Life Is Too Short for Bad Wine Distribution Agreements: 10 Key Considerations | Farella Braun + Martel LLP
If you are like most wine brands, DTC through your tasting room, club, and website can only take you so far. Success usually means accessing the general on- and off-premise markets, and accessing those markets means working with a distributor. Finding the right distributor and negotiating the right distributor agreement is critical to the health of your wine business. The right distributor relationship can grow your sales and reputation. The wrong relationship leads to cost, missed opportunities, and frustration.
As distributors continue to consolidate and states continue to look out for local wine distributors at the expense of suppliers, starting the relationship off right becomes ever more important. Here are ten critical considerations a supplier must address when entering into a new distribution relationship.
1. Know Your Partner
Not surprisingly, different distributors have different strengths and weaknesses. Have you done your due diligence? In which markets is your potential partner strong? What is their penetration in those markets? How do your brands fit into the distributor’s portfolio? How well is the distributor staffed? Will that staff be able to give your brands the attention they need? For some time, the trend has been for the winery to take on more and more of the marketing responsibility, including through tastings, winemakers’ dinners, and other events throughout the covered territory. Are the parties’ respective marketing expectations clear? A distributor, in effect, takes over a part of your business, so it is imperative to know this potential partner.
2. Don’t Go Naked
In the enthusiasm for a new relationship and excitement at the prospect of new sales and markets, it is easy for both the winery and distributor to get ahead of themselves and begin operating with only a vague (or contradictory) agreement or no agreement at all on critical issues. Unfortunately, it is simply human nature when something goes badly for a party to remember an unwritten “agreement” on the terms most favorable to that party. That is a recipe for a bruised relationship, at best, or worse, expensive litigation. The mirror danger is to dismiss everything other than, say, pricing, in a written contract as “boilerplate.” If it is in the agreement, it is in for a reason, is likely to be enforced, and, if you didn’t put it in, is likely to work against you.
3. Define the Territory
Where is your distributor permitted to sell and promote your products? Distributors often push for the broadest possible territory at the earliest possible moment. A supplier may want to consider a smaller territory early on in the partnership and, if things go well, expand from there. You may also find that you are better off working with multiple regional distributors that know the ins and outs of a more limited market. There is no one-size-fits-all solution: It is important that your distributor(s) understand your business and your needs and that you understand their strengths. Finally, if the territory includes so-called “franchise” jurisdictions, you could be locking yourself in with this distributor for a very long time.
4. Identify the Products
Which of your products will be included? A given distributor may not be able to sell all your products in a market due to its positioning and penetration in that market or restrictive agreements with third parties. Granting exclusivity to this distributor could be disastrous. Conversely, some of your products may be more attractive than others. Will you be able to mitigate cherry-picking by the distributor? Will any new products be automatically included in (or necessarily excluded from) the distributor’s line? Again, you need to understand the capabilities and expertise of the distributor by answering these questions at the beginning of the relationship.
5. Determine Exclusivity
As noted above, granting exclusivity to a given distributor, while common, must be considered carefully. The question is whether, to the extent state and local laws permit it, you would be better off having more than one distributor promoting and selling the same or other products you offer in the same area. On the other side of the coin, would you be OK with your distributor offering similar products from other producers? As always, there is no right answer, but you need to determine what is the best fit for your business and your relationship with your distributor(s).
6. Define the Term, Termination, and Consequences
Terminations are surely the most litigated distribution provision. The broader the territory, the greater the products covered, and the more exclusive the relationship, the more important the termination provisions become as the threat of termination tends to determine who has the leverage in other disputes. Distributors push for the longest practical term and narrow grounds for early termination, arguing (legitimately) that these incentivize the distributor to invest in building the brand in new markets. A winery will typically want a shorter term and broader early termination rights to discourage complacency and ensure the relationship is working. In our experience, “for cause” early termination clauses can be difficult to enforce, and it is often more fruitful to concentrate on negotiating a not overly long initial term, followed by “evergreen” clauses under which either party may terminate the agreement upon reasonable notice for any or no reason.
The consequences of termination should be thought through; the supplier, for example, will typically want the right to repurchased inventory in the distributor’s hands to avoid multiple distributors confusing the market. The distributor will often seek a termination payment to compensate it for its brand building. This is not necessarily unreasonable but should be tied to factors, such as the length of term or how much time has elapsed since notification of non-renewal and the final termination. It is tempting to overlook these “divorce” provisions at the beginning of the distributorship “marriage,” but overly generous termination provisions can lead to punitive costs discouraging an otherwise needed termination.
7. Specify Pricing and Payment
You have a retail price in mind for your product, but are you on the same page as your distributor? Who decides? When? When is payment due and what are the incentives to pay on time? The answers may seem obvious, but different answers may seem just as obvious to your distributor. The agreement needs to leave no room for disagreement.
8. Spell Out Marketing and Sales Targets
Marketing is more than sample allowances. What are your distributor’s responsibilities for advertising and marketing your products? How are marketing plans and budgets determined? If so, who will be paying for such efforts? Above all, what happens if sales and marketing goals are not met? It is often difficult to enforce “for cause” termination for failing to meet sales targets, so consider practical, cooperative meet and confer processes to address issues and flexible contract renewal provisions to incentivize efforts.
9. Address Intellectual Property
You, of course, own the rights in your winery name and the names of your products, but your distributor is going to need to use those trademarks and perhaps other intellectual property in doing its job. To that extent, you will need to include a license that permits them to do so while ensuring that your intellectual property is used properly. Failure to do so leaves you at risk of losing the rights in some of your most important assets – your brands.
10. Designate Required Reporting
While it’s nice to see your wine going out the door, you will need to ensure you get a regular, detailed report on the distributor’s efforts and sales. You’ll need information on the timing of sales, inventory, marketing, and other data to protect your business and accurately forecast production needs.
Deciding to work with and appointing a distributor could take your wine business to the next level. For the best chance for success, wineries need to do their homework on the distributors they are looking to work with and make sure they do everything they can to use the distribution agreement to answer all the what-if questions that could arise during that relationship. Failure to do so will almost surely lead to a less satisfying relationship and potential costs in dollars, resources, and opportunities.
