Australian Vintage recently entered into a five-year distribution agreement with Invivo to exclusively distribute Graham Norton, Invivo x Sarah Jessica Parker and Invivo branded wines in the UK and Ireland. The partnership is expected to add 500,000 cases and generate $15 million in additional annual sales revenue for Australian Vintage. But what sort of factors would Invivo, the producer, and Australian Vintage, the distributor, have considered in entering into this agreement?
What is a distribution agreement?
Under a distribution agreement, a manufacturer or, in this case, producer appoints an independent third party, the distributor, to market and sell its goods. They are commonly used where a producer needs assistance to bring a product to a particular market.
As Invivo is based in New Zealand, partnering with Australian Vintage, an established distributor in the UK, gives them continued access to the UK and Irish markets, whilst Australian Vintage adds a wine brand to its collection that is complementary to its existing offering and enhances its sales.
Considerations for the producer
In the first instance, producers should consider whether to appoint an agent or a distributor. Agents negotiate and possibly conclude contracts with customers on behalf of the producer, receiving a commission on the sales they make. In contrast, a distributor buys the products from the producer and resells them to customers, adding a margin to the sale price to cover its own costs and profits. Where an agent is appointed, the only contract for sale is between the producer and customer, whereas distributors contract with both the producer and the customer.
If the producer does decide to appoint a distributor, they may be appointed on an exclusive, sole or non-exclusive basis. Under an exclusive distribution agreement, the producer agrees to sell the contract products to that distributor only within a defined territory or in respect of a customer group. A sole distribution agreement is similar except that the producer reserves the right to supply the products directly to customers. If the producer wants complete freedom to sell directly to customers and to appoint other distributors, then they should enter into a non-exclusive agreement.
The distribution agreement should clearly establish the products or range to be covered and how long it is to last. There will also need to be consideration of the territory that the agreement will cover and whether possible future changes in constitutional status need to be accounted for, for example, how would the agreement work if a nation ceased to be part of the UK? Any trademarks or other intellectual property rights which the distributor will need a licence for will need to be identified and suitable restrictions on use will need to be put in place.
In the case of the alcohol industry, the producer will also need to decide whether the distributor will be on-trade, off-trade or both (depending on the distributor’s business model). “On-trade” refers to venues where alcohol is sold onsite for immediate consumption, such as pubs, restaurants and hotels, whereas “off-trade” refers to places where alcohol is sold for consumption offsite, such as supermarkets and online retailers. For example, Chilean wine producer Vina Santa Rita recently announced the distributor Schenk Family as its UK off-trade partner.
Considerations for the distributor
Both the distributor and the producer will be subject to a number of obligations under the distribution agreement. Before entering into the agreement, the distributor will need to carefully consider if it can meet its obligations, for example, minimum sales or purchase targets, promotional and marketing requirements, or the ability to hold adequate product stocks. If the distributor does not meet its obligations, there may be significant consequences including termination of the agreement. In the event of termination, the agreement should be clear about what is to be done with the distributor’s remaining stock.
Distributors will also need to consider if they are the person who first brings the products into the UK and places them on the market. If so, they will be an importer and will have additional obligations which need to be set out in the distribution agreement, such as paying any tariffs and informing the producer of applicable local laws and regulations. Importers are also liable for defective products. The distributor should ensure that the distribution agreement addresses this, for example, by way of insurance and product recall provisions.
Ultimately, the relationship between the producer and distributor will be governed by the distribution agreement so both parties should be comfortable with the agreement and their obligations before signing.
If you would like to discuss any of the issues raised in this article or anything connected to wine and spirits law, please contact Ed Henderson on 0207 222 5381.