By: Sean Bosse
Taking products to market for sale to the end consumers usually entails a supplier engaging with a distributor or an agent in the supply chain. Broadly observed, the distributor and agent would appear to be one and the same thing except for the obvious difference in the names. This broad observance has, however, caught many a supplier out and has been the subject of many disputes. But why?
Generally, a lack of understanding of the differences between the purpose, scope and function of an agent and a distributor and how, and to what extent, the engagement of the one or the other impacts the supplier’s business are the main reasons. In this article, I intend to give a broad overview of what an agent and distributor is as well as some general insight into the advantages and disadvantages a supplier should consider before concluding an agency or distribution agreement.
Agent and Agency Agreements
An agent is best described as an intermediary tasked with bringing together the supplier and the supplier’s customers. The best example of this relationship is that of an estate agent who assists a home owner to market his or her property to the general public and, through such marketing efforts, finds a willing and able purchaser. The agent brings together the home owner and the purchaser so that they can conclude the sale agreement.
An agency agreement usually sets out the extent that such agent is empowered to represent the supplier in its dealings with the public at large and the supplier’s customers in particular. So, for example, the conclusion of an exclusive agency would prevent the supplier from appointing any other agents in the territory and would also limit the rights of the supplier in marketing and selling its products directly to the customer. A sole agency, on the other hand, would likewise prevent a supplier from appointing other agents in the territory but would allow the supplier itself to seek out sales in the territory. Finally, an agency may be granted by the supplier on a non-exclusive basis allowing the supplier to appoint multiple agents in the territory while also allowing the supplier itself to seek out direct sales with customers.
In terms of the agency relationship, the agent earns its remuneration by way of an agreed commission for the services provided to the supplier. The amount of the commission payable by the supplier is one that is agreed between the agent and the supplier. Such commission is, however, usually much lower than what a distributor earns is the sale of the products for the reasons explained below.
The advantages of an agency relationship include the following:
- The customers will be those of the supplier and not that of the agent. Maintaining direct relationships with customers is an important consideration and under an agency agreement, this will, generally, be achieved as opposed to that under a distributor relationship;
- The supplier will control the sales process right from the marketing of the products, the terms of the sale contract and the price for the products;
- The payment of commission is usually payable to an agent only on the meeting of certain agreed terms resulting in a sale contract. This frees up monthly cashflow for the supplier rather than the burden of having to pay the agent a monthly salary;
- The performance of the agent can be strictly controlled by the supplier. In the event of a non-performance or an under-performance, the agency agreement may be terminated by the supplier.
There are certain disadvantages a supplier must be aware about when concluding an agency agreement. These are:
- The agent is an extension of the supplier and, as a result, all the actions of the agent will be regarded to be the actions of the supplier. The supplier will, generally, be liable for all of the acts of the agent;
- The supplier will continue to be burdened with administrative matters and the cost of administration in dealing with customers as well as bear the full financial risks in marketing and selling the products. All after sales issues will also be the burden of the supplier and not that of the agent.
Distributor and Distribution Agreements
A distributor, unlike and agent, purchases the products from the supplier and then re-sells those self-same products to its customers in a particular territory and on its own terms. The distributor is not an intermediary and therefore enters into a sales contract direct with its customers.
An example of a distributor would be someone who obtains the rights of an overseas manufacturer or supplier to distribute the its products in South Africa. The distributor acquires the product direct from the overseas supplier and will, thereafter, conclude a sales agreement between it and its own customers. The overseas supplier does not feature in the contractual relationship with the customer at all.
Similar to an agency agreement, a distribution agreement will also set out the parameters of the rights of the distributor including whether such distributor is granted rights to distribute and sell the supplier’s products on an exclusive, sole or non-exclusive basis.
Unlike an agent, the distributor earns its revenue from the mark-up it levies on the products purchased from the supplier. The mark-up is usually at a greater percentage than what an agent would earn on commission but such difference takes into account the financial risk the distributor takes.
Some of the advantages of a distributor relationship are the following:
- The supplier has less administrative responsibility and has reduced administrative costs to contend with as its supply and sale of the products is to the distributor and not to a plethora of customers. Customer accounts and customer management are, therefore, far less in a distribution arrangement than in an agency relationship;
- The distributor bears most of the financial risk in the supply and re-sell of the products. As a result of this risk, the distributor’s earnings are normally greater than that of an agent;
- The distributor is motivated to sell products quickly given that its funds are tied up in the sale and until the payment of the sale price by the customer.
- The main disadvantages of a distribution relationship are the following:
- The supplier has very little control over the activities of the distributor, especially in the way and manner it markets the products and the after-sale service;
- The customers purchasing the products from the distributor are the customers of the distributor and not those of the supplier;
- There is limited control by the supplier on the price establishment as the distributor will usually determine the mark-up to be levied on the products to cover not only its costs but also ensure a reasonable profit margin.
Agency or Distribution?
The choice of whether to engage an agent or a distributor is one that requires careful consideration by the supplier for the many reasons summarised in this article. The decision by the supplier as to the best supply channel to market must not only be driven by profit but also upon careful consideration as to whether the agent or distributor will help to enhance the supplier brand and grow sales through their commitment to ensuring standards of safety and utility of the products sold and the brand building of the supplier and /or the products to develop meaningful trust in the mind of the customers.
Simply concluding an agency or distribution agreement without thought into the advantages and disadvantages of both is a recipe for disaster. If you do that, all we can say is “Supplier be careful!”
As retail lawyers, we can advise you on the appropriate supply chain channel partnership to engage in and to assist you in preparing your agency and distribution agreements. Contact us if we can assist.
Disclaimer to this article: This article is published for you to read and, if you so wish, share with others on the understanding that at all times the copyright herein will and is the sole and exclusive ownership of the author. The article is made available for informational purposes only and does not in any way constitute legal advice. No representations as to the accuracy, completeness, suitability or validity of this article is made. No liability will attract to the author for any losses, injury or damage you may suffer arising out of your use of this article. It is recommended to always seek professional assistance of a qualified lawyer at all material times.
