Designing Selective Distribution Agreements to Prevent Secondary Wholesale Margin Distortion
Structure selective distribution contracts with audited back-end rebates and serial tracking to eliminate secondary wholesale margin leakage completely.
Unauthorized Sub Distribution
Meaning
Distribution breaches occur when an authorized distributor resells a manufacturer’s products to unauthorized wholesalers or retailers who are not part of the selective network. This unapproved transfer, known as unauthorized sub distribution, violates the selective distribution agreement and disrupts the organized route to market. It applies to closed distribution networks where retail partners must meet specific qualification standards.
It stops being a breach if the manufacturer has not established a selective network.
Economic Consequence
Market price erosion occurs when goods are sold to discount retailers who do not invest in proper display or customer support. When unauthorized sub distribution is left unchecked, it allows unqualified discounters to undercut authorized dealers who bear higher operational costs. This pricing pressure damages the profit margins of the brand’s primary retail partners.
It leads to a decline in the brand’s overall market presentation.
Tracing Protocol
Serial scanning and digital batch tracking are used to identify the source of leaked inventory. By scanning items found on the shelves of unauthorized sellers, the manufacturer can trace the product back to the specific distributor who made the unapproved sale. This process provides the proof needed to take action.
Contractual Remedy
Termination rights and financial penalties help to enforce network discipline. If a distributor is found guilty of unauthorized sub distribution, the manufacturer can terminate the contract and stop all future shipments.