Understanding CPG Costs
Juliana Casale, is the Founder of Toronto-based Balloon Sparkling Water. In a recent post on LinkedIn she asked:
I used to wonder how on earth anyone could charge $2.99 for a can of sparkling water.
Now that I’ve peeked behind the curtain of how retail works, I have a whole new level of respect for how near impossible it is to become successful as a small CPG brand competing against massive conglomerates who own their own production, supply and distribution chains.
It costs me $1.35 to produce a single can of Balloon; this includes ingredients, cans with printed labels, and getting the cans filled by my co-packer.
Retailers typically add 40% to the price you sell your products to them for; if I were to make zero money on my product, the cans would sell for $1.89.
But wait, there are a bunch of costs we haven’t talked about yet:
- The distributor wants 20%
- Warehousing costs an additional 10%
Then there’s:
- The shelving fee
- “Free fill” (free product samples)
- Mandatory promotional costs
- The cost of shipping palettes of product
- Not to mention broker fees, which add another 5%.
You can easily see how $1.89 turns into $2.99.
The profit margins are razor thin, and with surprise costs like returns fees and fees for delays in restocking inventory you can be forced into the red overnight.
Now it’s obvious to me why people max out credit cards and put their houses up as bank loan collateral, why so many brands declare bankruptcy and why an acquisition like Siete’s is even more of a lightning in a bottle event than it initially sounds.
It’s *incredibly* difficult to bring new, innovative, better-for-you products to market at any kind of scale. If we were in it to make a quick buck, we’d be charging a heck of a lot more.
Her post generated 104 comments and 10 reposts. Most of this discussion is relevant to kombucha brands, particularly those in the United States and Canada. Here’s a rough approximation of the cost breakdown of the $2.99 retail price itemized above (I might not have the numbers right, please advise if you have a more accurate chart):

Here’s an edited summary of the comments:
Challenges
The CPG shelf anywhere is a messy and volatile field. The damages must be kept to a bare-to-none minimum.
It’s very easy to say “Oh it is expensive and the company is exploiting with pricing.” However, when you start it, only then you come to know the dynamics. Gone those days where your brand can float in blue ocean. Now, its all red ocean and if you are not innovative, a shark might just get you in a single bite.
This is the reality of so many new brands. The reality is economies of scale are alive and well in the beverage space, and across grocery.
Thin margins: it’s why we grind and why we need scale/volume to make a profit. It’s challenging but so worth it.
Costs
Beverage manufacturing and distribution is a razor thin margin business. It’s all about efficiency and volume. Profitability is a tough nut to crack.
There’s still the fact that all costs are borne by the consumer. Sorry you’re not making much in the end, but this does not address affordability. The supply chain members getting their “cut” is being highlighted here – that is the main issue hindering success regarding customer perception.
Don’t forget to toss in PR, brand marketing, media ad spends, trade shows, consumer shows, samples, collateral, collabs, and customer service. Don’t forget the additional overhead costs of consultants, staff, plant, office, general marketing, plus loss, damaged product.
It’s wild the costs associated with getting a product to shelf – and that’s before talking about the cost of getting it back OFF the shelf into a consumer’s basket!
I’m making the leap from farmers market to retail. I’m learning about all these fees during the trip. Co-packer > Broker > Distributor > Retailer. Everyone gets a cut.
When you have a smaller budget your messaging and strategy needs to be even tighter.
I hear people not in the industry speculate about how much money companies must be making charging these crazy retail prices since the ingredients only cost 10% or less of the finished food cost at retail. Of course, they’re unaware of all the costs of doing business that when added up mean that brand is probably losing money on every unit sold hoping they can eventually become profitable at scale.
The unfortunate reality of drinks CPG is a goal of 40% GM. Pricing chain is the #1 thing IMO that CPG founders mess up accounting for all the tiers margins, damages, slotting fees, build in an ad spend etc.
The COGS is also increasing as ingredient prices are ramping up. The reality is scaling is a hell of a journey and the system does not help much. When retailers want free fills and higher discounts to sell your products, your profit margin is nonexistent. It is great that we keep the discussion because as you mentioned consumers do not have the whole picture.
Tips and lessons learned
Just a few tips from a bootstrapped founder: Do as much direct as possible early on (save the distributor fees and added deductions). Once you can negotiate better co-pack pricing, scale selectively with regional distributors. Also, I would raise the price to $3.49 so you be on sale at $2.99 quarterly.
It’s a fast-track learning to how business and pricing, economies of scale, distribution, and overall money works in the world in the grand scheme of things. Shipping around these tiny products all over, working with a vast array of companies, trying to always provide the best price in the end–you start to realize how everything in life works.
Potential solutions
Do you need a broker if you have great distributors? I’ve always battled with that 5%. Some distributors act like brokers.
We are taking our time and growing locally and organically right now. Being profitable earlier on allows us to move at our own pace and proceed into larger retail on our own terms.
We need to go back to local markets and end the craziness of large supermarkets!
A true startup brand would be one that invests in actual equipment and capital assets. Co-packing was traditionally designed for larger brands to create products at large scale and for supermarkets to create private label brands to offer consumers a competitive affordable brand. It was not really intended for small ‘startups’ to co-pack to large scale. Your best bet is to stick to small retailers to keep your costs manageable and sell yourself cut out the broker.
Consumer Education
I wish schools taught basic business fundamentals, so consumers were all a little more aware of what “real” prices look like (prices include fair and sustainable pay across the value chain).
I feel that we also must change the mindset of the consumer, teaching them how to be more health and wellness focused. For example, millions of people do not hesitate on spending $35 for a bottle of wine that is consumed by a few people in a small amount of time, but they cringe at the price of quality natural, good-for-you products. A can or bottle of kombucha will quench your thirst and satisfy your taste buds.