Distribution - Retail
Previous article: Distributors
Retailers are the gateway to the consumer, and as such hold the most power in the supply chain. And they’re not shy at wielding it either, they are experts are offloading costs and risks on their suppliers - you.
This said, selling directly to retailers removes the distributors from the equation and allows you to keep a larger share of the profits. It also affords you control over packaging and in-store messaging, so you can build a brand.
Do the benefits outweigh the risks? For a strong product, yes. If you’re not sure, adopt a distributor strategy instead, which often means avoiding the US market until the product has proven its worth elsewhere.
In Bossa Nova’s case, that’s exactly what we did. We demonstrated strong sales in Europe, where distributors took most of the risks, and gained the confidence to enter the US market and sold directly to retailers.
The Buyer
As a vendor, you will interface with a single person in charge of your product’s category - the buyer.
Buyers are responsible for a given category, which may represent one or more aisles. Their job is to make the shelves generate revenue, which is measured by dollars per unit of linear shelving. Their mandate is to maximize shelf productivity, which they perform by first and foremost selecting winning products; projecting accurate estimates of unit sales; determining correct pricing; driving sales with in-store promotions; and quickly removing under-performing products to liberate space for more productive items (hence the markdown!).
Buyers are generally rotated from one department to another every couple of years - this ensures that they don’t become too comfortable with specific vendors and that they learn the overall business.
Becoming a Vendor
First and foremost, you must convince the buyer that your product will sell well. Having a compelling product and/or pointing to success elsewhere is a good way of doing it.
That’s how you get your foot in the door. To open the door, you must demonstrate a degree of professionalism and savvy over and beyond what distributors expect from you.
From a product point of view, you must demonstrate a roadmap and vision that goes beyond the first product - a retailer will not go through the trouble of setting you up as a vendor if you’re a one-trick pony.
On the marketing side, you need to demonstrate that you know how to sell the product on their shelf - that’s packaging that makes the product stands out, in-store promotions that pushes the product out, and very importantly, a promotional campaign. You demonstrate these by presenting packaging executions, agreeing to in-store promotional programs, and devising a credible marketing plan.
On the financial side, you need to punch above your weight and and convey that you have solid foundations. This means that you have cash reserves in the bank that allow you to weather potential problems with the product itself, with sales, or with the market. Retailers want you to be their partner when the going is rough (but not so much when they’re making money!).
Once you pass all these gates, the door opens and you are invited to become a vendor.
Even though selling to a retailer takes a lot of effort, you’re principally dealing with a single buyer, and only occasionally with their hierarchy. That one buyer/customer alone will make you more money than an entire country in fragmented markets. So it can be worth the trouble.
FOB vs Domestic
A retailer will want to buy a first order on FOB basis and receive replenishments on a domestic basis. What does this mean?
Selling on FOB means completing the sale at the port of shipping, typically close to the factory. Domestic sales means that you ship and warehouse the merchandise in your market, and ship to retailers small batches to replenish their stock as sales deplete them.
It should be your obsession to never ship domestic - always sell on FOB. The advantage is that you hold the inventory for much less time, and you start the clock on your customers’ payment terms much sooner.
What’s the advantage of domestic sales? It’s to maximize sales. When you sell FOB, the retailer has to buy the complete inventory before the selling season really starts, so the volume of purchase reflects their most conservative sales estimates.
As the selling season progresses and your product (hopefully) flies off the shelves, the retailers’ stock runs out and they turn to you to replenish it. However, without domestic stock you don’t have the time to run a new production batch and ship it, so you leave money on the table.
Despite the lower sales, you win by reducing your inventory risk. You should therefore avoid domestic shipments all-together, or keep them at the minimum needed to service your website sales.
The World Follows the US Market
There is an unwritten rule in retail - the US sets the trends for the rest of the world. If a product works in the US, you will see it spread to other markets like wildfire.
The flip side is that if you botch the US launch you will struggle everywhere else… not to add pressure!
Managing the product’s life on the shelf and the retailers themselves is the purview of sales, so we’ll turn our attention to that next.
Next Up: Sales - Direct to Retail