the parties. Producers will cultivate good will down the channel. Distributors will both push and protect their dealers. Dealers will "stretch" to meet producer needs by stocking a little more—and will benefit when product is short by being first in line for shipments.
CHALLENGES FOR DEALERSHIPS AND DISTRIBUTORSHIPS
One recent challenge for dealers and distributors are changes in the relationship with the original manufacturer or franchiser. For example, General Motors in the early 1990s wanted to establish 10 percent of their dealerships as factory-owned, according to Robert Ulrich in Modern Tire Dealer. GM was looking to maintain its brand name at its dealerships, many of which had begun selling more than one car line under their roofs. Existing independent dealerships were concerned that factory-owned dealerships would receive preferential treatment in the areas of advertising, service agreements, promotions, and even inventory. Dealerships viewed their ability to sell more than one brand as an opportunity for cross-selling into the GM brand when the buyer may have been initially interested in another brand.
The advent of the Internet has also changed the way that dealerships and distributorships operate. Dealerships and distributorships emerged as businesses when manufacturing companies were new and focusing on production, as opposed to distribution. As production costs diminish with increased pressure for profits, many manufacturing companies are looking for a bigger piece of the pie. Business-to-business selling has increased dramatically. Manufacturers have begun selling their products directly to the public, and the Internet is a relatively inexpensive method of doing so. While this may take away some sales from the distributor, a manufacturer's Web site can also benefit its distributors. Many manufacturers use the site as a storehouse for information on the company and its products, providing prospective sellers with needed information that its distributors cannot deliver to unknown markets or sellers.
While they may engage in direct online sales, it is in the best interest of the manufacturer to also direct visitors to the distributors themselves, providing another channel of opportunity for the distributor. In order to improve their chances at getting that sale, a distributor should establish its own Web presence. While online purchasing capabilities are most likely beyond the resources of a distributor, a site gives the manufacturer something to direct the customer to and provides another marketing opportunity to the distributor.
Dealerships and distributorships can be great business opportunities for the prospective entrepreneur. The benefits of established brands, no manufacturing costs, and marketing and training support from a larger company come at a price, but may mean the difference between success and failure.
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Caffey, Andrew A. "Different Worlds: How to Choose Between a Franchise and a Business Opportunity." Entrepreneur. 19 June 2000.
Caffey, Andrew A. "Eight Steps to Choosing the Perfect Business Opportunity." Business Start-Ups. September 1998.
Entrepreneur Magazine: Starting a Home-Based Business. John Wiley, 1999.
Estratiades, Anastasius. "Ten Key Questions to Consider Before Your Client Goes Global." Journal of Accountancy. February 1997.
Gibbs, Andy. "How to Sell Your Product." Entrepreneur. 4 September 2000.
Peterson, Dean D. "In the Beginning." Doors and Hardware. August 2000.
Pressman, Arthur L., and Craig R. Tractenberg. "An Introduction to Franchise Law." The Legal Intelligencer. 31 May 2000.
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Hillstrom, Northern Lights
updated by Magee, ECDI
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