Talk to other sellers about the terms they negotiated with distributors. They can provide useful insight into the different tricks distributors use to make money from sellers. Some large distributors have a ruthless reputation you should know about before going into a deal.
Bargain like a Pro
Distributors will request a number of promos, type of promos, frequency; these are all negotiable terms. Keep in mind, that the distributor has less negotiating power if the store wants your product in right away.
Understand your true margin - pad margins beforehand
Price changes may take 6 months to go into effect at some large distributors and by the time sellers realize the need for better margins, they are hemorrhaging cash. Large national distributors have low margins and earn higher margins on marketing programs.
Read the contracts very carefully
Small, innocuous terms in the distributor contracts can make a huge difference in the outcome of the relationship.
Distributor advertising programs
As a seller, you could be required to run (pay for) multiple ads per year in a distributor’s catalog, at $1000s each, coupled with a requirement of offering a discount to stores for the duration of the ad run, the “ad program” investment may total $10,000+ in advertising costs not including the expense of the discount.
Large distributors will also sell tabletops at their internal trade shows enabling buyers to order/purchase immediately through distributors. Although this opportunity may be great exposure to buyers, it is important to ensure the cost of buying a tabletop is built into the margins.
Temporary price reductions (TPR)
TPRs enable distributors to move product faster. For example, to secure end cap product placement in a store, sellers provide temporary price discounts to move high volume.
Distributors will offer percentages off to buyers and give away samples without warning, which add up quickly. Careful tracking is critical to minimize loss--a seller may lose 18% to a large distributor on chargebacks and therefore real distributor pricing nets to negative 18% what was actually initially charged.
Returns happen for a number of reasons:
Some large distributors require a minimum shelf life to remain for the products to stay in their warehouse. The distributor contract may include this shelf life requirement i.e. “we require 50% of max shelf life”. For example, if a product has a 24 month shelf life and only has 10 months of shelf life remaining, they will return the product.
One way to avoid half-expired product returned is to offer the distributor a discount on the product so the moves before the minimum shelf life expiration date. Some distributors purposely overstock product to hit the expiration threshold and can subsequently demand a discount.
Occasionally, distributors return product simply because it is not moving. This lack of movement may indicate pricing is not optimal, insufficient awareness of the product, etc. If this happens too often, reexamine pricing and marketing strategies.
Be very careful to read distributor contracts to see if you’re agreeing to be charged for expired, damaged or sampled product-- if possible, negotiate a maximum allowance (%) for these things.
Understand Manufacturer Chargebacks (MCB) vs. Off-invoice discounts (OI)
In an off invoice (OI) period, the distributor buys product from you at a set discount. With manufacturer chargebacks (MCB), the distributors claims a credit when their customers (stores) purchase product from them, during the MCB period. MCBs are generally safer for manufacturers than OIs.
Distributors will request a certain number of OI periods during deal talks, but you can negotiate that number and set your own promo schedule. Big distributors will stock up their warehouse while you are OI and then wait for the next OI period to stock up again, eroding margins. Worse, this can lead to product returns if the distributors over-stock. Many distributors will require multiple OI periods-- if you space them out, distributors can stock up, but if you run them all in a single season, they won’t be able to stock up.
Conclusion: become an expert, or get help!
Working with distributors can be a daunting task and costly investment without proper planning and due diligence. For certain categories of product, in order to succeed, you will have to become an expert in distribution. Enlist the help of a broker to mitigate some of these risks and take advantage of their industry knowledge, expertise and experience working with distributors.