How to Deal with the Demand for Exclusivity from my Chinese Distributor?
Exclusivity in the past
In the past it was simple: no exclusivity is to be granted to any distributor, at least not from the beginning. In those days it was perfectly possible to divide a large country such as China into different geographical regions (for example North, East, South and West). Additionally, a separate partner per distribution channel or per market segment could be identified: for example, if you are active in the food business, you could find another partner for the retail sector and the food service sector. In this way, you could keep your options open and – if one of them doesn’t deliver – look for another distributor. Alternatively – if you find a very good one – ultimately sign an exclusive contract with one of them.
The above principle was based on the fact that a distributor could be very strong in a certain city or region, or in a specific market segment, but not necessarily across the whole country or in all market segments. In addition, most distributors didn’t have a nation-wide coverage, but cooperated with sub-distributors in other regions. Unfortunately, this was often a cause for loss of control and further dilution of your brand positioning and pricing. Consequently, as a foreign brand owner, trying to stay in control or getting direct information from the market was not easy.
In recent years the pressure from Chinese distributors to get exclusivity has substantially increased. The main reason for this is the tremendous growth and importance of e-commerce in China. Today, every Chinese distributor is active on various Chinese e-commerce and social media platforms, which means that they cover the whole country. Hence, most distributors demand exclusivity, which allows them to justify their investment in marketing.
In case a small European player faces a large and financially strong Chinese distributor, the European SME often has little bargaining power to refuse this demand for exclusivity. This is an additional reason why the choice of the Chinese partner has become even more important than it was in the past.
The main condition for giving exclusivity to a distributor in China is a minimum volume that can be achieved within a certain period of time, usually 1 year. However, it is advisable to link a few additional preconditions to this claim for exclusivity.
In an initial negotiation phase it is best not to use the term "exclusive", rather talk about "temporary protection". The latter means that the pre-selected Chinese partner can, for example, get protection during 6 or 12 months (can be formalized in a letter of intent), during which the European SME will not contact or contract any other party in China. If the distributor keeps its promises and meets its targets, he can get formal and full exclusivity at a later stage. Psychologically, this is a different way of negotiating, giving the foreign brand owner more negotiating power. Obviously, this strategy doesn't always work, but it's worth the try.
If possible, if you are selling more than one brand or selling in different market segments, it is best to limit the temporary protection to only one brand or one market segment. At the same time the foreign SME can give another Chinese party temporary protection for another brand or a different market segment. At the end of that "protection period", you can determine the overall best distributor and you can keep the other partner as a backup for future business. This approach offers an important additional benefit for the European SME: you stay in control at all times.
Prepare a business plan
In addition to submitting a certain target volume, it is important that the potential Chinese distributor comes up with a concrete business plan and commitments: how do they want to launch the brand?; at what prices?; which target groups?, in which distribution channels?; which online channels are they considering (e-commerce and social media)?; etc. Furthermore, they should provide more insights into which areas they supply directly and which sub-distributors they work with in other regions.
It is also worthwhile to know which foreign brands they currently sell and how successful they are with these brands. If they really want to work with you, they have to be transparent about their other business. It may even be interesting to contact the other European suppliers. Are these suppliers satisfied with the collaboration? Is that collaboration exclusive?
Very important is also to find out what kind of support the Chinese partner requires from its foreign supplier, for example in the field of marketing (time, marketing materials, financial, participation in fairs, etc.?). Finally, it is very important to draw up a good distribution contract, in both English and Chinese. Solid agreements must be made so that no misunderstandings arise once the cooperation starts.
To conclude, it is no problem to give exclusivity in China, but before you do so, you should make sure to understand the Chinese market and know your Chinese distributor and his intentions. Horsten International has more than 2 decades of experience in identifying Chinese partners and managing start-ups or scale-ups in China. Don’t hesitate to contact us in case you need any help.