PODCASTS / E35
DEC. 1, 2020
Welcome to episode 35, Understanding Stakeholder Classes: The Buyer. This is the second in my series on stakeholders. For consumer brands sold in traditional retail, still the vast majority of all consumer packaged goods sales, the buyer, quote unquote, is perhaps the ultimate gatekeeper class you deal with. Why? Well, they gate keep access to the playing field, more or less. And in consumer packaged goods, you might be able to get to initial scale online. Yes, it’s happened many times, and more and more recently. In fact, I encourage it. However, sooner or later, you’re going to need to sell to where the vast majority of consumer brand buying traffic still occurs, even for innovative premium brands.
And that is brick and mortar retail. So this means you’re going to have to sell into a merchandising organization, which functions very differently than Jeff’s dudes in back of the curtain at seller central. That merchandising organization carefully manages its physical shelf space to maximize profit for the chain itself. This generally means catering to large legacy brands, primarily because they sell enormous volumes. And this is despite the fact that their penny mark-up per unit may actually be lower than yours and lower than most premium brands.
So many founders, early on, they get sucked into what I would call a distributor first mentality, all hail the distributor. And that is because it’s often the only way into many of the retailers that you have available to you in your local area, and primarily the independents that obviously use distributors exclusively to get their product, because they’re too small. So in order to get into independents, or many different chains, sorry, you’ve got to have inventory inside that distributor’s local warehouse first, or at least have proof of onboarding at such a warehouse.
And the way that distributors treat small brands is, well, shall we say beyond notorious in its indifference, if not outright fee exploitation at times. But buyers, see, buyers are very, very different stakeholders than distributors, and not for the obvious reasons that you’re thinking. And the most important reason that they’re different, that I want to discuss today on this episode, is that you can actually make them material amounts of cash very quickly if you’re growing exponentially. And that’s because their markup is significantly higher in penny gross profit than that of any distributor. It’s based on where in the price waterfall they locate their markup. How convenient for them.
For example, if you have grown your company to a million dollars in company book sales through distributors, then you’ve probably added … If you’ve grown to a million dollars in company sales to a specific chain retailer, and let’s say it’s through a distributor, you’ve actually added anywhere from three quarters of a million to one million dollars of gross unit profits to that retailer’s balance sheet and to that buyer’s desk, in many, many cases. So this is literally three times more per unit in money than you’ll be grossing off of the same inventory at the price you’re selling it into the distributor, as you painfully know.
But since the distributor’s markup is off a lower unit price than the retailer’s markup, it will take you longer to produce the equivalent profit for the distributor. In other words, the retailer is going to make money faster, because of where they sit in the value chain, than the distributor is. On a million dollars of sales to that retailer through, say, UNFI, they’re going to earn maybe 400 grand max in gross profit. So you would need to be two to three times larger than that million dollars to generate as much as you are for that end retailer off that million dollars in case volume you’re selling. Look, even if you’re growing along the skate ramp exponentially, this is a difference of years between when the distributor’s seeing seven figures and when the retailer is. So they’re going to see it multiple years in advance at your big retail accounts.
And this is one reason why startups don’t get taken very seriously by distributors, except as a source of fee income. It’s also why they’re charged [inaudible 00:05:12] discounts and all sorts of punitive stuff, any kind of MCB to pad the lower gross profit dollars that startups generate for distributors. They’re basically a giant pain in the ass, except that their aggregate fee income is yum yum in the tum tum.
It’s also why they try to get you to pay. I love this. You, the completely broke startup, they get you to pay to promote your own brand inside their system, because A, they need the fee income, because they’re not making enough money off of you, and B, they certainly have no reason to bust their butt to promote you, because you’re just one of those folks who’s probably going to be out of their system in 18 months. Until those major chain buyers come calling, then suddenly whoop de do, they sure do change their tune fast.
So buyers can make material amounts of cash in specific metros off of the fast-growing premium price start-up. And they recognize this themselves, which has always been the inherent subconscious attraction to premium brands that, you know, from the perspective of the traditional grocery operator’s business model, are completely worthless suppliers to them. Like, there’s no reason to spend an iota of time on them, except that if they could just grow, they bring in money at such a faster rate per unit. And that is exciting, because it doesn’t cost any more money to merchandise them than it does Lay’s or Oreo, if they even handled it, which they don’t, but that’s a separate issue.
So the only reason that people like Lay’s get treated so much better, aside from the DST guys who handle all the shelving for the retailers, that they just sell such a massive amount of volume, it makes up for their crappy unit profits, in terms of pennies. So remember that buyers are the stakeholders most likely to make material money quickly from your growth, if it becomes exponential, and so you need to put them at the top of your list of folks to flatter and serve, but you also need to see them as partners, and you have to respect the desk, as they say. Their job is to manage profits for a category or a set of merchandising categories in stores.
I’m not the only one talking about this, but they are looking for new sources of category growth to get their whole pie that they manage to grow, or they’re looking to boost the profit margin in their category pie, or they’re looking to bring traffic into the store away from local competition because of their category mix, which brings you into the equation, right? You would be shocked to see the amount of PowerPoint slides devoted at Walmart corporate HQ to taking money from Target. It would astound you. I have seen some PowerPoint decks. Oh my word. You would think that Walmart has been on the cusp of a tsunami of upper middle class mommy dollars for the last 15 freaking years. Yeah, I’m still waiting, but whatever.
You need to understand how to position your innovation, not only as cool, premium priced, and growing, but also as a strategically valuable addition to that customer’s, that buyer’s set, in context of their never-ending battle to grow their banner’s local share of wallet. Now, not all buyers are really savvy about the whole local shared wallet thing. That tends to be an executive retail mentality, but the smarter ones are, and they certainly will respond to that argument, if you could make it with data. The process of selling into buyers, it might involve working with, say, one supermarket chain exclusively in key markets, until enough jealousy has been induced through data streams they all access that the buyer of the jealous chain calls you in a [inaudible 00:09:07] and boom, starts wanting to bring you in.
And that’s a great position to be in, because now you’re a hot item. You’re the next keto fabulous [inaudible 00:09:17] brand. But don’t hold your breath, because it doesn’t happen that fast, and it doesn’t happen with all fast-growing brands. I mean, it’s generally the unicorns that reliably cause an onboarding frenzy like I described, but it does happen with other businesses. The thing that I’ve noticed is that skate ramp brands, even though they’re doubling in size every year off a small base, they sadly don’t, in my experience, generate the feeding frenzy quite as easily. And part of that is the fact that buyers are a strange crowd. They’re attuned to looking for incremental spikes in their category pie, and it’s all incrementalism. That’s basically how buyers think. What item can I add that’ll get a little lift in my pie, make it a little bigger? What TPR programs will cause my pie to grow? Yada, yada, yada.
I mean, this is basically how they’re trained to think. Everything’s tweaking incrementally. They’re not actually trained to identify skate ramp brands with the potential to become huge profit producers in their category or on their desk. I found that buyers easily glom onto unicorns because the velocities are insane. It’s so extreme that it just gets their attention out of the incremental tweaking. But when they’re not seeing that unicorn behavior in terms of velocities, they can’t find that middle ground that the skate ramp represents. They’re back to, “Oh my God, what are you bringing? What kind of incremental business are you bringing in my category? Prove it to me, because I don’t see it.” And they get into this really conservative incrementalist view.
I have a small following of buyers, folks, from Kroger, Target, Walmart and others, who I’m desperately trying to influence with this exponential model, so they’ll start understanding the math that’s inside their own data feeds that can predictively assign a higher status to a brand like yours, if it’s growing on the ramp. And I could tell you, buyers do not think a couple of years down the road. I’ve never met a single one that does. I wouldn’t say they’re as bad as the IPO public crowd, who can only think quarter to quarter, my old client base. No, but definitely they’re focused on this year or next year. They’re not sitting there thinking, how can I merchandise this for the next five years.
Now, merchandising executives at major chains do have those conversations and they do have those meetings, and that thinking is occurring, but it’s not always filtering down to every single buyer. And honestly, buyers can easily resist some of the upward politics of their organizations. God forbid, buyers who don’t behave. Oh my.
That’s all I have this time. And remember, be safe out there.