The Food Industry, a Game of Monopoly?
Who really owns the market?
What if we told you that you owned 80% of the hotel properties on a monopoly board? Everything from Baltic Avenue to Park Place. With majority ownership, you would set the market standard, price floor and ceilings, and industry innovation. People often think of Amazon as owning the online market, but food distribution into grocery stores (dare we say..?) is worse?
10 Big Food companies own 80% of the grocery retail space.
Big conglomerates such as: Nestle, Pepsi Co, Unilever, and Kraft have “ownership” of hundreds of different brands that fall underneath the company. Now try winning that game of monopoly with one hotel against the big guys!
We want to discuss HOW these large companies can get hundreds of their products on shelves with little brand diversification, just as if you were buying out all monopoly’s hotel properties.
By the time the product is in the store shelf mom and pops are often making cents. There are many factors at play, listed below are elements we’ve experienced as a growing small business that makes it challenging to beat large conglomerates.
Think of a distributor as the middleman between the manufacturer and the retailer. You have a delicious product, but now need it stocked in store shelves. In addition to connecting manufacturers to retailers, distributors can manage inventory, returns and deliver your products. Sounds great right? It is, but it comes with a cost. Distributors typically work on a 15–30% margin on the wholesale price of your product. With that being said, you either eat your profit margin, or increase the price to which you sell to the distributor (wholesale price) at the risk of them not picking you up.
Brokers are similar to distributors in the sense that they connect consumer packaged goods (CPG) manufacturers to retailers, acting as the olive branch between the two. Brokers have established relationships with retailers in which they discuss product lines and promotions to the retailers interested in your product. Brokers do a great job of knowing where your product is most likely to sell within retail stores given demographics. Due to brokers' well established retailer relationships, they typically charge a 5-10% net invoiced price of what is sold to retailers. This doesn’t even include logistics!
Free Fill, also known as “slotting” is when the food manufacturer provides free, yes FREE product to retailers to promote distribution and future sales with specific retail stores. The idea behind this is that retail can entice customers to purchase the product with a high discount and measure your product’s sales success. The risk with free fill programs is that you may not see positive cash flow, and can wait months (if not years) for sales to generate or even break even.
Don’t you love a BOGO, or a 50% item while grocery shopping? These promotions from a food manufacturer's end can be enticing as they reduce the barrier of trial between both consumers and retail groups through a variety of sales channels. There are multiple “funnels” of promotions offered to retailers.
- Off Invoice: a percentage of the retailer's invoice has an applied discount for your product. An example being 15% of 4 cases of peanut butter.
- Manufacturer Chargeback: A retailer (think Kroger, or Safeway) buys product from a distributor at a discounted percentage which is then passed to your consumers during a predefined period.
- Scans: Also known as scanbacks, this is when the promotional discount of the product is applied at checkout. Typically measured in dollars, this gives greater transparency to the food manufacturer as the discounted amount is tied directly to the transaction.
Thinking about products on a shelf differently? Us too.
Given the challenges from product distribution, relationships within the consumer packaged goods industry (with a cost associated with them), and retail expectations it is very difficult to come out on top.
High costs associated with these elements can make it difficult to see a positive financial impact. A lot of the time small businesses, such as ours, risk supplying products without having a long-lasting shelf space to gain consumer exposure and increase sales.
It’s a hard game to play but that doesn't mean it's not worth it.
Is there a "get out of jail free" card? There are many small businesses that can beat the game. We have seen the positive impacts of working with great distributors and gaining new customers given promotional offers and free fill products.
Love your Americano nut butter? Tell your local grocery store! Word by mouth is the most influential tool that can help get us into more stores near you!
Comment below your go-to monopoly piece! Our personal favorite was the dog! 🐕
Guardian News and Media. (n.d.). Revealed: The true extent of America's food monopolies, and who pays the price. The Guardian. Retrieved February 17, 2022, from https://www.theguardian.com/environment/ng-interactive/2021/jul/14/food-monopoly-meals-profits-data-investigation
What do CPG distributors do? Buffalo Market. (n.d.). Retrieved February 17, 2022, from https://www.buffalomarket.com/blogs/food-distributor-cpg/what-are-cpg-distributors-responsible-for#:~:text=Distributors%20typically%20work%20on%20a,wholesale%20price%20of%20your%20CPGs.&text=Once%20your%20CPGs%20are%20bought,re%20looked%20after%20in%2Dstore.
In-store promotions explained. Rodeo CPG. (n.d.). Retrieved February 17, 2022, from https://www.rodeocpg.com/knowledge-share/in-store-promotions-explained
My personal favorite is the dog too! ;)