There is a nearly infinite number of potential retailers and other sales channels you can leverage to put your products in front of consumers. The options can be daunting and the strategies used to make each sales channel successful can be complex.
So, why not sell products to a single distributor who can service the relationship with each retailer? You make one sale to the distributor. The distributor then makes many sales to each retail chain. It sounds wonderful, and sometimes it is. But, sometimes it is not.
Continuing our four-part series on retail readiness, we will explore the basics of when and why (not) you should use a distributor.
- When should you use a distributor to service a retailer relationship?
- When should you avoid a distributor altogether?
In light of the shutdown of one of the largest distributors in the US, careful planning is more important than ever.
Be sure to check out Part 1 (How much inventory should I commit to a particular retailer?) and Part 2 (What does the retailer setup process entail?) of this series if you missed them.
When should you use a distributor to service a retail partner?
Rarely does the situation arise in which you are absolutely obligated to use a distributor. The decision to give away 7% to over 10% of your gross margin should not be taken lightly. Take a critical approach to this decision and thoroughly review the pros and cons.
Over nearly three decades of history, Rush Order’s clients are most often successful with distributors that add REAL value. In other words, successful distributor relationships are usually the result of working toward very specific goals that would truly be difficult to achieve without the distributor’s help. Here are a few examples where we see distributors add value.
Transforming your packaging and demand generation into the local language and norms can be difficult. For example, perhaps India is one of your target markets. Selling products in India may require a very different strategy than any other region you sell in. Do you need to transform your packaging and marketing into just one language? Or possibly many languages in India?
Localization of your products and marketing efforts to resonate with local consumers may go a long way to generating sales in certain markets. There are distributors in these unique markets that can help.
Some distributors can help with international business compliance. There are well worn paths into most western markets like North America, The UK & Western Europe, Australia and others. However, the above example of selling product in to India carries lots of complexities with both taxation and supply chain management. Physically moving products across the country in a tax efficient manner is not easy. A distributor may be able to help because of their existing footprint and expertise in the country.
Unique or small specialty retailers
Some retailers are genuinely hard to reach. This may include individual “mom & pop stores”, or perhaps smaller regional chains.
If these retailers are accustomed to ordering from certain category-specific distributors, you may be wise to have your products listed in those distributors line cards.
A good example would be selling robotic toys in to small hobby shops. Even as a startup, you don’t need a distributor to get in to Best Buy or Toys R Us, but you may need help reaching hundreds of independent hobby stores. Perhaps there is a distributor with a sales team that can reach all these small stores. Other examples of specific markets that may be well served by distributors include government, certain non-profits, schools, universities and probably lots of others.
Sales rep groups or agencies may be an alternative to distributors in this situation as well, but that is a topic we will cover another time.
This is the weakest of the pro-distributor arguments, but it is a point worth discussing. There are times when distributors may offer payment terms that are more attractive than the retailers who will eventually stock your products. In other words, the distributor would pay you faster than a retailer would.
Forfeiting large chunks of profit margin to improve short term cash flow is a scary proposition. Improving cash flow is helpful, but it is not a strong standalone reason to use a distributor.
On a related topic, we do hear arguments about using distributors to manage credit risk. For example, you could argue that you are more likely to be paid by a distributor than a retailer like Sears or Kmart. However, as the Wynit shutdown showed this is not a foolproof plan and there are other ways to mitigate this risk.
When should you avoid a distributor altogether?
The short answer is that distributors should be avoided “most of the time”. That sounds harsh, but the real point is that distributors should only be used when they add tangible value to your sales, marketing and logistics efforts.
It is almost a certainty that using your own 3PL or inhouse warehouse for fulfillment and logistics will be substantially cheaper than the 7% or more a distributor will charge. It is true that a 3PL like Rush Order will not directly help you market or sell your products (we do make intros to resources that can sell products though). However, for most retailers, we repeatedly discover that large US and European distributors do not help generate sales either. So, why should you give away additional margin when you do not have to?
Our clients almost always speak with retail buyers themselves (usually via their CEO or VP of Sales). No large distributor is going to do a better job of explaining and selling your products than you and/or your VP of Sales. This is especially true when it comes to major retailers like Amazon, Best Buy, Walmart, Target, etc. If a distributor’s only pitch is that you cannot get into stores without their help, you should run the other direction. This may have been true in the era when distributors sold PCs to CompUSA, but it is no longer true in the 21st century.
Keep in mind that retailers are in desperate competition with each other. They are always looking for the next interesting product to draw people into their brick & mortar and online stores. If you can demonstrate that you hired competent experts to setup the EDI and routing infrastructure mentioned in installment 2 of this series, retailers will buy your products.
Of course, they also have to fall in love with your product, pricing and demand generation strategy in the first place (see installments 1 and 2). Making and marketing a great product is the hard part. Do not add to your woes by giving away another 7% or 10% of your margin to a distributor for little or no value-add.
Join us next month for the final installment of this four-part series. We will discuss how you can cope with retailer compliance chargebacks and incorrect credits for returns.