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by Renee Fellows

February 25, 2008— If you’re looking to move your product from the manufacturing floor into the hands of your customers you may envision yourself traveling from store to store to peddle your wares. What you might want to consider is a different method of selling called distributorships.

Let’s consider a nonprofit organization that wants to sell a chocolate bar to generate revenue to support their mission. This won’t be just any chocolate bar, but an environmentally friendly (the wrapper biodegrades), organically grown, rich Belgian chocolate bar that provides a portion of its proceeds to the nonprofit business for which it was created. Something this altruistic should sell itself, right? Well, in theory sure, but as most entrepreneurs know, nothing is ever that easy.

How can the nonprofit create a streamlined distribution channel that will help them carry out their mission and more importantly, make a profit selling chocolate bars? First and foremost, they need to understand how distribution works. In the grocery/retail market, there are many layers of distribution and marketing involved behind the final product you see on your local retailer’s shelves.

How distribution works:

Each industry (dairy, meat, bakeries, breweries, import/international and local green grocers) has its own ‘home’ distribution center. Items are then placed on trucks and transported to central and regional warehouses and are then picked and routed to local grocery/retail stores. The customer then completes the final circle by driving to the store where the products ends up in our carts and households. Each level of distribution is paid a percentage of the final product’s cost for their work (be it transportation or warehousing) adding a cost to the final product.

Back to our chocolate bar

The nonprofit has created a delicious gourmet chocolate bar, built a solid marketing campaign, and they’re ready to hit the streets to sell the bar, right? Well, yes and no. How will the nonprofit deliver the bars to local stores that are willing to sell it? What will the price point be to the retailer (i.e. what profit will they make by selling your chocolate?). These decisions can make or break the success of the altruistic effort.

Types of distributor relationships:

• Open a series of retail stores to sell your chocolate bars. While opening ‘The Chocolate Zone’ retail outlets may seem like the best idea ever (who doesn’t love chocolate?) are you really qualified to open a retail location, man the store, manage the accounting and inventory? Should you stick to making the best chocolate bar ever and leave the selling to a broker who can easily add the product to a distributor’s already successful line of products?
• Sell the chocolate bars on consignment through local boutique stores and quick marts. These are often easy to obtain selling space and have a high traffic volume to create sales. However, selling to them requires a tremendous amount of time on the road.
• Use a manufacturing distributor who will license your chocolate bar, possibly even manufacture it, and put it into their existing distribution line. This can free you to develop new chocolate concoctions and focus your energy on what you do best.

What do distributors charge?

Typically, distributors take a percentage of the total manufacturer’s suggested retail price (MSRP) or basis points, some as little as 5 percent to as much as 50 percent depending on the product type. The larger the retail outlet, such as Wal-mart or Target, the tighter your profit margins will be. The benefit of working with the ‘big fish’ is that they can instantly provide your product with the largest customer base in the country – sometimes the world. The downside is that you may not be able to afford the reduction in profit. If the chocolate bar sells for $2.25 and costs $1 to produce and another $.90 to distribute that doesn’t leave much return for charity. The box store may squeeze out another $.15 per unit. Can the business survive on just $.10 per unit?

Another issue with national distribution is the ability for the small enterprise to handle the rapid increase in demand. Working with large retail outlets typically requires a multi-step vendor application process including:

• Completed vendor application – be thorough when completing this application and even have your attorney review to be sure you fully understand what you are agreeing to provide and when.
• Minimum of a $2 million insurance binder
• Ability to meet production demands and schedules
• Ability to raise enough capital to meet supply chain demands
• Meet all labor laws, compliance and for your food product, all US Food and Drug Administration health requirements. These regulations even translate to what is included on your packaging for ingredients, allergens, and dietary requirements.

That’s a tremendous workload to bite off for a ‘little fish’, though not impossible. Many companies have made the transition, but they have done their due diligence. A majority of small manufacturers made the jump by switching gears from independent manufacturer to a manufacturing distribution model in order to meet the demand and grow their brand.

Distribution Benefits for Small Business

Remember that there are tremendous benefits for the entrepreneur to utilize the distribution model, otherwise they wouldn’t do it. However, it may not be for everyone.

Distributors can provide your business with:

• The ability to focus on business at hand and not travel the countryside trying to sell your product to small retail shops.
• Reliable delivery systems. Bear in mind that certain retail contracts may charge a penalty should your product fail to arrive on time. Using a distributor can help to streamline delivery and provide guaranteed on time delivery.
• Invoicing and paperwork processing with the retailer(s). This removes the small business from the billing and accounts payable issues and ensures that they’ll be paid.
• Access to a large network of marketing opportunities and potential partnerships.

On the flip side, distributors expect certain standards in return for access to their large purchasing network including:

• Marketing support. Distributors don’t sell your product for you rather they present your product as part of their line of products. You must still provide marketing, advertising and public relations support for the chocolate bars to make them attractive to potential buyers. What makes your chocolate bar special, unique and worthy of a higher price point? Don’t forget to provide point of purchase displays and a solid advertising effort to support the product.
• Outstanding packaging. As part of marketing you need to create eye-catching packaging that will compete with the myriad of chocolate bars already on the store’s shelves.
• Buy-in pricing. Can you afford to sell through a distributor or will you be left with a negligible return on your investment? This is a critical question and not one to be overlooked in the attempt to grow faster than your budgets will allow. It’s wonderful to have a national contract, but not if it comes with such a large price tag that you find yourself out of business within the year.

The best advice?

Talk with other businesses that have embarked on the distributorship journey and learn from their mistakes. Ask questions, lots of questions. For pricing and comparison, also talk with trade associations in your industry to see what other similar businesses are paying for basis points and contract requirements. Learn about every aspect of their process from production through to marketing and find out how their business changed once they decided to work with a distributor. Then sit down with key personnel at your business and have a frank, open discussion about what this change will mean for your company. Everyone must be on board for the new distribution process and be willing to make often drastic changes to how the business operates.

To learn more about distributors and how they can make or break your business growth plan, talk with a Fiducial Advisor by calling 866-Fiducial or visit the web site at www.Fiducial.com.

To learn more about creative advertising strategies and making your marketing dollars work harder, talk with Renee Fellows at ClearPoint Marketing Communications at (603) 434-9433 or visit the web site at www.oneclearpoint.com.

Renee Fellows is the owner of ClearPoint Marketing Communications in Derry, New Hampshire. She works with small business clients to develop marketing and public relations strategies that bring business and customers closer together. She can be reached at 603-434-9433 or via email at Rfellows@oneclearpoint.com.

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