When I talk to young CPG companies and ask how their retail distribution developed, most entrepreneurs tell me it has been fairly reactive: a random call from Whole Foods; the Safeway buyer saw us at a trade show, etc. Distribution is the lifeblood of any CPG company—you need to get products in front of the consumer to build a brand. Yet distribution can be incredibly tricky and expensive to build. So how should you go about building retail distribution? Here are three suggestions:
1. Just say no…to slotting.
I hate slotting. Big grocery retailers will charge companies well into the five or six figures to get their SKUs on the shelf in many categories. And what do you get for your $100,000 investment? Generally, you get shelf space for one year, after which you could be kicked to the curb. Whichever form slotting takes (e.g. cash up front, free product, deduct from A/R), it sucks precious cash from a young CPG company when that cash is needed most. If you’re launching a product that is completely unproven at retail, a $100,000 slotting risk can sink your company.
My advice? Focus on customers that don’t charge slotting, especially with a new product. Walmart, Whole Foods and Costco, to name a few, often don’t charge any slotting fees. What's more, Costco and Whole Foods both make regional buying decisions, so you can see how your cookies sell in Costco Bay Area without paying any slotting, then if consumer take away is strong, you feel a lot more confident about your slotting investment elsewhere.
2. Take the road less traveled.
Most chips in the grocery store are sold in the salty snack/chip aisle, an aisle dominated by Frito-Lay. Frito has ~60 percent share of the potato chip category in tracked channels and uses direct-store delivery (DSD) to get its products to market. DSD encompasses a huge fixed asset base of delivery trucks, warehouses and IT infrastructure, all of which allow Frito employees to actually stock the shelves of your local supermarket on their own.
Enter Stacy’s Pita Chips. Stacy’s recognized early on that it was extremely difficult for a small company to compete head-on with Frito-Lay in the chip aisle, so they sold their chips into the deli section of grocery stores instead. What happened? Stacy’s grew from $1.3 million (a size that’s great for CircleUp) to $60 million in sales in five years and sold to Frito for a price rumored to be in the nine figures.
3. Breaking up is hard to do.
Once a company establishes its distribution strategy, it’s really hard to change it. For example, say you are a premium pet food company with scant independent pet store distribution, and one day Walmart calls you because the buyer saw your product and wants you in 400 stores.
You may be excited about the much needed cash; however, when you want to go into PetSmart the following year, you can bet they are going to say no way because you are in Walmart. So make sure the retailers you partner with reflect the values of your company and where you want your consumer base to be—not where it might be today.