Distributorships and Dealerships

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.

PARTICIPANTS

The Manufacturer

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

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.

The Dealer

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.

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