Distributors, and what they take

A distributor gets you into shops you cannot reach and takes a layer of margin beneath the one the retailer already takes.

What a distributor does

Buys from you, warehouses, sells to retailers, delivers, and handles the invoicing. For a small producer the real value is the sales relationships and the delivery network, not the storage.

Some are regional specialty food distributors; some are broadline. The specialty ones understand a small craft product and the broadline ones move volume at a price you may not survive.

The margin stack

The retailer takes roughly half of shelf. The distributor takes a further cut beneath that. So a shelf price that worked for direct wholesale does not automatically work here, and the arithmetic tightens again.

Work the numbers backwards from shelf price rather than forwards from cost. If the result is below your cost plus a real margin, the honest answer is that you are not ready for this channel rather than that you should absorb it.

When it makes sense

When you can make more than you can sell, and when the constraint on growth is reach rather than production. Going to a distributor while production is the bottleneck creates demand you cannot fill, which damages the relationship you just built.

It also makes sense when a retailer you want will only buy through their existing distributor, which is common with larger chains.

What to agree in advance

Territory and whether it is exclusive. Payment terms and who carries the risk on unsold stock. Minimum order and lead time. Who pays freight. What happens to product near its date.

And whether you can still sell direct in that territory, at markets or online. That clause is the one producers sign past and regret, because direct sales are usually where their margin actually is.

References