05 Dec HARSEST – Principles of Distributorship Agreement
1. Distributor
2. Distributorship Agreement
3. Contents for the Agreement
As the volume of business increases in overseas B2B sales, a partnership is needed to take charge of a country. When the head office is not able to handle overseas sales, a partner becomes the distributor who is in charge of marketing, sales or CS to increase the brand value.
Distributor
Distributors (DT) are overseas partners who can play the most important roles with agents. DT is usually more professional and covers bigger field than most agents.
DT is generally a partner of a brand in one or more overseas countries who represents a brand in terms of B2C sales as well as marketing, CS and brand value. For example, in the case of Shinsegae International, which sells Acne, Celine, and D&G, Armani is managing and distributing the brand name of Emporio Armani in Korea since 1992. The bigger scale DT who focuses on overseas transactions such as Happy Sockets, Penfield, QWSTION, and Cheap Monday have workshop showrooms in Korea. This report deals with the important aspects of the transactions between brands and overseas DT.
First of all, brands targeting overseas exports must begin with distinguishing agents and DT, as mentioned in the Harsest report “The Agent Agreements”. In other words, countries with tariffs (non-FTA agreements) need DT to provide a basis for easy access to B2B sales and B2C through retail. Otherwise, sales through agents or a direct sale of a brand requires a DT as a partner to manage further situations. The Swedish brand Our Legacy, for example, is working with agents in the 28 EU member countries, which are under the FTA with general retailers in Europe. In Asian countries with the tariff, retailers and DT work as partners. In China, DT takes care of various orders due to a large number of retailers. In addition, if the country of origin is not the same as the brand, it is better for shipping conditions to be formed so that it can be sent directly from the country of origin to China without having to enter Sweden.
As you can see in the table above, distributors take care of more things in terms of sales than agents. DT are partners who have their own distribution channel in a certain territory (B2C sales) while agents are limited to B2B sales. DT often generates more profit margin than general retailers.
For instance, if a Korean brand named A retail their products in Russia rather than to the country of the EU FTA, the profit margin structure is as follows:
Conditions: The Korean brand A has a profit margin structure of retail price at 2.5 times larger than the wholesale price of 100,000 won.
Price sold to Russian retailer: 100,000 won
Arrival price in Russia including tariffs and shipping (30% of landed cost): 130,000 won
Recommended retail price suggested by the brand to the worldwide retailer (including Russia): 250,000 won
Profit margin: 1.9 times (130,000 won – 250,000 won sold)
However, if the DT is in charge of B2C sales and receives a discount of 30% for the same price, the following is the case.
Price sold to Russian retailer: 100,000 won
The actual amount paid after discount: 70,000 won
Arrival price in Russia including tariffs and shipping (only 20% of landed cost due to ordering large volume): 84,000 won
The recommended retail price suggested by the brand to the worldwide retailer (including Russia): 250,000 won
Profit margin: 2.9 times (84,000 won – 250,000 won sold)
However, if the DT is in charge of B2C sales and receives a discount of 30% for the same price, the following is the case.
Price sold to Russian retailer: 100,000 won
The actual amount paid after discount: 70,000 won
Arrival price in Russia including tariffs and shipping (only 20% of landed cost due to ordering large volume): 84,000 won
The recommended retail price suggested by the brand to the worldwide retailer (including Russia): 250,000 won
Profit margin: 2.9 times (84,000 won – 250,000 won sold)
For this reason, when DT has a distribution channel with several import brands, there is a retailing chain that can be created and sold with a private brand (PB), which can create a larger profit margin.
Distributorship Agreement
The way a brand can meet a DT is similar to the way of meeting an agent. In Europe, the number of agents is larger than DT. Most of the agents in European countries and North America are in charge of distributor’s tasks as well. According to my personal experience with a partner in Canada, the first 2 seasons were with an agent who was in charge of DT’s tasks. After the first 2 seasons, I was offered to sign a Distributorship Agreement which guarantees sales volume. Similar to this, the Agreements differ by case. In America, the DT is distinguished with importers. Importers are partners that help with import tasks while the DT is in charge of distributorship in America and Europe. Countries such as Italy, Portugal, and Greece in Europe belong to the 28 EU member countries that are free from tariffs, however, government charges tariffs. Therefore, there is a large number of DT as well as agents due to those charges. In addition, DT is usually in charge of larger businesses; therefore, it is difficult to meet them at fairs.
For small to mid-sized brands, one of the most favorable factors to consider when selecting a DT is an Exclusive Distributorship Agreement with multi-line DT. Signing a contract with multi-line DT could be risky since they are already signed with multiple brands. It is better to include beneficial contents in an Agreement regarding the PR section, MOQ, etc. In the case of signing an Exclusive Agreement, keep close communication by requiring them a feedback regarding sales and marketing to prevent distributing products through a different channel at a discount.
Brand and DT sign a Distributorship Agreement which has more contents than an Agent Agreement. It includes brand, graphic, and interior manuals that can be forwarded to DT so that the identity of a brand can be transferred without any distortion.
Signing a Distributorship Agreement begins with a draft version and adding on to the contract. It is recommended to have it written by lawyers to prevent legal disputes and potential sales curtailments. From the perspective of both brand and DT, it is important to check every detail from various angles to avoid creating favorable conditions for the other party by aligning the interval in communication.
Contents for the Agreement
As mentioned earlier, the Distributorship Agreement is more complex than the Agent Agreement since it deals with the more complicated matters regarding sales volume and orders for each season. In this report, the tips in writing an Agreement with commonly used content is presented through examples of Distributorship Agreement of more than 20 fashion brands.
According to the chart above, the content covers not only the Agent Agreement and sales areas but also the overall contents of the brand. The followings are detailed clauses for the Distributorship Agreement.
A. The information of the two contractors
DT and the brand, usually referred to as the Manufacturer or the Supplier, is expressed as a company name, address, business license number (for Europe: VAT number, for Australia: GST number, for Korea: business registration number), etc. This section gives a brief introduction of the relationship between the brand and the DT as well as referring to each party with hereinafter.
B. Sales area, cost, and product price
The sales location section is similar to the Agent Agreement, but in some cases, the minimum area limited scope is usually contracted in groups of countries or more. The cost section must include that the DT will take care of shipping, insurance and service activities on the items purchased. The price of the product includes the period of notifying the distributor in the case of any changes in the price.
TIP: In some cases, DT and the brand are not from the same continent. Due to the tariffs, shipping, etc., the price in the local market could be higher than the price set by the brand. Although there is a difference in a segment, the difference is usually 30 percent in China, 20 percent in Korea, and is even higher for luxury items. From the standpoint of the brand, the price resistance line can be eliminated if the price of a single item sold through the headquarters homepage and the price of DT directly into B2C is adjusted to a similar level.
C. Sales conditions
This section indicates the bank information as well as a method for DT to pay the brand for the cost of wire-transfers or LC where the order will be paid 30% in advance and the remaining 70 % will be paid upon delivery. In the case of LC, the portion usually exceeds €30,000 and extension of the credit facility is included.
TIP: For brands, FOB is advantageous in non-tariff areas (when the items are imported to the countries that signed FTA) and EX-WORK is advantageous for distributors. For example, when there is a UK brand that manufactures the product in India who is working with Korean DT since Korea and India has Comprehensive Economic Partnership Agreement (CEPA); it is beneficial for the UK brand to send the materials directly from India. In this case, if producers in India send a CEPA origin certificate directly to Korea along with products (drop shipping), the tariff would be 6 percent rather than 13 percent. If the UK brand brings goods from India and sends it to Korea, it is difficult to benefit from FTA.
D. Warranty of the product and limited liability
This section specifies the liability for damages in the case of shipment, handling, transport and storage, etc. The brand is not responsible for the product once it has left the brand’s hand.
E. Delivery
This section specifies the method such as FOB, EX-WORK, etc. It indicates that when the brand has a warehouse in another country, the product is shipped directly from the manufacturing country. It also indicates the delivery date and shipment after confirming the order.
TIP: For example, if a UK brand manufactures a product in India and is working with a Korean DT, since Korea and India have a Comprehensive Economic Partnership Agreement (CEPA), it is beneficial for the UK brand to send the materials directly from India. In this case, if producers in India send a CEPA origin certificate directly to Korea along with products (drop shipping), the tariff woulf only be 6 percent rather than 13 percent. If the UK brand brings goods from India and sends it to Korea, it is difficult to benefit from FTA.
F. A delay in payment
This section is included in case a DT fails or delays the payment. The unpaid items are not sent until the payment and until then, 1 percent is charged a storage fee.
G. Product return
Usually within two weeks after receiving the goods, DT notifies the brand about any unshipped items or defected goods. Otherwise, the brand sends credit invoice to DT.
TIP: For defective items, the brand asks DT for details in the Excel file along with the image. In some cases, the number of items sent by the brand and the number of items received by the DT is not consistent. It is better to prove the fact by recording the unboxing process.
H. Brand identity
This section is the biggest difference between the Agent Agreement and the Distributorship Agreement. The brand identity section representing the Distributorship Agreement indicates graphical guidelines, interior manuals as well as brand manuals in order for DTs to maintain local markets.
I. Patent, copyright, and logo
DT does sales and marketing on behalf of the brand in a region, however, DT must not detract from the brand’s value by using the brand’s logo for any reason. It is also to prevent unauthorized items from being produced. The webpage domain must be attributed after the contract expires, and all intellectual property rights, such as trademarks, patents, copyrights, and logos, belong to the brand regardless of region.
TIP: In China, the brand buys a .cn domain directly or the Weibo company account and number (for example, Skype Number). These cannot be applied or purchased from the outside of China. After signing a contract with a Chinese DT, it can register a brand in China (which usually takes one or more years), the registration can be canceled as soon as the contract is terminated. To minimize disputes, indicate that DT is only being specified as a representative of the brand.
J. Tax
It specifies that all taxes, such as tariffs, shall be borne by DT in accordance with the Retailers Terms and Conditions and the Agent Agreement.
K. Repackaging / re-labelling
Aims to protect the brand identity and value from forbidden reproduction.
TIP: Exceptions include the origin and mixing ratio of the brand or items that need inspection, which is not marked by the brand. The label may be added to the original labels in the country of DT.
L. Sales report
It enables the brand to receive sales reports from the DT at least twice per season to identify popular items, etc.
TIP: For larger brands, a global sale may be possible by opening a cloud-ERP system to overview B2B sales. A brand without a system should create a source to identify preferences and price competitiveness in each market by enabling the display of the items before distribution.
M. Applied language
Contracts, agreements, and appendix are all written in English. Documents written in any other language are not valid.
N. Terms and termination of contracts
Although the contractual terms for each brand vary, it is usually longer than the Agent Agreement (3 years in general). The contract period depends on the minimum order amount and discount rate presented in the appendix. The termination of a contract is also specified in this. It states that the contract may be terminated if the DT sells items outside of the country, infringe on the intellectual property rights, unpaid items, and rights detrimental to the third party, etc.
TIP: Longer contract terms are more beneficial for DT. Although there is no importance in an online shop setting, an offline store where a DT sells via B2B can be registered in a distributor’s country and can be sold overseas.
Appendix
A. Minimum order amount and discount
The most significant difference between the Agent Agreement and Distributorship Agreement is the minimum order amount. In other words, the DT typically sets the minimum order amount and discount rates for each season within the contract period.
TIP: The discount rate and minimum order amount may vary depending on the duration of the contract. Setting the contract period to 3 to 5 years based on the same volume, a 3-year contract gets fewer discounts than a 5-year contract. As volumes grow, as shown in the graph above, the discount rate can be applied differently. From a brand’s perspective, it is beneficial to continue on contract depending on the sales after signing a shorter Agreement. The standard for the MOQ is calculated by the number of sales in the existing region. For instance, if the sales volume from 5 retailers in the UK is 40,000 euro, the MOQ for a distributor should be around 60,000 euro so that it could be 42,000 euro after a 30 % discount rate. The actual margin is 2,000 euro compared to retailers; however, the profit margin is increased due to the reduction of manufacturing cost, and easier handling through a single distribution channel. Therefore, the margin exceeds the actual profit of 2,000 euro. In addition, the brand also benefits from promotions as well as popularity.
B. Brand shop
This section is included when a brand enters into a contract with a larger distributor with a separate brand shop. In the brand shop the interior manual related to the display of the product is given by the brand so that the shop does not damage the brand value. In case of European brands, it is necessary to comply with International Labour Organization (ILO) and fair trade agreements.
Closing sentences
Relationship between distributor and brand is important since sales and brand value depend on the DT. It is also important for brands to balance the changes to mass-targeting brand and manage the fan base.
Although there are not so many cases where Korean fashion brands make big sales and increase brand value through transactions with overseas DTs, I believe that the popularity of Korean brands in America and Europe will open an opportunity after a retailing and partnership with agents are done in a positive manner.
In particular, the deal with DT is important in terms of potential as for a brand itself as well as an opportunity to enter an overseas market that will lead brand to greater success. As Steve Jobs from Apple said that a success cannot be achieved in a short period of time, companies must prepare ahead and endure many steps in order to achieve greater goals.
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