I work with a lot of food and beverage founders and next to the difficulty they face raising the needed capital, the most commonly shared frustration centers around their relationships with their broad-line distributors. Deductions, communication issues and the cost to serve are a real challenge for most brands.
I promise this is not going to be another article that lambasts the likes of UNFI or KeHE. They are simply victims of a flawed model that is no longer capable of effectively meeting the needs of today’s brands and retailers.
Why do I say the model is broken? There are many reasons. First, source dependent, since the start of this decade, somewhere between $18-22 billion of market share has transferred from the largest food companies to the emerging food brands. That transfer has had a major impact on distributors as more and more of their inventory is comprised of products from small companies from whom they only buy a little. This limits the ability to aggregate shipments and leverage buying power.
At the same time this market share transfer has taken place, there has been continued and significant consolidation of retailers. These larger entities have used their buying power to negotiate favorable terms from their primary distributor. Most operate under a cost-plus relationship. The challenge is that as those cost-plus percentages have been driven down by industry consolidation, the cost to serve for the distributor has continued to increase.
It is really difficult to serve a retailer with stores all over the country on a cost-plus 8 percent arrangement, and that is not an uncommon structure today. A distributor which has to shoulder the cost of inventory, large physical warehouses, trucks, drivers and more, just can’t deliver enough per stop to make it an attractive model. Add to that a tough regulatory and compliance environment and what you have is a pretty ugly picture.
Distributors have reacted to this reality. They have monetized other services, from freight backhauls to analytics, to creating promotional vehicles and events. Large food companies that have correspondingly large budgets can absorb these new costs, emerging brands can’t.
If the model doesn’t work for emerging brands and they are making up more and more of the total market, then the model must change. I believe it will and that there will be a disintermediation of distribution as it relates to emerging brands. Manufacturers will connect directly to the retailers they serve. Technological platforms will be constructed to facilitate this new transactional relationship. I am seeing attempts to do so already with the likes of Shelfmint and Pod Foods. Although neither has quite solved it yet, when they do or someone else does, it is going to change the way food and beverage companies go to market.
In the meantime, this broken model has opened the door to other channels. Emerging brands should be really asking the question if retail is right for them. Direct-to-consumer and alternative channels such as micro-markets, concessionaire and food service may all be better places to launch.
Today’s retail distribution model is not working. But, with the level of innovation pouring into this space, I am confident that one of those innovations will be a completely new route-to-market model. One that leverages technology and disintermediates the relationship between brand and retailer.
Elliot Begoun is the Founder of The Intertwine Group, a practice focused on helping emerging food and beverage brands grow and become scalable and investable.