Be an Exclusive Distributor

Becoming the exclusive U.S. distributor of a foreign product can be a great way to secure startup success.
Magazine Contributor
10 min read

This story appears in the October 2006 issue of Entrepreneur. Subscribe »

After studying Japanese in college and living in Japan for part of the '90s, James Allard always wanted to do something in business that was Japan-related. When he and Steve Rosen decided to start a business in 2004, they went to Japan to search for a product they could import to the U.S. In a Tokyo department store bathroom, they spotted an electric hand dryer made by Japanese conglomerate Mitsubishi.

"Neither of us had ever thought about hand dryers," says Allard, 40. "But we were both kind of enamored with it and thought maybe this was it." Following a year of correspondence with Mitsubishi, Allard and Rosen, 39, became exclusive U.S. distributors of the Jet Towel hand dryer, an item long popular in Japan because of its quick-drying features but never sold in the U.S. The Jet Towel license formed the foundation for Seattle-based Pacarc LLC, a five-person company for which CEO Allard expects to post yearly sales of $1.1 million by the first quarter of 2007.

Having an exclusive license for the giant U.S. market is one of the more solid foundations a company can start with, even if it's not a sure thing, according to Kenneth D. Weiss, a Gaithersburg, Maryland, import-export consultant and author of Building an Import/Export Business. "If you can get exclusive distribution, you're not likely to have competition directed at that same product, although you're very likely to have competition directed at similar products," Weiss says.

The Pacarc co-founders felt likewise. "We figured if we were going to put all this time, energy and financial resources into the product, it made the most sense to be an exclusive distributor," says Allard. "Otherwise, our work might end up benefiting other distributors."

If you'd like to ink a similar pact, Carl Nelson suggests looking to your own experience. "The entrepreneur who wants to become an exclusive foreign distributor has to say, 'What do I know?'" says Nelson, a professor of international business at the California School of International Management in San Diego and author of Import/Export: How to Get Started in International Trade. "Do I know refrigerators or gold or jewelry? What do I think I can sell?"

Next, ask yourself what kind of business you want to start. Will you sell to high-end or mass markets? To wholesalers or retailers? This will help you focus on products that fit your vision.

Once you have an idea of the product, you obviously need to start looking for it. "Keep your eyes open for products in foreign countries that might be useful in the U.S.," Weiss advises. One advantage of traveling in search of products is that, while in a foreign country, you may get to meet with the manufacturer.

Large trade shows in foreign countries are often stocked with manufacturers looking for U.S. distributors, Nelson says. Another approach is to check with foreign trade offices in U.S. embassies. The U.S. government won't help you import foreign products, Nelson notes, but the foreign trade offices can usually provide lists of manufacturers to help you get started.

Internet matchmaking sites represent a recently introduced tool for finding products to import to the U.S. These sites normally collect a commission for deals arranged through their services, Weiss says. You can also look at print and online newsletters for foreign manufacturers in search of U.S. distributors. Industry export councils representing manufacturers in a particular category can help you identify potential distribution partners as well.

When you start talking to manufacturers, scrutinize individual products to see if they meet your needs. Key criteria include the product's foreign sales history and the potential size of the U.S. market. Evaluate the product's appeal to U.S. buyers and what the profit margins would be at the likely sales price.

Foreign Relations

Developing a relationship with the manufacturer may be the most critical point in the process of becoming an exclusive U.S. distributor.

Persistence is a major ingredient in this type of relationship building. Exclusive U.S. distribution licenses don't happen overnight, says Rosen, pointing to the year-long wooing of Mitsubishi that preceded the Jet Towel pact. The courtship began with a visit to Mitsubishi's website. That steered them to Mitsubishi Electric, the division responsible for the Jet Towel, and then to the unit's U.S. headquarters in Atlanta.

Though much relationship-building communication can happen by e-mail or phone, it will normally involve at least one trip to the foreign manufacturer, as well as a visit from the foreign manufacturer to check out your facility. After returning from Japan, Allard and Rosen began a series of trips from Seattle to Atlanta to talk with Mitsubishi Electric.

Relationship building is less about getting down to business than getting to know someone. "When you're trying to get comfortable doing business in another country, it's not easy to know who you can trust and who has the knowledge that fits with what your company needs," Rosen says. "So be patient, and focus less on the business side and more on the relationship."

Taking Care of Business
When it is time to focus on the business side, you'll need to demonstrate both commitment and the ability to adequately represent the manufacturer in the entire U.S. market. Rosen and Allard divided the country into 21 distributor territories and presented a detailed plan for acquiring appropriate distributors before receiving Mitsubishi's approval. The plan included projected sales volume and specific marketing strategies.

Don't be afraid to be different, Rosen says. Pacarc included some progressive marketing ideas in its proposal, such as search engine marketing, online communications with influential bloggers and a strong PR effort. "We like to think that's fairly out-of-the-box thinking compared to what a larger distributor would do," Rosen says.

Logistics is another key skill for exclusive U.S. distributors. Problems are always going to crop up when moving goods internationally, Nelson says. Consider using a customs broker for your initial shipments to help you learn the process. To assist with letters of credit, currency exchanges and other financial complexities of international business, develop contacts at a good international bank; that may be tough, however, because the larger global financial institutions don't always welcome small companies, Weiss warns.

To show commitment, the Pacarc co-founders purchased several Jet Towel units on their own and began making sales presentations to prospective customers even before inking the exclusive deal. Being able to demonstrate purchase commitments from actual customers helped greatly in convincing Mitsubishi that their passion for the product would lead to significant U.S. sales, Allard says.

When it comes time to negotiate deal terms, prepare yourself to accept that the arrangement won't give you permanent exclusivity. A term of one to three years is normal. At least two years is preferable, because it gives you a year to set up a distribution network and another year to develop enough sales to give you a return on your investment, says Nelson.

Your exclusivity may also be somewhat compromised by the deal terms. For instance, you may have to allow the foreign manufacturer to sell products that complement the one you'll be selling, Nelson says. You should also consider how to treat direct sales from the manufacturer to U.S. customers as well as gray-market goods-products that a distributor in another country sells in your territory illegally. You may be able to get partial commissions on direct sales and provisions to discourage gray marketeers.

Aim for specific provisions regarding finances, including who will pay for such costs as assembly of products, training for vendors and marketing materials. Normally, manufacturers are willing to share the costs of pre-assembly, printing marketing brochures, attending trade shows and travel expenses for sales calls.

The manufacturer contribution to marketing costs, along with unit price and expected sales volume, will help determine the all-important commission you can expect. This may run from 20 percent for an unproven product to a much smaller percentage for a commodity selling in high volumes to established customers.

Forming Alliance

Maintaining your relationship with the manufacturer is likely to require regular visits in both directions, as well as frequent communications by phone, e-mail and fax of routine business matters. It's easier to keep your relationship exclusive if you start strong. Even if bigger, more experienced competitors want to vie for a piece of your exclusive distributorship, they may be unsuccessful if you have solid personal ties to the manufacturer.

That's been Pacarc's experience with a second company they've begun representing exclusively in the U.S. "We consider the founders friends," Rosen says. In a recent meeting, they learned other companies have approached the manufacturer asking for similar deals. "We were happily surprised that one of the reasons they chose not to work with these other companies was that they enjoyed the relationship with us," he says.

The first exclusive national distributorship probably came not long after the establishment of the first nation, but the practice continues to evolve. Recently, new challenges have been raised by direct selling through the internet, which allows manufacturers and others to sell into an entrepreneur's supposedly exclusive territory, and terrorism-related security procedures that make it harder to import to the U.S. But entrepreneurs continue to chase the big potential that comes with having exclusive rights to sell the world's most wanted products to the world's largest market. "Pacarc started because of some of the cool and unique things we've seen in Japan," says Allard. "Our mission continues to be finding the products we are really passionate about."

Sealing A Sweet Deal
Long distances and cultural divides make international trade challenging much of the time. When you add exclusivity to the mix, it creates nearly insurmountable problems for an already tricky task. For that reason, obtaining an exclusive U.S. distributorship requires more patience, sensitivity and commitment than almost any other business model.

There are countless places to buy honey and just as many brands to choose from. But for Eric Bromberg, 44, founder of New York City importing company BBV LLC, one kind of honey is so distinct that he wanted to have the exclusive rights to sell it in the U.S. The honey comes from a single farm in Mexico, where a seasonally changing variety of flowering plants gives the honey flavors that change several times a year. "It's a unique and extraordinary product, and it tastes entirely different [than] honey from other areas because of the floral makeup of the region," says Bromberg, whose year-old company employs six.

The problem was that the farmer sold most of his crop in Europe and wasn't interested in having a U.S. distribu-tor. Luckily, a member of the farmer's family worked as a chef in a restaurant where Bromberg was a partner. But it still took eight years of talking and convincing to get the exclusive license to sell Blue Ribbon Honey in the U.S. "It's such an extraordinary bond between a farmer and his product that they needed to know we respect what they were making and were going to treat it as lovingly as they have," he explains.

So far, Blue Ribbon Honey is only sold at the Blue Ribbon Bakery Market in New York City and is generating a modest $150,000 in annual sales. Bromberg is looking at wider distribution through retail chains, but he's remaining patient and trying to make sure his business's needs are addressed as thoroughly as those of his Mexican supplier. "The more exclusive the product," he explains, "the more we'll be able to keep our price at a point where it makes it worthwhile to do this."


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