In a previous post we discussed the pros and cons of working with distributors as a way of scaling your business and expanding your reach beyond what you could achieve with self-distribution alone.
Over the next few posts, we’ll assume that you’ve determined that the pros outweigh the cons, and made the call to build a distribution network. We’ll cover what you can expect from your distributor partnerships, and how best to play the distributor game to your advantage while not getting burned.
A Note on Examples and Sources Used for This Series
One difficulty with covering distributors is that there are many different types of them, and each small wholesale producer will have different distribution needs.
For instance, maybe you represent a perishable product such as bread, or a frozen product such as ice cream. And maybe your goal is not to go national with your product, but more to solve the logistics challenge of how to get your goods from Point A to Point B. In that case, you may just require the delivery services of a local distributor to bring your goods around to local shops.
In this series, I will assume that the goal is to scale, so I will focus on the example of a national “broadline” distributor (defined below), such as KeHE or United Natural Foods (UNFI). Both are major distributors of natural and organic foods to retailers in the U.S. and Canada.
But again, there are countless local and regional alternatives to broadline distributors, and depending on your product and your goals, these may very well be a better fit for you. Just bear in mind that each distributor will have its own programs, fees, margin requirements, etc.
In short, take everything that follows as describing a common distributor arrangement that you will likely need to adapt to your specific situation.
As for my sources here, what follows comes from a mix of personal experience and conversations with other small wholesale producers, along with information that I gathered from KeHE’s and UNFI’s new vendor materials. I also made much use of Natural Products Consulting’s Natural Products Field Manual,¹ and the Specialty Food Association’s 2008 white paper Roadmap to Retail.²
The Broad Strokes
A distributor is an intermediary or “middleman” in a retailer’s supply chain. Distributors purchase goods from producers, store them in their Distribution Centers (DCs), and then resell those goods to retailers.
There are two general categories of distributors: “broadline” and “partial-line.” Broadline distributors offer a full spectrum of products, carry tens to hundreds of thousands of items, and deliver on a national scale. Partial-line or regional distributors are more niche-focused, both in terms of product offerings and delivery range.
Broadline natural product distributors service three key retailer types: independent natural products retailers (including grocery co-ops and what you might call “Bodega Plus” stores), Super Natural Chains (aka “Supernaturals,” including Whole Foods, Sprouts, Albertson’s, Wegmen’s, and the like), and mass market grocery chains (Kroger, Meijer, Safeway, H-E-B, Hy-Vee, Shaw’s, etc.).
With very few exceptions, larger volume and chain retailers purchase exclusively through distributors (rather than directly from the producer), and the preponderance of those purchases are with broadline distributors. For these retailers, broadline distributors offer one-stop shopping, volume discounts, product line consulting services, and daily delivery via their networks of DCs and trucking fleets, among many other perks.
Approaching a Distributor With Your Product
A distributor like UNFI or KeHE is in the businesses of servicing volume retailers (the countless smaller independent retailers that they also service do a significant combined volume that rivals that of the larger chains).
Within the vast landscape of mass market retailers and products, your brand is, quite frankly, not a significant player. At least not on its own. But independent brands, when taken as a whole, comprise a very important category within a distributor’s overall product offerings. Retailers, regardless of size, want their offerings to be current and relevant, and it is a well-established trend nowadays that small startups are better than big food companies at providing this.³
Unfortunately, getting your product listed among a distributor’s offerings is nowhere near as simple as setting up a meeting and showing them how great your stuff is. You need to present them with your strategy for getting your product to succeed within their system, which means having no fewer than six key pieces in place:
- A broker.
- Interest or purchasing commitments from key retailers.
- A well-timed submission.
- The production capacity to meet the sudden increase in demand that comes with new distribution.
- Competitive pricing that allows the distributor and the retailer to capture a suitable margin.
- A budget and strategy for utilizing distributor programs.
We’ll cover the first four below. The last two are larger topics that will get their own posts.
Brokers are third party agents who coordinate and manage the relationship between producers and distributors/retailers. Think of them as well-connected freelance sales reps with an insider’s knowledge of how distributors and large retailers function.
They may represent any number of producers, selling a variety of product lines from multiple brands to a portfolio of retailers. Brokers generally take 5–8% of your sales price, and sometimes a monthly fee, in exchange for working their connections and negotiating sales of your products to harder-to-reach retailers.
They tend to focus on specific regions and specialize in certain channel segments — in the food realm, for instance, a broker might focus on New England, and specialize in natural food stores, convenience stores, or food service.
Having a broker in your corner will grease all kinds of wheels for you, including the next two pieces of the distributor puzzle.
Timing Your Product Submission
Broadline distributors have strict category review schedules, during which time they decide which products to discontinue (due to underperformance), and which new products to bring on in their place.
Distributors may only review new product submissions from your category once or twice per year (quarterly at most), so if you miss your chance when it comes around, you may very well need to wait another year.
Bear in mind that there is A LOT of complex paperwork involved in these submissions, much of it so esoteric that no average human could possibly get their head around it. Enlisting a broker to get this paperwork done — and done right — is highly advisable.
Broadline distributors will expect you to have demonstrable demand for your products before they’ll take you on. A category manager won’t want to stock you in one of their DCs unless you are able to forecast a certain minimum weekly movement (usually on the order of 5 cases/sku/week per DC).
Part of this will come through the growth you have achieved through your partnerships with smaller regional distributors, but more important still will be that you can demonstrate interest in your products from one or more of their key retail customers. Better yet would be purchasing commitments from them.
How you go about garnering such interest is the tricky part, and you’re very unlikely to do so on your own. Buyers for big chains are known to wander the floors of trade shows such as Expo West, and may express an interest in your product. But holding their interest through the setup process with one of their distributors may not be possible without the aid of a broker.
Brokers have relationships with key retail buyers. A good one will understand how to approach your targeted retailers, and how best to navigate the onboarding processes of the distributors that these retailers purchase from. They know how to present new products to them, and how to negotiate terms that are favorable to you, the producer.
There are ways around demonstrating a natural demand for your products from key retailers, such as UNFI’s “Speed to Market” program. These are expensive programs, however, and something we’ll cover in Part III of this series.
Increased Production Capacity
It goes without saying that when you launch with a broadline distributor, demand for your product will suddenly spike. These distributors order by the pallet, not by the case. Will you be able to meet that kind of demand in a timely fashion, while also meeting the demand of your preexisting customer base?
This gets to be something of a chicken-egg problem: how do you ramp up production to meet the theoretical demand required to get the purchasing commitments needed to successfully apply with a distributor?
This is really a topic of conversation for you and your production team or co-packer, but it is certainly something you’ll want to be prepared to discuss when approaching any distributor.
Alright folks, we’ve covered a lot in this post. Please share your questions and experiences in the comments below, and stay tuned for Part II: pricing your products for distribution.
² Roadmap to Retail, Specialty Food Association with Cannondale Associates, 2008.