Keywords: selective distribution, distribution agreement

What is selective distribution?

Selective distribution is a type of distribution agreement where a supplier sells goods or services to a limited number of "authorised distributors" who are selected on the basis of a set of criteria.

Why distribute selectively?

Selective distribution is an effective way for a supplier to monitor and control the resale process.

As a retail strategy, selective distribution is not uncommon in the sale of goods, e.g. high-tech or complex goods, which warrant technical expertise and responsible selling, or luxury goods where quality customer service and the retail experience is integral to brand integrity.

What harm could arise from selective distribution arrangements?

According to the draft implementation guidelines published by the Hong Kong Competition Commission, selective distribution arrangements are often economically beneficial and an effective way of furthering inter-brand competition.

The potential benefits of selective distribution include:

  • Enabling a supplier to build and maintain the image and reputation of a luxury brand;
  • Incentivising retailers to increase marketing efforts;
  • Encouraging retailers to invest in staff training and improve customer service; and
  • Setting and maintaining quality standards.

Where the supplier and/or authorised retailer(s) have market power, however, there is a risk selective distribution may exclude the entry of more efficient or "discount" retailers. In oligopolistic markets, the prevalence of selective distribution networks may facilitate collusion among suppliers.

What selection criteria are acceptable?

Generally, qualitative and objective criteria that are fairly and uniformly applied will not be viewed as anti-competititve.

Quantitative criteria such as a fixed number of retailers by locality, the carrying of minimum stock or achievement of minimum turnover may not be problematic, but a review of the selective framework would be advisable to rule out any potentially negative effect on competition.

Next week

Next week, we will take a look at franchise agreements.

Originally published 20 May 2015

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