Distributorships and Dealerships

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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