Distribution - Distributors

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Distributors buy from you and sell to retailers. They take a portion of your profit, but in return fund your inventory and marketing, and they handle retailers on your behalf. When you’re new and have everything to prove, they’re your ticket to relevance.

Inventory

Owning inventory is risky business, because you freeze your money in the goods and can’t use it to pay salaries and finance your operation until you sell. And inventory can be very expensive. So distribution is really about having the money to own inventory and the experience to manage the risk.

A distributor of good standing will pay for your product at delivery, which means that you will be able to pay the manufacturer directly from sales. This is much cheaper than all other forms of production financing.

In addition, the distributor may agree to advance cash for long-lead items, which manufacturers typically request before the start of production. In other words, a distributor covers a large part of your production costs.

Once in possession of your inventory, the distributor will try to sell it to retailers (sell in). If the product sells in well, it’s happiness all around. If it doesn’t, it’s the distributor who gets stuck with the unsold product, not you.

Marketing

Promoting your product in the market requires know-how and money. Distributors are typically more knowledgeable about their territory than you, so they ought to design a better-targeted promotional campaign. Past experience should tell them what’s the best combination of channels to promote your type of product (TV ads, print, online, in-store displays, fliers, catalogues, etc).

They will ask you to produce the material (aka marketing assets). This can be expensive, and you’ll need to plan for it in your budget. However, the distributor will pay for the actual promotion, which can be very costly.

In addition, distributors take on the translation of the marketing material into their territories’ language and produce their own packaging based on yours.

Ask potential distributors for their marketing plan, and base your selection in large part on their marketing savvy.

Retail Management

This is another big deal. Following a distribution model makes most sense in fragmented markets served by many retailers, as in Europe and Asia. In contrast, the US is consolidated, with the top 7 retailers owning more than 50% of the market, so few distributors operate there. This makes the US market more efficient, as the pie is split among fewer parties, but also more difficult for newcomers.

Distributors have long-standing relations with retailers in their territory. They are vendors of record, and retailers know that if a product doesn’t sell through, the distributors will have the financial means to support any clearance activity. They view distributors as partners and are willing to heed their recommendations on new products.

Retailers are notoriously high maintenance. They push as much work as they can on to product manufacturers and distributors, and are constantly trying to reduce prices, a nightmare scenario for you. The distributor is the one putting out the fires here while you direct your energy elsewhere.

Pricing

You set your retail price based production cost, competitive analysis, and the crowd funding test. This is the price for end users. From there, you work back your price to the distributor.

It is very hard to have the same price in all markets, though you should strive for it. Europe, for instance, factors VAT in the pricing, whereas the US does not. Also, the type of retail channel matters - large stores such as hypermarkets will always want to underprice specialty shops. It is the distributor’s job to work closely with each channel to maintain as much consistency as possible.

The rule of thumb in the toy industry is that retailers take a 35-50% margin, depending on whether the item is advertised on TV. The higher the marketing spend, the lower the margin retailers accept. Distributors take about 30-40%, which leaves you with the balance, 30-35%.

Calculations: margin = (selling price - purchasing price) / selling price.

Example 1 - non-promoted item:

Example 2 - TV-promoted item:

Another rule of thumb: calculate the retail price of a TV-promoted item in Europe is by multiplying your selling price to distributors (in US dollars) by 3, and replacing the $ with € (leaving the number unchanged). This was true when 1 € = 1.3 US$.

As you can see, there will be room for negotiation and optimization. A lot of it will come down to how much the retailer and distributor believe in the success of the product, which is why the early test is important.

Contracts

You don’t always need a contract with your distributor, you can rely on the terms and conditions attached to the purchase orders they’ll give you. Regardless of the form, here are the important considerations to keep in mind:

Agent

How do you meet and vet distributors? And manage them? One way is to hire an international agent.

The agent would have personal relationships with all the major distributors in a given territory. Ideally, in all territories. They would setup presentations for them to see the products. They would submit a go-to-market plan (retail channels, marketing campaign, sales volume, payment terms) and you would make your selection

An agent earns a commission on sales (your sales to distributors), typically 3-5%. Good agents work your business diligently and justify the commission.

Trade Fairs

Trade fairs is where you meet all your potential customers, and where your existing customers check on your progress in product development and on new products. You can’t avoid being there, so budget travel expenses accordingly.

Budget marketing expenses too. You have to project an image of marketing savvy and polish your presentation. This is signaling that you know how to package, present and sell your product.

In the toy industry, a product’s commercialization journey starts with a preview in October of year 0 (the year before you hit the market). Distributors and retailers see your new prototypes and start considering whether to include them in next year’s selection.

If you get a positive response, then you’ll advance development and see the same customers again in January and February of Year 1. You must show substantial progress towards productization. This is also where interested distributors bring retailers from their territories to gauge their interest.

Distributors will make their decisions around that time, so you know you can continue building the product. Retailers take longer to finalize decisions, typically at around April or May of Year 1.

Product Delivery

It is paramount that you meet your delivery schedule, or else distributors would not have the time to sell in to retailers and would cancel orders. You have to manage the factory closely to minimize this risk.

For toys, shipments start in May and continue through August-September.

Recap

A good first step for commercialization is to sell to distributors and rely on their experience to build your business. At the end, you would have proven your product in the market and the viability of your business. You then have the leisure of optimizing efficiency and increasing sales. You’re ready to go direct to retail.

Next up: Retailers

 
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