Small Business

Why Wholesalers Limit Sales to Small Retailers


Suppliers' practice of restricting product amounts might seem unfair to an online startup. But it's part of ensuring even product distribution, pricing integrity, timely delivery, and creditworthiness

I recently went to a trade show and placed merchandise orders for my new Web-based business. Then I got a call from one of the companies telling me that since I have an online store, they would limit me to carrying a maximum of five styles of their product in three colors each. My credit is good, and I plan to actually stock the items. Is this legal? —S.L., Ventura, Calif.

It feels "wrong" when a supplier limits your purchasing based on your operating an online company, but it's not illegal. "There is no law that says companies must sell product to everyone, or that everyone gets the same terms of sale," says Shawn Helms, an attorney in the technology and telecom practice group at Jones Day law firm in Dallas.

"Unless the company is discriminating based on some kind protected class—like not selling to a person of a certain race—or is taking an action that would violate antitrust law, there is no law preventing this kind of product sale limitation. In fact, sellers routinely put various restrictions on the resale of product and control the flow of inventory to different resellers," Helms says.

Bob Shirilla, a longtime retailer who expanded into e-commerce in 1999, can relate to your situation. "We wanted to carry Vera Bradley handbags on our Simply-Bags.com site. They refused to sell us any product and explained their territorial retail distribution channel and how Internet sales would have no territorial boundaries," Shirilla wrote via e-mail. His other site, Keepsakes-etc.com, faces similar restrictions on its inventory of collectibles, he says.

Restrictions Protect Value

Restricted buying is a common technique used for many purposes, including product distribution, pricing integrity, timely delivery, and creditworthiness, says Don Sussis, an Internet consultant and director at Structured Portfolio Management in Stamford, Conn.

Competitive protection is another reason for wholesalers to limit their supply to certain vendors. Some Internet retailers dump product into the market with very low—or nonexistent—margins, a practice that can destroy legitimate online and offline retailers. "If a major retailer is selling an item for $100, they will be very displeased to find it discounted on the Web for $85," Sussis says. "It makes them look greedy and, potentially, can cannibalize later sales and clearances."

A wholesaler would not consider it smart to make a small sale to a Web retailer—especially a startup just building a customer base—if that sale resulted in a major retailer being undercut and cancelling future orders, Sussis says.

You should support wholesalers who monitor their retailers, even if they won't sell you as much inventory as you'd like immediately, Shirilla says. In the long run, they may be protecting you as well as your brick-and-mortar competitors. "Ask them to explain why they want to limit the styles they will permit you to carry," Shirilla says, but "if you're in the e-commerce space for the long run, I would highly recommend doing business with wholesalers and manufacturers that monitor their retailers."

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Too Cool for Crisis Management
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus