Episode 94 – Getting Real About Distribution – w/Gregory Esslinger – Part Two

May 15, 2023

Dr. James Richardson:

Welcome to Episode 94, part two of my interview with Dr. James Richardson. Seriously, the tendency has gotten more granted to third-party distribution as the launch point. When I look at case studies, it’s not how people started. A lot of successful-

Greg  Esslinger:

Yeah, people are skipping the smaller distributors, right? There’s big distributors, small distributors. There’s all these regionals.

Dr. James Richardson:

Why?

Greg  Esslinger:

And they’re just skipping that step. Sometimes it makes sense, but if you want to go deep into one marketplace, I mean, and you’re not going after a national account, then I would definitely say stay with a small distributor, stay with-

Dr. James Richardson:

Like DPI or Chex Finer Foods or something.

Greg  Esslinger:

Yeah, go deep. Go deep with a distributor that actually helps create a good symbiotic relationship, that helps you with sales, and is a real partner.

Dr. James Richardson:

Well, they’re more likely to give a shit about you, right?

Greg  Esslinger:

Yeah, absolutely.

Dr. James Richardson:

Your potential for upside for them is more in the near term.

Greg  Esslinger:

These are the small fish in the big pond. I mean, if you’re doing 100,000, 500,000 in sales with a UNFI, and they’re $20 billion business, do they really care about you? I mean, sure they’re doing the best they can. There are supply managers to try to help you, make you feel that way, but you’re pretty much nothing to their bottom line. If you go to a Chex or a DPI, then you’re a much bigger piece of the pie.

Dr. James Richardson:

Yeah, no question. Totally agree. But it’s the one I think you focus on in your work the most, and so it’s the one that I think causes the most sunken stomachs and panic attacks, and that is the chargebacks. So let’s start with the first time you encountered this, and that’s usually that first invoice, which you think is going to be a lot similar to the purchase order amount. And you find is actually 80% less than that.

People still get hit by this. Now, yes, the barriers of entry to UNFI and KeHE clearly are low, but I’m assuming that they don’t warn new people in the onboarding process this is possible, or people aren’t listening. What literally is going on? I don’t understand why this… because people have talked about this.

Greg  Esslinger:

Yeah. I mean, yeah, it gets talked about. I mean, when I was a supplier manager, I let all my brands know like, “Go back, read your contract, understand it. If you have questions, come back to me. Let’s talk about it.”

Dr. James Richardson:

And then they don’t want to. They don’t want to read.

Greg  Esslinger:

They don’t want to read it. That’s like they want to stick their head in the sand, is what I feel like, at least. The option’s there to ask the question, to understand it. You don’t need to rush into everything and think that the opportunity is going to go away if you take a few days to really digest it. Hire an expert to help you understand that contract, but it’s not as bad if you know what you’re getting into, right? Even if you can’t change the contract, even if you can’t negotiate on it, you got to know what the costs are going to be so that you can plan accordingly, and you can price accordingly, and-

Dr. James Richardson:

Have you seen charismatic folks without a lot of experience, industry background, negotiate-

Greg  Esslinger:

They try.

Dr. James Richardson:

… changes to a contract?

Greg  Esslinger:

They try. I mean, with KeHE and UNFI, they’re just too big to make too many changes. There are a few spots that the category managers and supplier managers can negotiate on. So there are a few different spots, but for the most part, they hold pretty firm. Like I said before, if you got the proper leverage, if you got Whole Foods and you can sit around for a while, and… because they also use the tactic of, “Okay, we just won’t respond to you for a while and see if you give in.”

Dr. James Richardson:

I tried that with my business.

Greg  Esslinger:

Oh, I did that. I used to do that all the time.

Dr. James Richardson:

Oh, wow. Yeah.

Greg  Esslinger:

I mean, yeah, I was on the other side, unexpected deductions, unexpected chargebacks. If you price right, you’ve got it built into your COGs, basically, you can still be profitable. It’s just you got to build it all in. If you don’t have the right expertise looking at that and helping you with your pricing in the beginning, then it’s going to be hard to plan for it.

Dr. James Richardson:

So just for the sake of the truly new folks listening, let’s talk about some time windows because I don’t think this gets talked about enough. We still have lots of folks who are coming into the industry as innovators, and artisans, and essentially creatives. They don’t have an accounting department at all, right? So if you can count on the fact that your first KeHE, UNFI invoice is probably going to be 50% or less of what the PO was, then you can just go in with a pessimistic assumption. Now, that’s a 90 to 120-day reality before you get to that, so you-

Greg  Esslinger:

Yeah. Before you get the first check, yeah.

Dr. James Richardson:

Aren’t we talking about 180 to 240 days before you actually get material revenue? Am I thinking about this-

Greg  Esslinger:

Oh. Oh, yeah. Material, yeah. I mean, you got to think about most of these… You sell into Whole Foods, guess what? You’re giving a free fill. You’re not getting away from that. Yeah, you’re getting charged back at the published wholesale price, not at your cost to Whole Foods. So that’s another big one. It says it all over the contract, and I don’t know how many brands just don’t understand it, or they don’t expect it. But, yeah, it’s going to be 35% higher than what they’re paying.

So you’ve got to just understand these things, and, yeah, you’re right. They’ve got the new vendor hold for how long until you get paid. They want you to prove the product’s going to continually move so they’re not going to cut a check until that. At that point, those free fills will move through the system and get charged against your positive balance. Then you’ve got a negative balance, so then you’ve got to continue to fulfill orders before you get a positive. It’s true.

Dr. James Richardson:

So we’re talking like six months or more before you should expect… Is that what we’re talking about? Because no one really-

Greg  Esslinger:

Yeah. I mean, assuming that you’ve offered a big free fill to a big retailer, I mean, at minimum because you’ve got to wait for the velocities to start to move at the store level. That’s going to take a little bit of time. And once it does start to move and you get those reorders, you’re not going to see any real money until-

Dr. James Richardson:

So the reorder is really when they start to-

Greg  Esslinger:

Yeah, I would assume-

Dr. James Richardson:

… get closer to writing you a check?

Greg  Esslinger:

Yeah, yeah. I would assume your first order, unless this is some exclusive or private-label deal, and I see nothing like that going on, and this is just branded product with free fill written all over it, then you are not getting paid on your first check for probably six months.

Dr. James Richardson:

Yeah, I think the accounting outfall of that, listeners, is basically you need to have six to nine months of fixed operating costs in your seed money, and this is well over 100K. I don’t care how lean you are.

Greg  Esslinger:

Yeah. No, I agree.

Dr. James Richardson:

It could be a lot more than that, to be honest with you, but I don’t see how it’s any less than 100K unless you really are a laptop founder who’s homeless, has no apartment. It’s like I don’t know how lean you can get, man. You need an internet connection. Yeah, I mean, I think people don’t talk enough about how this needs to factor into your seed raise planning before you even do anything. What we’re talking about is literally laptop math you could do before you even commit to share.

Greg  Esslinger:

Yeah. I mean, hey, you’re going to be doing free fills, so keep the cost of your case down. Let’s do a six-pack, not a 12-pack. I don’t know how many brands come in with the thought process of doing a 12-pack, because, “Hey, we’re selling more product.” Well, no, it’s not that simple. If you cut that in half, your cost on those free fills is cut in half as well.

Dr. James Richardson:

Yeah, those are are people-

Greg  Esslinger:

I mean, it comes to-

Dr. James Richardson:

They’re the ones misapplying my price pack architecture to phase one, which is not what I intended. Yeah, you probably don’t want to come out with seven pack sizes out of the gate, but most people find out that they can’t do that because they can’t afford all the packaging runs. But, yeah, I could see that happening.

Do you catch wind, just obviously anonymously, in your client base of angel-funded brands starting off in phase one and two who are displaying the same kind of crazy, financially irresponsible behavior that essentially we’re alluding to that we know the venture capital community historically has pushed people to do? Because they’re like, “Hey, I wrote you a check for 3 million.” They’ll tell you, “You have plenty of money.” They’ll go… Have you seen the same thing in the angel community? Because some of these brands are getting a million, 2 million from just rich dudes in LA.

Greg  Esslinger:

Yeah, it does happen. Yeah, they do do the same thing, at least in my experience.

Dr. James Richardson:

It’s-

Greg  Esslinger:

Every once in a while, they’ve got a good advisor forum that maybe their venture capitalist or their uncle or whoever happens to know. For the most part, they’re still just as green.

Dr. James Richardson:

All I can say is the folks that I know that I just see who make it out of the death funnel that they talk attribute intact… I mean, I’m not saying they’re stress-free. They’re miserable. Everybody is. And every small business has a death funnel. Mine did, my other business. So anyway, they’re all miserable in there, but the ones that seem to make it through fairly efficiently are the ones who plant enough seed because they did forward cash flow analysis of what was going to happen because they’d done their homework. I assume you can get ahold of essentially the UNFI contract language from somebody without paying a dime because-

Greg  Esslinger:

Yeah. No, that shouldn’t be hard.

Dr. James Richardson:

Yeah, if you’re scrappy enough, right? So do your homework, folks, and know all the math variables, and then say, “Hey, this first year is going to be sucking vapor, so what do we…” I’m just talking about this old scenario where you go straight in, assuming you’ve got a buy. This is all assuming that you did it right. You got someone to go demand that distributor want you, but I still think I don’t see enough of that cash flow planning at all. So I’m going to let you go because I need to respect your time. I took too much of it today.

Greg  Esslinger:

Oh, you’re good. We’re good.

Dr. James Richardson:

Thank you so much, Greg. Any parting words of wisdom?

Greg  Esslinger:

Words of wisdom. Just open your eyes before you jump in both feet.

Dr. James Richardson:

Needs to be said louder and louder all the time. Thank you, Greg. Have a great rest of your week. Keep helping founders, man.

Greg  Esslinger:

You too, man.

Dr. James Richardson:

All right. Take care.

Greg  Esslinger:

Keep doing the good work.