In this post, we’re going to cover the vast topic of of distributors’ marketing programs. We’re also going to discuss how you are billed for them, some of the hidden costs to watch out for, and some basic techniques for getting your distributor’s reps to be aware that a) your products exist in their catalog, and b) it’s worth their time to present your products to retail buyers.
I’ll be honest — researching and writing this post was difficult. At times it seemed like the more I read on the subject, the less I understood. It may not be too much of a stretch to say that no one in our industry truly understands the full scope of this stuff. A lot of terms are used interchangeably, and there is no standardization in processes from one distributor to the next. Perhaps this nebulousness also has to do with the fact that broadline distributors and big retailers have evolved in lockstep with giant food manufacturers — not us small wholesale producers — such that the entire paradigm is of a different order than our own.
Nonetheless, I’m going to do my best to lay out how this stuff is supposed to work theoretically, with the important caveat that nothing quite works the way it does in theory, does it?
Marketing programs are tools that a distributor will provide you with (at a cost) to advertise and market your brand.
These programs fall loosely into two categories based on who they are aimed at: “Trade Programs” (aimed at retail buyers) and “Consumer Programs” (aimed at retail customers).
Trade Programs address the fact that retailer buyers have way more products available to them than they have shelf space for. So how do you get a buyer to give you any of that precious shelf space in the first place? By offering them incentives to stock you.
Consumer Programs come after you’ve convinced the buyer to put you on the shelf. Now you have to get the end consumer to notice and buy your stuff, so that the retail buyer will continue to stock you. When you see an item on promotion at a grocery store, that’s an example of a consumer program.
Your participation in trade and consumer programs is not optional (in case you were wondering if you could just use a broadline distributor for their logistics services, you can’t). A distributor won’t authorize you in the first place unless you have a plan and budget for utilizing their marketing programs.
The degree to which you participate in these programs is largely up to you, and you can pick and choose which programs you participate in. But keep in mind that if you don’t show enough movement (depending on your category, that could mean 5–10 cases per sku per week per Distribution Center), and you’re not showing effort to grow by paying to play, your category manager may very well discontinue (“disco”) you when the next category review rolls around.
It’s very much on you to make your product a success, and participating in these programs is a key part of that equation.
Marketing programs are expensive, so having the means to finance them is imperative. Naturally, you’ll want to make sure you’re getting the best possible return on your investment. A broker can help you weigh your options, understand the pros and cons of each, and make sense of all the paperwork involved in signing up. Whatever you choose, make sure you have a system for measuring a program’s effectiveness as you experiment with different ones.
Let’s take a look now at some examples of trade and consumer programs.
Trade Program Examples
Product Catalog Advertising: A distributor publishes quarterly catalogs that retail buyers reference when placing their orders. They’ll include details like product name, unit size, wholesale/list price, SRP, etc, and you can place ads in these catalogs adjacent to your product listing to help grab the buyers’ attention. UNFI also has a monthly “New and Now” catalog that they send to buyers as a way of announcing new products, which you can also place ads in. Timing these ads with when you run promotions can be an effective way to drum up orders, though it does take some careful synchronization with the distributor’s advertising department to make sure the timing aligns.
Free Fill: This is a common condition of selling into large, multi-door retailers, in which new vendors are required to provide a free opening order of one case per sku per store. For example, if you have six skus and the store has 20 locations, you would need to provide 120 cases of product, no charge. The reasoning is that a free fill offsets their administrative costs in setting up your products in their system, and in making space for you on their shelves. This is a significant cost for a small producer to bear, and it’s always worth negotiating. One option is to push for a BOGO (see below) rather than a straight up free fill. Producers with sales strategies that target large chain stores often design smaller case packs in order to minimize the cost of free fills. If your case size is 12 units, make it 6 units.
BOGO: A Buy One, Get One Free discount that you can use to incentivize buyers to stock up on your products or try out new SKUs. BOGO can also be used as a counter offer when a big retailer is demanding a free fill.
Slotting Fee: Some large retailers will require that you pay cash for space on their shelves when they first bring you in, and any time you introduce a new product. Or any time you want better positioning on the shelf. There’s no way around it: you have to pay to play in the world of big retail, but you can always negotiate.
Consumer Program Examples
Consumer Circulars: These are those monthly in-store flyers that you see in independent stores on newspaper racks as you walk through the front door. Most independent retailers can’t afford to print these specially for their store (the way that mass-market retailers do), so a distributor will print generic ones for all participating stores. By advertising in one of these, you can force distribution of your product into all participating stores, since they’ll feel obligated to stock what’s in the circular for that month. This isn’t cheap, though, so you have to make it count. An ad in one will cost you thousands, plus you’ll need to extend a hefty promotional discount to the distributor so that your product can be priced on the shelf at the advertised sale price.
Nowadays, retailers offer digital coupons as well, so distributors have programs for this. An advantage with these digital programs is the reporting that you get access to, detailing when and where coupons were redeemed.
Product Demonstrations: Being present in stores to sample and discuss your product with customers when your product is on promo can boost product movement. Hiring third-party demo specialists and brand ambassadors is the way to go here, rather than scheduling your salaried salespeople to do demos. Collect post-demo sales reports from whoever does the demo, or from the store itself so that you can evaluate their effectiveness, determine the optimal times for doing demos, etc.
Temporary Price Reduction (TPR): On the shelf, a TPR takes the form of a colorful tag announcing that your product is on sale. This can be a strong call to action for consumers — someone who was on the fence about trying your product might be nudged into doing so, and maybe you’ll win them over from a competitor.
Note that you will generally run your consumer promotions through your distributor, but many retailers will set their own promotional calendars and not work off of what a distributor has on deal. This is an example of how things can quickly get out of hand if you’re not minding those devilish details — overlapping promotions between your distributor and a retailer can result in you getting crushed on the billing end of things. Speaking of which…
How the Billing Works
If all this doesn’t seem complicated enough already, wait until you try to pay for participating in these programs.
Manufacturer’s Chargeback (MCB): An MCB is probably the most common way that a distributor will charge you for any number of things, such as promotions, spoilage, free fills, short shipments, etc. MCBs take the form of a deduction from payments owed to you — you receive a check for product you delivered to the distributor, and it has all kinds of deductions taken from it for various payments that they believe you owe to them. It’s very important that your accounts receivable person monitor these carefully, and work closely with the distributor’s accounting department to correct any mistaken chargebacks (there will be a lot of them, and often they’ll claim chargebacks from months prior, so you want to have a paper trail ready to dispute them).
Off-Invoice Discounts: This is how you (the producer) will often pass discounts to a retailer by way of your distributor, to account for a promotion or for an everyday low price arrangement. You provide a discount off of your regular list price to the retailer, with the idea being that the retailer will extend this discount to their customers by reducing your shelf price. As the name suggests, the discount is taken off the invoice that your distributor sends to the retailer. The distributor then bills you for the difference via an MCB.
Off-invoice discounts are usually how the billing works for TPR promotions. The danger is that retailers have been known to stock up on your product while it’s discounted so that they have cheap product to sell well beyond the end date of your promotion. So it’s wise to monitor these discounts closely.
You can also use off-invoice discounts all the time with a particular retailer as a tool for getting your shelf price into alignment with your SRP. (We discussed how your shelf price can come out of whack in Part II of this series).
Scan-Backs: In a scan-back arrangement, you reimburse the retailer a per-unit discount for every unit sold during a promotion. Compared with an off-invoice discount, this is usually a more advantageous arrangement for you, since there is no risk that the retailer will stock up on your product at a discount. However, off-invoice discounts and MCBs are easier for the distributor to process, so they’ll generally push for these over scan-backs.
Other Concepts To Be Aware Of
Guaranteed Sales (aka Buybacks): A condition of purchase by certain big retailers that they be reimbursed for any product that expires or is damaged on the shelf. They pass this risk on to the distributor, who passes it on to you in the form of MCB’s for expired product that the retailer charges them for. This is yet another reason to be selective about which stores you sell your product too, and to make sure that they’re a good demographic fit.
Spoilage Allowance: This is an alternative to guaranteed sales that you could propose to your distributor if you’re not comfortable shouldering the unknown risk of guaranteed sales. Instead of reimbursing for any and all expired product, you simply apply an agreed-upon discount (around 2–3%) to your invoices to account for product that may potentially go out of code.
Distributor Reports: Astonishingly, distributors are under no obligation to tell you which stores they’re selling your products to. Some will provide distributor reports that show which stores they have you in and how your product is doing in those stores, but they often charge for these reports. Furthermore, these reports can be woefully infrequent and even incomplete, since it is ultimately up to the stores themselves to decide whether or not to allow the distributor to share their data.
Payment terms: Distributors can have long payment cycles (typically Net 30 or Net 45) for product you ship them. On top of this, they may give themselves a discount (such as 2%) if they pay for it in under 10 days.
Even with a great product, a competitive pricing strategy, and a solid marketing budget, you still can’t bank on your product being a success within the whole distributor-big retailer system. Distributor sales reps represent hundreds of products, many of which are very similar to yours, so in order for your products to come to mind when they’re meeting with their retailers, you must spend a lot of time and effort cultivating mindshare among the reps.
This can be accomplished through:
- Product presentations at their sales meetings. UNFI has a program where you can pay to get in front of the entire sales team via a webinar. Outside sales reps are harder to get in front of than inside customer service reps, since they’re out in the field and rarely in a room together.
- Ride-alongs. This is where you physically shadow an outside sales rep for a day, going from store to store with them, meeting with buyers, and helping to pitch your product.
- SPIFFs. A SPIFF is an incentive that you offer distributor reps to sell more of your product to retailers. It’s usually money, but it could be anything that incentivizes them to allot your product more mindshare than they otherwise would. It almost seems unethical when you think about it, but it’s very common practice. For instance, you might set up a friendly competition with your distributors reps, in which the rep that sells the most of your product during a given period wins the prize.
Gaining mindshare with your distributor’s reps also involves spending a lot of time in the market yourself to support their efforts (meeting with store buyers and managers, providing samples and staff trainings and demos, etc). It also means frequent phone calls and meetings with your category manager to discuss inventory levels, projections, progress with key retailers, and so on.
Something to keep in mind is that reps aren’t going to stock and face your product for you. You still have get into the store yourself and freshen up your displays. As with product demos, hiring a third-party company to do this for you is probably better than sending your salaried salespeople into stores to face product. These companies are known as merchandisers. Merchandisers will also check inventory levels at a store and help prompt buyers to place orders with their distributor rep.
That latter point is an important one: maddening though it may be, you can’t always rely on distributor reps to prompt an order from a retail buyer when your product is low or out of stock at that store. It may seem like order-gathering should be the most elementary service that a distributor provides you with, but you shouldn’t take this for granted. It all comes down to mindshare — if reps view you as small potatoes, they may not bother gathering orders for you. Prompting buyers to place orders will still be a big part of your job, even with a distributor.
Putting It All Together
There is no single recipe for success for this stuff, no one-size-fits-all approach. It’s all trial and error, but it can be educated trial-and-error if you’re measured about it and tracking your sales results. Just make sure you’re well-funded and well-prepared. This is the only way you won’t lose your shirt/mind.
As always, you need an amazing product, competitive pricing, and a targeted channel strategy where you are only approaching retailers with suitable demographics, where you know that your product has a fair shot at success. The pressure is on to perform once you sign on with a distributor, and you can’t afford to have a dud product or to sell into dud stores.
If your strategy is well-executed and your product is great — and you have a high tolerance for chaos — there’s a real opportunity for you to go big with broadline distributors. Once you have proven success through one Distribution Center, you can expand to more and more regional DCs. Your track record of success will pave the way to new major retailer relations, and your distributor network will grow until you are a full fledged national brand.