For a small business to buy goods directly from a large manufacturer you need to do a turnover of over R100 million a year in order to qualify for competitive pricing.
It makes more sense for smaller businesses to buy from companies such as Makro, who operate on a low-cost/low-margin trading philosophy that allows them to sell high volumes of merchandise at very competitive prices. Pick ‘n Pay spends billions a year so that they can offer goods at very competitive prices.
What does it mean to be a distributor?
Distribution is one of the four aspects of marketing. A distributor is the intermediary between the manufacturer and retailer. The distributor sells the product to the retailer who then sells to the customer.
The starting point
Smaller operators would be better off buying goods in bulk from large retailers. When you first start, you would be buying at higher prices. As your volume increases, you’ll be able to get better pricing and/or move up the supply ladder to a bigger wholesaler.
With some products there may be a chain of intermediaries; each passing the product down the chain to the next organisation, before it finally reaches the consumer or end-user. This process is known as the ‘distribution chain’.
How do distribution chains work?
A product can go from manufacturer to retailer many ways. Understanding local distribution channels and establishing where you fit in the supply chain, can help you find the right wholesale supplier for your retail business.
- A retailer can buy directly from the manufacturer (but has to purchase huge volumes) or
- The retailer can buy from the exclusive distributor or regional distributor (they sell to smaller local wholesalers) or
- The retailer can purchase stock from a wholesale retailer (Like Makro)
When you start dealing with a manufacturer, you may need to enter into a distributor agreement.
Types of Distributor Agreements
A poorly worded distribution agreement can cause misunderstanding and financial loss. A distributor arrangement is for a fixed term.
Under this arrangement, the manufacturer agrees to appoint a sole distributor within the distribution area. This distributor is the only entity allowed to distribute the manufacturer’s products within the specified area and assumes all responsibility and risks associated with doing so. As a typical distributor arrangement is for a fixed term, this distributor has a strong incentive to effectively promote the new product and secure a financial return.
A non-exclusive distributor arrangement gives the manufacturer freedom to appoint more than one distributor within the territory or to sell its products directly.
The supplier allows a distributor to appoint a network of distributors, provided the additional distributors meet certain criteria. This is useful where the product requires a service either during or after the sale.
In South Africa, the “Law of Contract” governs distributor agreements. Where there is no contract or tacit agreement, common law will apply.