The explosive growth of e-commerce channels has forced brands to completely rethink their go-to-market strategies. Across Europe, the business momentum created by e-commerce, especially the growth of open online marketplaces like Amazon, has made decades-old business practices obsolete.
There are a number of concrete steps that brands can consider taking now to improve the legal and commercial strength of their current European distribution agreements in the face of these developments. One of these stages is the shift from exclusive distribution to selective distribution.
Traditionally, brands have often relied on what is known as ‘exclusive distribution’ in Europe – an approach whereby a brand designates a single exclusive distributor for a particular territory (often a country) or group of customers and prohibits it from being sold. its exclusive distributors to sell “actively”, for example through direct marketing, in territories / customer groups exclusively allocated to other distributors.
Prior to the rise of e-commerce, exclusive distribution offered distributors effective incentives to promote brands and create strong and engaged distribution networks within their exclusive territories. Consumers tended to buy from physical stores in their home country, with purchases made by retailers from the distributor assigned to their territory ensuring that the investment made by the exclusive distributor was protected.
However, as e-commerce has grown across Europe, the way many consumers buy their products has fundamentally changed. Rather than limiting their purchases to retailers in the territory or country in which they are based, consumers can use the internet to shop on a cross-border basis throughout Europe. As a result, it has become much easier for distributors and retailers to look beyond exclusive distribution territories and reach customers across Europe, simply by buying and selling online (often assisted by online markets). While providing many benefits to customers, this development has made it much more difficult for brands to maintain the integrity of their distribution channels.
In order to understand the options available to brands to regain control of their European channels, it is important to understand the legal framework. The EU Vertical Block Exemption Regulation, or ‘VBER’, provides a ‘safe harbor’ of EU competition law for common forms of distribution agreement, provided specific conditions are met. are met. In particular, the agreement must not contain any “hard” restriction of competition and the brand and each of its authorized distributors must have market shares of less than 30% in the market (s) concerned. If the market shares are above 30%, an individual assessment under EU competition law may be required.
In addition to the prohibition of any form of resale price maintenance, the VBER limits the ability of brands to restrict the freedom of their distributors to freely choose their own customers, for example by referring to the location of a potential customer. Thus, the VBER defines any restriction on a distributor’s ability to respond to unsolicited sales requests (referred to as “passive sales”) from customers located anywhere in Europe as a hardcore restriction. Since selling from a website is considered a form of passive selling for the purposes of EU competition law, this means that brands cannot simply prohibit their distributors from selling online. If an agreement contains such a limitation, it is no longer protected by the VBER Safe Harbor and is presumably illegal.
Once a distributor has sold a brand’s products, the absence of any contractual relationship means that the brand has virtually no control over how those products are then resold by customers downstream from the distributor. Although the brand retains its trademark rights, once the distributor has sold the products with the brand’s consent anywhere in the European Economic Area (EEA), they are effectively in free circulation. As a result, any downstream customer can resell the brand’s products as they wish, including in online marketplaces across Europe, without any regard for quality control, branding, support. marketing and promotions, or other efforts that the brand expects from its authorized sellers. . The end result is that resellers can profit from the efforts of the brand’s authorized sellers, ultimately discouraging those authorized sellers from supporting the brand, thereby damaging the brand’s reputation – the exact problems that exclusive distribution was meant to avoid in the first place. .
While exclusive distribution may still be appropriate for brands that wish to focus on driving sales in particular territories, or have particularly strong local relationships that they wish to cultivate, these developments mean that it may not be. be more the best strategy for brands seeking to exercise maximum control over how and by whom their products are sold, and thus protect their brand image and maximize overall commercial return.
Instead, brands are increasingly turning to selective distribution. In a selective distribution system, a brand creates a closed network of authorized distributors, who have been selected by the brand on the basis of precise criteria, and undertakes to sell products only through this network. Authorized distributors are only allowed to sell to other authorized distributors within the selective distribution system, or to end users, i.e. consumers. Conversely, they should be free to sell – both actively and passively – to each other. on the other side the brand’s network.
Once implemented, selective distribution thus allows brands to refuse supply to unauthorized sellers, who remain outside the selective distribution system, and to take direct repressive measures against authorized sellers who sell to resellers. unauthorized, in violation of their selective distribution agreement with the brand. In some countries, a brand may also be able to take legal action against unauthorized distributors who acquire products from network members (in violation of their selective distribution agreement), despite the absence of any relationship. contractual. Additionally, selective distribution allows the brand to require all authorized distributors to take proactive steps to protect the integrity of the network, ensuring that all members remain motivated to support brand action to prevent sales to – or by – unauthorized sellers.
For brands that are considering moving from exclusive (or open) distribution to selective distribution in response to the new challenges presented by today’s market, there are some questions that require analysis and strategic planning. For more information on the selective distribution model and how to implement it, read our recently published white paper, co-authored with Euclid Law, an award-winning competition law firm with offices in London and Brussels.: https://econtrol.vorys.com/european-distribution-strategy-whitepaper