Distribution Decisions for Food Manufacturers
Start-up businesses have an almost 50% failure rate after 2 years and 80% of the survivors never get past one employee (SBA). Even if you survive two years, the odds are against you for transitioning from a life-style business to a real business. One of the many critical decisions you will face is: “how to get your product to the customer (i.e., how to handle the last mile)?”
Several years ago, I came across some valuable advice:
- Own and understand your product
- Control your channel of distribution
- Be in direct touch with your end-user
(From THREE BLIND MICE: HOW THE TV NETWORKS LOST THEIR WAY by Ken Auletta)
The distribution decision is critical to your chances for success because the wrong one will slow you down and drain you financially. If you are planning to sell your product to Professional Chefs, I have list of options and outcomes, based on my experiences, both good and bad.
When you begin producing your artisan food product, you probably have only one channel of distribution available to you. It is your own store, a farmers market or word of mouth where people come to your location. The number of customers is limited and furthermore may be below your capacity or revenue is too low.
You will need a plan to get more customers and you will need to make a decision on how to deliver your product to the customer. When I started out, there were only two options: 1) deliver to the customer directly via your own vehicles or 2) work with distributors. Today there is a third option: 3) deliver via FedEx® or similar courier.
This approach limits you geographically, but allows you to build a knowledge base on how your customers feel about you and your product. The biggest advantage is the short feedback cycle along with the control over when, how and in what condition your products get to the end-user. This should be an essential first step, no matter which distribution channel you use as you expand geographically. Word of mouth and local trade shows should support an intensive owner driven process of establishing relationships with as many end-users as possible. Quick response to product performance issues and demand surges are critical.
If you are successful in your local market, you will have to decide on how you are going to proceed outside your local market.
Delivery by Distributors
When I had to make that decision with my first company, there were literally hundreds of distributors across the United States looking for specialty products that could enhance their reputation and increase sales to their customer base. I wanted to establish national distribution via a network of independent specialty distributors supported by my own sales force, and was successful in doing so. Unfortunately, today the number of specialty distributors has shrunk significantly, resulting in severe competition for their shelf space and increasing your costs for this approach.
If you want your product distributed through one of the national companies, you not only have to create local demand by yourself and once you do, you will face financial barriers in the form of fees– for putting your product in the system, marketing fees, trade show allowances, free product samples and strict turn-over requirements. In addition, national or regional distributors such as SYSCO or U.S. Foods have financial barriers for taking on new products. Hence, you will have lost control and you will no longer be in touch with your customer.
Delivery by Courier
At my most recent company, I started out using the distributor channel and rapidly discovered that because of the consolidation in the food distribution market, it was not a viable option.
My solution was to use a courier service ( FedEx® Standard Overnight) to get the product to the customer, and hire a sales staff in each market to create customer demand. Depending on your product, you will have to select between overnight, 2 day, 3 day or ground delivery. This will have a major impact on your packaging and transportation cost. However, you retain the distributor profit margin to cover these costs.
The convergence of ecommerce, social media and the ability to deliver refrigerated or frozen products in commercial quantities directly to the customer’s door offers huge opportunities to the artisan food manufacturer.
If you have established yourself locally and are considering geographic expansion, I strongly urge you to consider finding a way to “not” out-source your sales function to a distributor, but instead out-source the distributor to a courier service.