· Additional level of product margin. Distributors work on a margin that generally runs in the 28%-34% range. As such, the retail shelf price will be higher when compared to that selling directly to a retailer.
· Increased fees and costs for executing promotional programs. Distributors now typically assess fees for most services; setting up products, setting up a promotion, processing a price change, processing retail deductions, etc.
· Partial pass through of off invoice (OI) promotions. Many distributors still take a full dollar value markup on products when an OI deal is offered. For example, if the distributor takes a 28% margin equal to $3.00 on a product, the $3.00 margin will still be taken during an OI promotion when the distributor cost has decreased. In essence, distributors may earn a higher margin during OI promotions thus reducing the impact of the promotion on the retail shelf price
· Once retail distribution is gained after being accepted into a distributor’s warehouse, a distributor may not take kindly to a brand moving to direct distribution to a retailer serviced by that distributor. Depending on the size and leverage of the brand, there may be subtle threats and a reluctance to push the brand once it begins moving to a direct basis.
Despite the disadvantages above, there are a number of advantages to a brand, especially a relatively new/small brand by going to a market using the distributor channel. These advantages include:
· Eased access to retail chain buyers. Account executives at distributors generally have a very good relationship with the category buyers at the retailers on which they call. This may provide more opportunities to present the brand’s products to retail buyers.
· Increased store services. If the distributor serves the retailer on a full service basis, they will provide in-store reps who will help cut-in new distribution, ensure tags are generated, place product orders, stock shelves and help set up in-store promotions. Good distributor reps can help sales grow by preventing out of stock situations, loss of shelf space and building display.
· Distributors with their economies of scale with delivery can get product to retail stores and on the shelves more economically than a manufacturer can.
· Shipping to distributors will involve larger quantities than if you shipped to the individual retailers serviced by the distributor, even if you shipped directly to the retailer’s warehouse and especially if you shipped DSD (direct store delivery). Larger shipping quantities reduce freight per case and the amount of freight attributed to the cost of your product.
Use of distributor’s can translate to faster growth. Specialty distributors have their own shelf space allocation in each category that they supply. It’s generally easier to become a “favored” brand and included in the distributor’s portfolio when presenting to a retailer than seeking distribution in the retailer’s main set.