Full interview at inpractise.com

We interviewed a Former VP, Sales at Pepsico to understand the fundamentals of distributing consumer goods in the grocery channel.

We cover:

  • Common mistakes and misconceptions about bringing a consumer product to retail
  • Distribution and slotting fee structures
  • The importance of relationships in gaining retail sales and distribution
  • Why Walmart is actually an easier choice for consumer start-ups gaining distribution
  • How start-up brands should approach category managers

Can we lay out the cost then? Let’s say you’ve got this two-dollar bottle and you want to get distribution. What are the major types of fees that you’re looking at?

Well, first and foremost, it’s going to be your distribution fees. Let’s take Kroger. Kroger is a great example because they’re a United States company across pretty much 40 states with different brands. Let’s say you want to get your barbeque sauce into Kroger. The first thing from a cost perspective: how are you going to get it to them? Where are you going to send it from? If you have a location, let’s call it Texas, you’re going to have to get your product to all of the different distribution centers that Kroger uses and there are six of them across the country. You’re going to have to get your product from Point A to their distribution center, before it ever gets to the store.

What happens is, a lot of people say “Well, I have a single-route system, I can take it from here. Why can’t I just take it to a Kroger distribution center?” Well, you can’t, you’ve got to take it to all of their distribution centers. Every retailer has that, so your distribution costs all of a sudden become somewhere around, as a small start-up, that’s about 12-15% additional costs.

Then you’ve got to pay slotting inside of those warehouses, not the shelf placement slotting, but the slotting you’ve got to factor in for the warehouse, for them to stock it into the warehouse to send it to their stores. You have another slotting fee there that’s typically 5-7% that they’re going to charge you if you’re going direct. I haven’t even discussed if you have to use a third-party because then it becomes even more expensive.

That’s five percent of what you believe you’re going to sell the final products at?

Correct, yes.

You mentioned the final retail price of $6.99 and you’re saying the 5% to 7% warehouse fee is on the retail price or wholesale?

No, that percentage is what you’re selling directly to them at your cost. Not the retail cost, because you won’t set the retail cost. That’s the next thing, you have to understand those two costs.

Then you’re going to pay a slotting cost, which is a shelf placement cost in the United States. They’re interchangeable. A lot of people got away from calling it shelf fee and shelf placement fee, because it’s borderline illegal; so they started calling it slotting. It’s the same exact thing. If you have your barbeque sauce, you better have at least two flavors before you can even get an appointment. Let’s call it two SKUs of my barbeque sauce, a smokey and a sweet. Each of those are going to cost you a $75,000 shelf placement fee per SKU. You’ve got to factor that $75k in your budget. You get nothing for it, except for a slot on a shelf, one facing on the shelf.

If you’re going to use a broker to get distribution, you have one of two choices: you’re going to pay a person, which is my recommendation, or the only other way is that you pay a broker. Brokers are trying to sell ten other barbeque sauces at the same time. It’s a waste of time. It’s the only two methods you can use to go see any retailer. Let’s say you use a broker. The broker fee for a small company, a start-up brand is another 5-7%. If you’re an established brand, it’s 3%. What they call a hunter’s fee, they’re going to charge you 5-7% of total sales.

You mentioned Kroger. They have five to six distribution centers across the 40 states they operate in, and they charge a slotting fee to have your product in the warehouse for distribution to their retail units, which is 5% to 7% of the wholesale price?

Yes. Every single retailer, without fail, is different. That’s the strategic part that I was talking about earlier. You only have two retailers in the entire country who do not charge slotting fees. Two large retailers, one is Publix and the other is Walmart. They don’t charge you slotting fees. Most people laugh when I say Walmart because people say, “They don’t charge you slotting fees, they fee you to death in other places, but they don’t charge you a slotting fee.” Strategically, people, when I tell them, the two places to focus is Publix and Walmart, they just kind of laugh. It’s your cheapest entry of the retailers, but it also has to match your brand. Sometimes that’s a problem.

With any center store item, the retailer is going to put a 38 to 45 margin on top. That’s pretty much center store margin, not mark-up, but margin. They’re going to have a gross margin on that product of at least 38-45%. When you place these fees on top of what it costs to manufacture the product, you start to see why that retail ends up at $5.99-6.99.

You mentioned Walmart don’t charge slotting fees. Where else do they make up the margin?

They will charge you pick fees. Walmart is probably the best at distribution, but for themselves. They have, I want to say, well over 100 distribution centers. You’ve got to get product to those distribution centers. That costs you a lot of money. Sometimes you’ve got to send ten cases to one distribution center and fifteen to another, so it becomes very costly. They don’t charge slotting fee at the shelf. They have very strict turn guidelines. If you get product into Walmart, you have to turn the product. If you put your barbeque sauce in there and it turns two units, when they’re expecting it to turn five, cost goes the same way. If it doesn’t turn that within the first six months, that product is out, and you’ve spent tremendous amounts of money.

Walmart do a lot of promotions and markdowns that they expect you to pay for. They get their money in different ways. I like to tell people; I’d rather put my risk on me selling my product that I believe in and not paying upfront $75,000 and get zero for it. The risk/reward is better in a Publix or a Walmart. You’ve got high risk in places like Safeway, Kroger and those places. Where they’re making a lot of their gross profit is off slotting fees. Then they put the risk on you to turn the product or lose it. I’ve seen tons of product come into Kroger, new items come into Kroger and stay there four months and then they’re off the shelf because they didn’t turn fast enough. You lose your $75,000. I noticed one of your questions is about a contract, there is no contract with retail customers, you have no contract.

How does the retailer look at it? Obviously, they all have different hurdle rates and targets to turn inventory, but do they look at it on a gross profit per square foot for example?

They look at revenue. Revenue per square foot is the key measurement. That’s based on turns, obviously. They worry less about the gross profit per square foot. What they do is, they go back, they’ll go to Kraft, for example, they’ll bump Kraft prices up because they can because it’s Kraft, for instance. They know what their gross profit is that they have to deliver out of that four-foot, for example, so they’re not going to require you to really focus on that. Say you’ve got 80 facings within a four-foot section, which are all equal. You’ve got to be generating x amount of turns per week out of those one or two spaces, or I’m going to have to replace it with something that can. At the same time, I’m holding Kraft accountable to turn. I may hold you accountable to turn 3 units per week. I’m holding Kraft accountable to turn 12 because of their branding and the fact that they’re established. It’s more about generating that revenue that you’re expected to generate out there. They combine all of that into their gross profit dollar. Does that make sense?