The New Independent Channel Opportunity for Consumer Brands

TLDR: New SaaS solutions for sales enablement (Pitchable) and marketplaces for wholesale ordering (Faire, Bulletin, Handshake by Shopify, Pod Foods, Mable, and others) are creating a massive new opportunity for consumer brands, particularly DTC native brands, to access the independent retailer channel at scale.

The Traditional Entry Point, Abandoned

The traditional entry point for consumer brands selling into the retail channel is independent retail outlets. As a brand, you would gather as many independently operated stores as possible within your region of origin and convince them to stock your product. Oftentimes, the salesperson was the founder themselves, or one of their first hires. Delivery was usually handled either by small parcel shipment (UPS/FedEx, etc.) or driven directly to the store by an employee of the brand. The payment was collected by physical invoice and physical check (and even, occasionally, cash). In short, a very manual and time-consuming process.

As the brand grows in popularity, achieves its first chain account(s), and secures distribution with a regional or national distributor, independent retailers quickly become an afterthought. They are too cumbersome to keep up with and the pressure of succeeding in traditional distribution forces the brand to concentrate mostly on accounts that can pull vast quantities of cases through a particular distributor’s distribution center. So, the brand’s sales team (internal or outsourced) tends to shift the focus onto chain retailers, where one meeting can land 5, 50, 500, or 5,000 new points of distribution. When points of distribution become the game, or more specifically sales velocity per point of distribution, smaller purchasers will always lose.

This begs the question, for whom exactly on the value chain is “sales velocity per point of distribution” most important? This metric is tied directly to a very specific number: the total addressable market (TAM) of retail points of distribution. If that number is X points of distribution, velocity per point needs to be Y cases sold, in order to achieve Z sales revenue. So, the answer lies in the question of who sets the TAM of retail points of distribution? Those businesses that have physical assets that place a limit on how many products they can move and stock efficiently enough to make a profit determine the TAM. These are distributors and the larger chain retailers, not the brands.

Disrupting the Velocity Per Point Equation

Nothing has laid bare the notion that velocity per point of distribution is the most important metric for a consumer brand better than the Direct-to-Consumer (DTC) revolution ushered in by Amazon, Etsy, and Shopify with the added benefit of Facebook and Google’s personalized ad targeting products. Every brand could become a retailer in less than an hour and instead of a TAM of chain retailer locations in the tens of thousands, there were now a couple hundred million points of distribution, completely changing the formula. A specific point of distribution, in this model an individual eCommerce customer, could purchase one retail unit every month and that would be considered a win! Brands could also now directly target customers they knew were their target audience, instead of choosing chain retailers as a proxy for a certain type of customer.

But what about the physical asset limitations that made velocity per point so important? Successful DTC brands set up a network where those limitations were exponentially reduced. Instead of a distributor + broker model, the DTC tech stack was introduced:

Sales Enablement and Lead Generation (example: Instagram Ads, Email and SMS Marketing apps)
Order Processing and Payments (Shopify)
Inventory Management (IMS solutions like Cin7)
Fulfillment (3PL solutions like ShipBob)
Customer Service, Engagement and Retention (Gorgias, Klaviyo, Repeat, etc.)

Since customers paid the brand their retail price plus shipping costs directly, the physical limitations had been transferred from brand to customer (how much were they willing to pay for the convenience)? Turns out, quite a lot. The limitation that ended up arising, as the new channel saturated with brands, came at the Sales Enablement and Lead Generation layer in the shape of Customer Acquisition Costs (CAC). New firms using AI to add more precision-targeting to customer acquisition, like Dianthus Commerce, could break down that barrier unlocking more value to the individual consumer brand.

Looking at this Shopify tech stack, and seeing how seamlessly tech was able to create a new channel with an immense amount of market power transferred to brands when compared to existing channels, you can see an analogous opportunity lurking for brands to take more control over their sales efforts in retail and wholesale platforms like Faire (founded in 2017, now worth $12.6bn) were the first to recognize it.

The Size of the Independent Retail Market

The sheer scale of independent retail in major Western markets surprised me when I first looked into it. For example, Faire, which operates in the US, Canada, EU, and most recently Australia boasts 450,000 retailers ordering through its platform.

In the US grocery market alone, the National Grocers Association (NGA) reported that America’s approximately 21,500 independent grocers account for 33% of US grocery sales ($250bn) in 2021, up from 25% in 2012.

For those who thought the Covid-19 pandemic would kill brick-and-mortar, and especially smaller retailers, there are more surprising statistics to share. A March 2022 report from McKinsey showed that 95% of shoppers buy at least some consumer goods in person and 20% still buy in-store only versus only 5% online only. Mckinsey reports that in-store spending is also up YoY:

“In-store spending is recovering at a healthy clip — with 8 percent year-over-year growth in March 2022, compared with approximately 5 percent in early 2021”

All signs point to an independent retail market that has emerged from the pandemic that in aggregate is quite large in size and market share. But how can consumer brands access this market efficiently?

Legacy Solutions Aren’t Working

We touched above on how brands have traditionally accessed the independent retailer market and how distributors and chain retailers have created a system, based on their physical limitations, that has made access to a large sector of this market nearly impossible for emerging consumer brands. Let’s look in a bit more detail at the legacy solutions, and their shortcomings. I break these into two categories:

The first category is Ordering and Fulfillment solutions. Distributors. Distributors have a lot on their plate (and balance sheet). There is the truck fleet, the warehouses (distribution centers), the labor, the fuel costs, the supplier relationship folks, the salespeople, etc. Pair this with a naturally low-margin business and you can see why their business interest is to focus on high-velocity retailers (and brands). If you can secure an exclusive multi-year distribution deal with a large chain retailer, as a distributor you might reduce your margin all the way down to 7–8%. Meanwhile, an independent retailer is subject to order minimum thresholds and if they cannot commit to any sort of volume, they are paying the price that is in the catalog.

Since I am most familiar with the grocery business, let’s look at some real numbers from that sector.

In the above example, we look at a product from a brand with COGS of $1.50. Your basic rule of thumb in grocery is to double that COGS number twice to get the retail price, so this product would likely fetch retail of $5.99. As you can see above, using the trusty and free pricing calculator available from RodeoCPG, this independent retailer will need to charge $7.99 for the product and the brand will net $0.22 after an average deduction percentage is taken from the payment. (If you aren’t familiar with deductions, take a look at Rodeo’s and Accountfully’s study on this topic here.) Suffice it to say for this article, distributor deductions are part of doing business with distributors and consist of deductions in payment from the distributor to the brand for services and fees agreed to by the brand in their service contract.

Here’s the same exact scenario with a chain retailer as a customer. Same $0.22, albeit at a higher volume.

When you account for the marketing programs you must run with distributors, (normally in the vicinity of $10–20k per product line per year as a starting point) you can quickly see that you need $70k in gross revenue before you make your first penny of profit. So of course, if in the distributor game, you need to focus on sales to chains that will drive points of distribution and velocity per point.

The second category is Sales solutions. Brokers. Brokers are the sales engine that most brands employ to help them gain access to the contacts necessary to sell to retailers both large and small. Brokers' high fixed cost is human beings who possess relationships with the buyers at retail outlets. If you ran a brokerage company, how much would you invest in human beings to cover the 21,500 individual buyers of independent grocery stores? It is no surprise that most brokers who attempt to cover the independent marketplace employ regional reps that focus on the top-grossing 500 independent retailers nationally at the very most and the rest of the organization is focused on the chains.

What do brokers make for this effort? The standard for emerging brands is a retainer of a couple of thousand dollars per month per region until they hit a threshold where 5% of sales exceeds the retainer. Larger consumer brands can pay as little as 2–3%, but that’s on tens of millions in revenues.

Let’s say your consumer brand has exceeded the sales threshold in a region where $2,000/month = 5% of sales. First of all, remembering the calculator above, you are down to 2% net profit (7% minus 5%) and you haven’t paid any G&A expenses yet. A threshold $40,000 per month in gross sales in one region until you can make our first $800 in profit is quite the expensive go-to-market threshold.

These unit economics have shown me that the go-to-market process of consumer brands selling to independent retailers via the legacy methods of a distributor for order fulfillment and a broker for sales management is fundamentally, irreparably broken.

Enter the “Indy-Enabled” Consumer Brand

An emerging tech stack that mimics the Shopify tech stack outlined above for DTC can solve this problem where the legacy solutions have failed and make the independent retail channel accessible to emerging consumer brands profitably, and at scale, for the first time.

Here’s the stack at a glance:

Sales Enablement and Lead Generation (Pitchable)
Order Processing and Payments (Faire, Bulletin, Handshake by Shopify, Pod Foods, Mable)
Inventory Management (IMS solutions like Cin7)
Fulfillment (3PL solutions like ShipBob)
Customer Service, Engagement and Retention (Pitchable)

Full disclosure, I’m not someone that is disinterested in this topic. I’m a part-owner of RodeoCPG and the co-founder of our Pitchable product. What we are doing with Pitchable is organizing all of the communication tasks normally done by human sales managers, pairing that with a proprietary database of contacts at thousands of independent retailers and, with a custom-developed email automation product, delivering sales outreach and management at scale with minimal involvement from the brand. The vision is for founders or sales managers to spend only 5 minutes inside our Pitchable app and let the app grow the brand’s sales and manage their current accounts. This will make sales to the independent retail channel accessible at scale immediately for brands and along with companies like Faire who are simplifying other tasks along the order fulfillment supply chain, I see independent retail becoming a far more attractive and profitable market entry point for brands than chains.

Let’s go back to the calculator:

I’ve made a few adjustments here from the distributor model:

First, I set the Distributor line from Margin to Markup and set that at 15%. This is to reflect normal commission rates charged by ordering platforms.

Next, I adjusted the Freight Out per Order to double what it was for the distributor scenario, acknowledging the reality that small parcel shipment will be significantly more expensive than pallet shipment.

Thirdly, since any promotional allowance will be directly negotiated and paid between the brand and the retailer directly, and there are no longer administrative, marketing, storage, lumper, or other fees associated with a third-party dsitributor, I was able to reduce deductions down to a reasonable trade spend budget of 20%.

Fourth, in acknowledging what these economics were showing me, I realized I could actually get the retail price down to $6.99, so I reduced my gross margin to 37%. Conversely, I could have chosen the opposite approach and increased my margin to 45%, resulting in approximately 25% net profit. (The choice between these two depends on how you judge your price elasticity in the channel).

In summary, instead of a 7% net margin (before sales and G&A), the brand using our recommended tech stack to become “Indy-Enabled” is realizing between 17% and 25%. Further, the costs of the stack are far less than normal brokerage fees. Pitchable’s costs begin at $90/month (for the whole country) and increase based on the number of retailers you are reaching out to. The ordering platforms commissions are baked in above and, if you are a food and beverage brand, may even be cheaper (Mable for example charges 12.5% only for retailers that are new to you once you join their platform). This leaves only the cost of an IMS and a 3PL, which you either have already or would need eventually anyway.

Shameless plug: RodeoCPG can set this tech and operational stack up for you. If you are interested in learning more, book a quick call here.

The Future of Retail

In no way should the reader construe that consumer brands, particularly food and beverage brands, should eschew chain retail and the distributors that serve them forever. What is on offer here is a perspective that technology has created opportunities to grow your brand in new channels, DTC, and access old channels in a new, more profitable and scalable way.

Brand recognition and brand loyalty are the secret sauce for consumer brand success once in chain retail. As we have already explored, sales per point of distribution is the ruling metric for chain retailers and the distributors that serve them. When selling to chains, savvy buyers ask sales managers: “What is it about your product that will bring new customers to my store?” Without strong brand loyalty metrics to show your answer to that question, your chances of achieving distribution, and your chances of achieving success once you secure that distribution will be subpar.

Another reality to consider as you consider whether your brand should become indy-enabled. Data clearly shows that chain retailers are focusing more and more on store brands (private label). As those offerings crowd more shelf space, legacy brands with deep pockets will offer more and more dollars for slotting and premium placement driving the cost of entry into chains higher for all entrants. Further, consolidation in the retail space has been a trend for as long as I’ve been in the industry, reducing the number of chains that can offer placement to brands. In short, the chain business is only going to become more and more inhospitable to emerging consumer brands.

This is all happening against the backdrop of an independent retailer boomlet, who do not face any of the above challenges. In fact, their core value proposition (highly curated offerings, personalized service, deep community connections, and consumers who accept higher prices) aligns perfectly with the type of customer emerging brands need to attract in order to show brand loyalty metrics so critical to their eventual success in the Targets, Walmarts, and even Amazon Whole Foods of the world.

The future of retail should be clear:

1. Massive, consolidated chain stores
2. Direct-to-Consumer eCommerce
3. Independently operated retail

Only 1 & 2 from the above list had been accessible at scale until very recently. That has changed, and consumer brands will either recognize this or ignore it at their peril.