February 18, 2013
Regardless of where you are in your business life cycle right now, you need to understand the various classes of trade, the ways that you can get your product to the end consumer, because each of these will affect how much money you make from each product. I’m going to go into more depth about the pricing and margins for each class of trade later this week but thought it made sense to start with an overview. Also, as you can tell, no expense was spared in creating the graphics to go along with this article.
Depending on what type of food business you have, many food entrepreneurs start by selling direct to consumers. This can be sales made from your food truck to the customer standing outside eagerly awaiting your culinary concoction, a product you sell at a farmers’ market, festival, or even from your own retail store, or even products sold online. In all cases you are selling directly to the end customer.
But what if you would like to – either now or down the road – sell to retailers? This, again, could be either online, mail order, or brick-and-morter retailers but all of these are third parties who are not affiliated with your company. Now we’ve added another class of trade, and as we’ll see later this week, another pricing layer you need to take into consideration.
All well and good but we’re not done yet. As a small food business you likely don’t have a dedicated sales team that can go out and call on all those retailers so you may start working with a broker to help you open new retail accounts. A broker is, essentially, an independent sales representative who has a number of different products and brands s/he reps. Typically, brokers don’t carry any inventory and they are paid a commission based on sales they make to the stores. And as such, there’s another layer of pricing you need to keep in mind.
Lastly, especially if you plan to work with supermarkets or chains, you will likely at some point need to work with distributors. Like brokers, distributors have a selection of products in their portfolio and they help get that product onto store shelves. Unlike brokers though, distributors take some of the inventory risk in that they will buy directly from you and hold the product in their warehouse. Of course, all of this comes with yet another price point…
So there we have it. The four main classes of trade – direct to consumer, wholesale (selling to retailers), via brokers, and via distributors – for food businesses. Like I said earlier, lots of articles this week because each day we’re going to break down one of those classes of trade and look at it a little more in-depth from the standpoint of margins, pricing, and profit.
Enjoy those graphics? As you can tell, Small Food Business has a big budget these days!