19 Sep

Why not sell your product direct to the grocery chain?

In my last blog we discussed the elusive sale at Retail, and why it is often very hard to finally get your product on the shelf when utilizing Specialty Food Distributors. While it’s still my opinion that using SFD’s is the best bet for entrepreneurial brands to find traction on the grocer’s shelf, there are alternatives to selling through SFD’s.  In fact most successful companies have, by default, deployed multiple channel strategies to sell their products.  Some customers and markets are sold direct to groceries, while other are supplied via, Specialty Distributors. Additionally, there is the growing trend of selling direct to consumers via Internet stores and websites.  

The most straight forward method to getting your product on the shelf is selling your product direct to grocery chains. Today, I want to discuss the benefits and obstacles to selling direct for small startups and their products.  To sell direct, you only need to meet with the grocery buyer for your category and sell them on the features and benefits of your products. If the buyer or buying committee green lights your product, then you will be on the shelf as rapidly as Plan O Grams can be changed, and Retail personnel can work the item onto the shelf. In future blogs I will delve further into the area of Retail, which is the term used to depict calling on each individual store.  Retail, as we say, is actually where everything happens!    

There are other benefits to selling direct than simply eliminating a number of touch points that must be sold. The biggest advantage is price point to the consumer.  If you sell direct, you have eliminated a middleman and your retail price on the shelf will drop by approximately 40%, depending on market and the item itself.  Working on a direct basis with the grocer also allows for easier execution of trade promotions, and overall better influence on you retail shelf price.  

Additionally, the emergence of the Local Food trend has made it easier for small startup companies to gain access to chain stores in their local area. Whole Foods has led the trend in having a local assortment of produce, cheese, meat, and local manufactured products like granola, and chips. The path to these opportunities is straight forward.  Go to the local market and speak to the store manager for information as to how you would go about getting your product into the store. More than likely he or she will direct you to the appropriate buyer at the area warehouse.  Each area warehouse supplies multiple stores, so if you can get into one or more of the warehouses your product will be authorized into multiple retail stores. But remember, local products don’t often get accepted chain wide until they have proven themselves outside of their home market. 

With the advantages in better pricing and control over promotions, as well as the ease of getting your product placed locally, why not always sell your product direct and avoid middlemen all together?  The answer is relatively simple. You probably can’t get your item into a majority of grocery chains direct because of costs, and movement.  And once you better understand risks you may decide selling direct may not be right for your product.  

You’ve probably heard or read that products compete fiercely for grocery shelf space. That has never been truer.  Most companies pay “slotting fees” to get onto the shelf.  The term “slotting” actually refers to the slot in the grocers warehouse (not the shelf) that your item will occupy should the grocer take your product direct.  

As with all economics, more of your product means less of some other product.  Since the grocery chain has a limited amount of slots in the warehouse, when a new one is needed something must go.  The grocer sets a price and has a source of revenue for what he charges manufactures to accept the new item.  If you want to get your product into all of the major chains in America, and you add up all of the sticker prices listed for each chain’s slotting fees, the cost is approximately $1.5 million dollars.  If you have three flavors of the item, then yes its $4.5 million!

Of course, anyone in the industry will tell you that is a highly negotiable number. But it’s important to recognize that you will be competing against huge companies that pay the sticker price all the time.  Grocers do like new companies, innovation, and often want to help the startup, but in a toss-up between similar products they will often go with the best slotting offer or one that is closest to their slotting fee list price. You have to recognize that the churn of new items in major grocery chains is a source of revenue that they budget for.  It’s not personal, it’s in the budget! 

Slotting fees are not the only obstacle in selling direct.  The grocery chain will have certain movement rates for its warehouse items. While these vary from category to category, they are much higher than items that are brought into the store from a Specialty Food Distributor.  Warehouse items often move a case or more per store per week, while a Specialty Food item will move one or two packages per store per week.  There is a huge risk if you pay the slotting fee and your product does not have enough consumer takeaway that it will be discontinued due to slow movement. As you might expect there is no slotting refunds if that happens! 

There is one final obstacle that I have touched on in previous posts.  Specialty Food Distributor’s appreciate loyalty.  If you sell a chain direct that is one of their customers, you are sending them a mixed message as to whether they are your true partner with them  in building your brand. 

While selling direct to grocery chains has the advantage of eliminating the middle man and reducing your price on the shelf, the obstacles around slotting, movement and loyalty make utilizing SFD’s potentially a better long term strategy in expanding your presence on the grocery shelves of America.  In my next post I will discuss the costs associated with using a Specialty Distributor and getting your pricing correct.  

For now, keep working,…to the grocery shelf!