Ep. 40 – Stakeholders – Distributors 

FEB. 15, 2021

So. In the world of third-party distributors, you generally won’t meet one who has rejected a product line because they think it won’t scale. Getting onboarded with distributors is not really about proof-of-potential. Trust me. Any more than a trade show vets brands with ‘potential’ before selling them a booth. Nope. Not happening.

Distributors are a lot like small co-mans: they need small businesses to top off their trucks’ volume and maximize return on freight mileage. You are a way to fill in gaps when they occur.

Yes, distributors are slow, bureaucratic, even annoying at times. But, they take all comers able to play by their many rules. They just want to avoid disorganized flakes. And trust me, distributors meet more than their fair share of incompetent suppliers and entrepreneurs. Oh, they have stories to tell. Yes, they are jaded. I, too, would create many hoops to weed out the hobbyists.

If distributors show any hesitancy, it’s because you’ve signaled to them that you don’t seem to have any basic organizational skills. That you’re not an operator. That you’re one of those dreamer types. Remember teamsters. Truck drivers. Jimmy Hoffa. I’ll stop there.

If you want to screw up your relationship with what is essentially a Teamster organization, then make sure your first impression is the most flaky, disorganized liberals arts graduate performance possible. They react well to that.

Distributors aren’t very discriminating. Got it.

Here’s why they aren’t very discriminating and why it should concern you…a lot.

Distributors monetize two things: 1) moving case volume out of their warehouses AND 2) manipulating chargeback amounts upfront and ex post facto at 100% gross margins for themselves.

The first is their primary stated business model. It has a frighteningly low net operating margin. Much worse than any mature CPG brand has.

The second is honestly an embarrassment of shocking under-regulation I hope gets solved soon, but I’m not holding my breath.

Moving case volume for a mark-up % with low net operating margin is an annoying business model predicated on one primary thing: keeping all trucks moving as much as possible and completely full. The recent pandemic solved the latter problem with the surge in unit sales of CPG products.

It’s the latter threat to their profits in non-pandemic environments that created the shady, often unethical business of exaggerated or outright fraudulent chargebacks.

If you ever want a warrior to help you scrutinize chargebacks from UNFI, KEHE, or anyone else, contact Greg Esslinger at Deduction Resolution Services or Adesso Solutions. Nothing gets by these guys.

The maze of OIs, deductions, on-promo discounts for Retailer B but not Retailer A, etc., quickly gets unwieldy once you get to seven figures, especially if you’ve done it with natural, specialty, and conventional supermarkets as your primary channels.

The most scary form of BS chargeback is paying on-promo unit discounts for units scheduled for promo at a retailer but which actually hit the shelf post-promo. These are supposed to be pass-through discounts for truly promoted units at the retailer; all distributors seem to think they can make a spreadsheet assumption to their financial advantage.

Again, more regulation is needed to protect small businesses from this kind of nonsense. It’s one reason you’ll meet many many founders who, having gotten burned badly once, ONLY sell online or to direct-ship retailers like Target, Walmart, Costco, etc.

The endemic corruption aside, distributors are beasts you have to work with to access some of America’s most high-value national chains. You’d be crazy to take a blanket attitude of no 3P distributors for me.

The key is to manage them like you manage your brokers. I’ll give you one area of management that seems to elude many newbs in the retail CPG sector.

Managing your distributor sales rep.

It’s amazing to me how many founders never even set up an initial call with these folks after onboarding. Huh? You can’t influence people you don’t talk to. I mean, talk to with your mouth, not e-mail or text…please…

It’s painful to me how many founders do not understand that, without warning, an un-managed distributor rep can and will spray your inventory to any and all independent retailers in the warehouses you are in. These are the thousands of retailers and small local chains (think Red Apple markets in Seattle) for whom the distributor is the category manager, the one designing the shelf set.

You need to convince your distributor rep that you have pre-committed most of your inventory to the retail chains of your strategic choosing so that this doesn’t happen early. And, it is when it happens early on, the founders run into near-fatal supply chain problems. Why? You’re too small to speed dial your co-manufacturer and get an additional run stat when your performance exceeds expectations at high value retailer B because your distributor rep released your inventory into dozens of local/regional independents when you weren’t looking.

Just say no to UNFI/KEHE catalogue-driven auto-sales. And to silly catalogue ads that encourage it. I’d personally would rather write a $5,000 check for nothing to UNFI in order to prevent a catalogue ad than cave to this ask upfront just to get onboarded with them.

If I keep going, I may burst an aneurysm on your behalf, so I’m going to sign off and remind you…

…please…

….please be safe out there in CPG land.