The Hidden Costs of National Distribution: How One CPG Founder Learned the Hard Way
Jordan Buckner is a startup advisor helping food and beverage companies grow from startup to scale. He founded FoodBevy, which carries CPG news and the Startup to Scale podcast series.
In a recent post on LinkedIn, he asked:
How expensive is it to work with National Distributors? Here are my real numbers — Amount Invoiced to KeHE (a National Food Distributor for natural & organic food and beverage): $32,000. Amount Paid: $21,000. Difference: $11,000.
That’s $11,000 in chargebacks, fees, and returned products from retailers.
That’s 34% of everything we sold them, meaning we lost all of our profit margin and barely broke even.
Suffice it to say, we stopped selling to them because it would put us out of business.
Here’s my advice to emerging brands:
- I highly recommend working with regional distributors to build your business over the national ones until you’ve reached $5 million in sales. Most retailers have preferred regional distributors that would love to have your business.
- Don’t let retailers purchase your product without having a marketing plan in place with them. The vast majority of fees ($8,400) came from products Jewel Osco purchased but returned because they didn’t sell the product. Why not? Our buyer left, and we had no contact. We tried calling Jewel HQ dozens of times, e-mailing everyone we could, and even tried working through KeHE to get in touch with their team so we could run marketing plans to move the product off the shelf. Nada. No response. Once the returns started coming in, we stopped fulfilling orders.
- Track and Analyze your deductions. If you are selling with National distributors, use a tool like Glimpse — an AI-powered deductions service for CPG brands that to analyzes and disputes unjustified claims and deductions.
He admits that this was his first retailer and first time working with KeHE, “so didn’t know what I didn’t know.” However, he states that this is typical of most first-time CPG founders who don’t know what to expect when entering into these contracts.
His post generated 136 comments and 25 reposts. Most of this discussion is relevant to kombucha brands, particularly those in the United States.
Here’s an edited summary of the comments:
It’s the nature of the business
This is not atypical. Novice CPG brands need significant up-front trade planning expertise. It’s +30% of gross revenue with slotting charges, and larger competitors have entire departments dedicated to it. The critical point is it’s a lot more than deductions. That’s simply the cleanup after the fact.
The distributors are essentially charging you back for what the stores they put you in are charging them just to do business with them. The average is substantial and can add up quickly. This should all be added to the bottom line and understood before entering an agreement with Brokers or Grocers. All charges should be stated upfront and added to your selling price to them. This is how to do business and be successful.
All distributors have a fee outline for all their clients. This is no secret. It is their core source of income. Promos should also be included in your costs. It’s a simple calculation; no company should pay any product fees unless they are for samples or marketing.
Many CPG brands are out of business simply because they don’t have the cash flow to continue operating when they expect a $50,000 check to arrive, only to find it was written for $5K.
Be aware that if you want to launch nationally, specific retailers have contracts solely utilizing KeHE for distribution.
Caution
I wouldn’t be offering a guaranteed sale indefinitely – we usually stick to ~90-120 days at most to mitigate listing risk and get buyer faith. But after that – it’s on them. Nothing prevents them from ordering more than they need if you’re just going to buy it back from them at a loss. Once proof of concept is done (or disproof of concept, come what may), the guaranteed sale period is over. This way, buying against proven velocity comes into play, and buyers only order as much as they need to get by until their next PO is filled.
From a deduction perspective, +85% or so of distributor deductions are legitimate trade promotions offered to them or their retailers with the designated fees. These should all be a defined part of your trade promotion plan and accrued for and reconciled monthly.
Too many small brands post “happy faces” on Instagram, pictured beside their product newly arrived on retail shelves. This does not mean you’ve got it made. The realization that all you’ve done to get on that shelf–that you thought was the hard stuff–was the easy stuff, is deflating. Your third re-order suggests you might have something. You can’t count on (most) distributors to sell your product; don’t expect retailers to do that either.
As for deductions, distributor programs should be understood before you start. They won’t hide their program costs. Build that into your landed cost to the distributor. If that only drives a retail strategy that doesn’t work, find a different way. This is math, not rocket science. It’s not for the faint of heart.
Don’t just sign the first contract offered. Like any other legal document, it can be amended and changed. Invest in a good lawyer, and don’t be too eager to start selling nationally. If possible, negotiate guaranteed sales for the first 100K of products — this has saved me.
Don’t blame the distributors
While some might have underhanded policies, you can minimize them if you are aware of them. It’s always all about the brand. If consumers want your product, you have leverage.
Work with regional, not national, distributors
Ask the retailer which their preferred regional distributors are. Managing 2-5 regional distributors can be less cumbersome than managing relationships with KeHE and UNFI (another national distributor that began as a small natural foods distributor in Auburn, California in 1976 and is now one of the largest publicly traded wholesale distributors of healthier food options across North America.)
This is especially true if you don’t yet have a category-leading product. That’s what the big companies want to pay attention to (rightfully so). Smaller brands need to create a great relationship with regional distributors first. They are often more receptive to helping grow an emerging brand and less likely to get lost in the vast mix of brands carried by UNFI and KEHE with associated costs and requirements.
A yardstick is sticking with local distributors until you reach $5M ARR.
The smaller regional and independent distributors will also service your accounts better, provide sales and marketing support more effectively, and appreciate your business. They can prove willing to meet each store owner or manager offer fair pricing, and fast delivery.
Regional distributors can be a great choice if you have the resources to manage them and your target retailers want to work with them.
However, a bespoke array of regional distributors can also be cumbersome for small brands. Ultimately, it comes down to growth strategy.
Map out a growth strategy
The brands with the most velocity typically follow the mushroom approach: Start small, build sustainably, and really understand what drives your business before you get too big.
Most vendors lack an understanding of how to move product. They think their work is done when they sell to the warehouse or get placed in stores. They lack critical thinking and are somewhat lazy. The easy part is selling in. The hard part is moving product into the customer’s hands and then getting them to buy a second time. Vendors need to think long and hard about strategy. My experience says most think once they sell in they can disappear. It’s supposed to be a two-way street. Yes, national distributors like KeHE are a challenge, but on the flip side, vendors need a viable strategy to move products. i.e., demos, merchandising support, marketing support.
Disclaimer
The views and opinions expressed in this post are solely those of the original authors and other contributors. These views and opinions do not necessarily represent those of this publication.
For more insights into the challenges of working with distributors, check out Mark Rampolla’s book High-Hanging Fruit.