Managing Distributors: Watchouts + Tips

By Chris Kajander

Chris Kajander has been working in CPG for nearly a decade. He is the cofounder and CEO of Candid and a founding member of Broadleaf Digital. He is passionate about sustainable sourcing, sustainable packaging, and food justice

Working with a distributor can be confusing and sometimes frustrating. But good distribution can lead to new doors, new consumers, and increased revenue. While there’s not necessarily a “key” to working with distributors, knowing a few of the “watch-outs” and building good relationships with distributor reps and category managers can lead to fruitful business.

BROADLINE DISTRIBUTION

If you have ambitions of working with Whole Foods and other big natural retailers, you’ll likely need to work with UNFI and KeHE – two of the top natural and organic food distributors in the country. Both UNFI and KeHE are known to present a unique “chicken or egg” scenario; while you need to work with them to get into many online and in-person retailers, you often need to be in a few initial doors for them to consider distributing their product. UNFI’s UpNext program and KeHE’s elevate program are workarounds for emerging brands facing this dilemma. These programs are designed to ease upand-coming brands into the system with hands-on advising at a regional level.

But even after securing one of the big guys as a distribution partner, there are still risks worth watching out for as you navigate business. In this article, I break down some of the major watchouts.

The Risk of Bridge Buying Working with distributors can create lumpy sales patterns (high one month, low the next). You may have great sales in March when you’re offering a promotional discount, but then don’t get a reorder until June. Some sales lumpiness is unavoidable, but this is a common result of how promotional planning can be both a blessing or a curse depending on how the promotion is executed.

Bridge buying, which is when a distributor uses one of your promotional periods to over-buy your products at a discount, is one of the potential risks of OIs1. There are a few things you can do to mitigate this risk:

1 A high off-invoice discount (usually over 15%) can trigger a bridge buy. Keep your OIs between 10-15%.

2 Stack your promotional planning and leverage it with distributors and retailers so your discount really moves the sales needle. Say you’re offering a 15% OI to the distributor. They will (hopefully) pass some of that discount down to retailers to buy your product – but a 15% discount may not be enough for the retailers to pass on a deal to their customers. So, while you’ve incentivized the distributor and retailer to buy your product, there isn’t anything in place for the end consumer. This is where you might line up an MCB2 or a scan-back to move the needle with both retailers and consumers.

3 If you’re lining up an MCB with retailers to coincide with your OI, try to leverage that big promotional push to get a secondary or tertiary display in-store, promotional signage, or get moved to a better (more visible) spot on-shelf. The point of a promotion is movement at every level: the distributor buys more product, retailers buy more product or try your product for the first time, and consumers take a chance on your discounted item. It takes a coordinated effort to pass a discount down through the food chain. The key is to communicate with all partners and make sure it’s executed properly at each point: from retail buyers knowing the deal is coming, to having proper signage on shelf letting customers know your product is on sale. That will hopefully prevent distributors and retailers from having a surplus of product that takes a while to sell-through, leaving you without new POs for many moons.

4 With many distributors, you can push back and revise POs if you’re concerned with the amount they’re ordering. This can be a way to avoid bridge buys.

Avoiding Free-Fills Because MCBs are between a retailer and a distributor, you as a brand are not involved. You may be “encouraged” to offer up free-fills3 to open up accounts. If you can, avoid free-fills. Unfortunately, they’re not always avoidable, especially if a larger chain demands them. Just be aware that you will be charged back the “listing price” to retailers for your product, not your wholesale price to distributors. So know your list price, and don’t authorize blanket freefills.

Managing Case Size Velocity will be measured at the store level by units sold, but distributors (and retailers) will often measure success by cases sold. If your master case has twelve retail case packs in it, and your retail case packs each have 24 units, then it may take a longer time to get a reorder than if each master case had two retail cases and each retail case had twelve units. If possible, it’s better to have a smaller master-case pack size and/or retail case pack size. It helps with both velocity and perceived velocity.

DSD (DIRECT STORE DELIVERED) DISTRIBUTION

DSDs are local or regional distributors that service smaller accounts and sometimes larger chains as well. There is a lot of variance in DSDs, who they service, how they work, and what kind of margins they take. Offering Incentive to Move Product It’s been my experience that managing through the distribution reps and offering good incentives (usually a SPIF4) can help move product. DSD reps often have 100+ brands they’re working with, so you’ll need to communicate effectively and make it worth their while to sell you in and keep the reorders coming.

Beware DSD Contracts Pay attention to what you sign. A lot of times a DSD will try to lock in the exclusive rights to distribute your brand and charge you a large fee to break that contract. It’s important to make sure they’re the right fit, and if you have other distribution already in place, carve that out and make sure they can’t claim it (unless you want to hand that business over).

CONCLUSION

Supplying to a distributor comes with opportunities, but many risks. Knowing what to watch out for and how to best make use of your partnership can make or break your distribution strategy. I hope this article will help you navigate challenges as you expand your distribution footprint.