I received this Quora question and here’s my answer.

When I look at CPG investments, my goal is to know the following:

1.  Is this product/idea differentiated in the marketplace and how easy is it for the competition to copy/replicate that differentiation?
2.  Does the team know what they are doing to grow the opportunity?
3.  What’s the plan to get the opportunity to 20% EBIDTA?

To accomplish the above, I need the following metrics, in this order, with the basis at the product unit level that the end consumer would purchase:

  1. Current sales in units/door/week by channel;
  2. SRP – suggested retail price of the item by channel;
  3. Repurchase rate;
  4. Retailer margin (%);
  5. Wholesale revenue;
  6. Returns;
  7. COGS;
  8. Gross margin (wholesale revenue – COGS);
  9. Tradespend;
  10. Marketing costs;
  11. Sales costs, incl. broker fees;
  12. Logistics and retailer penalties;
  13. All other operating costs;
  14. Net;
  15. Cash investment.

The above is structured like a basic P&L.  The metrics are less important because in most cases, they will not be to where they should be.  What’s more important is the qualitative discussions on each metric to help me get to my 3 goals listed above.  With the above metrics and a 30-minute discussion, I can usually know if this is a good opportunity for me.

Sales/Units/Door/Week and SRP by channel

This is a core metric to understand how the product is performing in the marketplace.  It will be different for each product category, but a good metric for many grocery categories is 1 unit/door/week. If this is average, does this product exceed that or is it below that?  If so, why?  If above, is it a unique product different enough from the competition?  If above, is the company doing some kind of in-store or external marketing that is driving sales?  If below, why?  Is the company’s marketing not effective?  Is it a commodity product getting lost in the clutter of all other commodity products?  Is SRP too high, too low?  Why?

These are exactly the kinds of questions category buyers ask in determining whether to take on new products, expand existing ones into more stores, or discontinue them out in favor of another product.  Even if a product is meeting sales threshold does not mean it won’t get discontinued.  Another better product could come along or one with better marketing.  The company needs to know its category and competitors and trends very well to try to position against this.

When I say “by channel” above, I mean I want to know SRP and margins by channel – grocery, drug, mass, club, etc..  Even if the company is not selling in these channels, what would SRP be in those channels, against the retailer margin?  Eventually, I would want to see them sell to the other channels to get more growth.  This is important to know now because setting SRP relative to margin and EBIDTA has to be done in the context of looking at other channels, because even though it might work in one channel, it will break in other channels, so you want to get that right from the start.

Repurchase Rate

This metric can only be derived with accuracy if the company has a direct-to-consumer (D2C) component (i.e.: sell via their website).  And it is very important to know because if the company has a low repurchase rate – and I assume if in grocery stores it’s a consummable product, so there should be repeat purchasing – then the company has a structural problem and eventually it will fail when it runs out of new consumers.  Having a D2C component is very important to know information like this.  I look at repurchase rate in context of 12-months from initial purchase.  Another similar metric is customer lifetime value, but I limit to 12-months.

If only in retail, the best way to gauge this number is through specialty or smaller chains that the company has been selling in for a while.  If succeeding, then you might infer that there is a good repurchase rate.  However, the caveat there is that the product is not in an impulse-buy store location, like the checkstand area.  If so, then be careful.

Retailer Margin (%).

For grocery, the target is 35% – the difference between wholesale and SRP, or the retailers markup.  Is it higher or lower than this and why?  If lower, then to expand to other chains, it will have to go higher, meaning it eats into EBITDA.  If higher, why?  Is it because it’s a new product and the category buyer wanted more margin because of the risk?  Or, is it because the company is not marketing or not marketing well to support sales, so the category buyer wants more margin?

Returns

Usually will be 1-4% for small companies in smaller retailers.  It should not be higher than that. If so, why?  Dig in to understand what is going on.

COGS

For smaller CPG’s in food, selling organic, this figure is easily in the 50-70% range.  The key to ask is not necessarily where it is now, but can the company get it down over time with increased volume?  They should be able to get it to the 30-40% range – closer to 40 if an organic product. Again, this is for consummables.

Tradespend

On average, for all CPG consummables, its 13.5%.  If higher why, if lower, why?  What is the company doing to warrant it being higher or lower?  It’s almost always higher the first year in a retail chain, then goes down.  What are the specific factors in tradespend that is causing this number to be what it is?  Experienced CPG people will know how to negotiate this number down over time.  Does this company know how to do this? Note: diving into this area will really tell you if the company knows what they are doing or not, in my experience.

Marketing Costs

This goes with tradespend, because in-store marketing is in tradespend. But external marketing (what the company does independent of the retailer) is everything else.  For small companies, marketing should really be direct response drive, in my opinion.  By DR marketing, your marketing has to drive sales and you have to be able to measure it to see if its working.  You can’t just throw dollars at brand marketing like large CPG companies because you will run out of money before they have an effect, in my experience.  With DR marketing, you need to know how many dollars are spent and what sales that brings in – simple equation called MER (marketing efficiency ratio).  A ratio of 2 or more is what you want, but it takes time to get there to optimize marketing.  A CPG company that knows how to do this can leverage it into retail growth very well.

Sales costs, incl. broker fees

Broker fees is what I really want to get at.  Goal is to get to 5% with no monthly upfront payment.  Hard to do for smaller companies, but that is the goal.

In the natural channel it will be 8-15% with a $500-800 monthly payment to good brokers. Over time, you can get the monthly payment to go away and with volume, get the % down.

I care less about the costs now and more about who the brokers are, what are they doing and are they good ones (I can usually tell by knowing how the brokers work by asking the company questions about them).  Good brokers are key to growing in retail.  You want relationships with good ones.

Logistics and retailer penalties

Goal is to get to 5-7%, or even lower if possible.  If higher, why?  This is another area that by digging in, will tell me if the company really knows what they are doing on an operating level.  Companies with less experience or with weak operations will have higher logistics and retailer penalties.  This area can kill a company if not under control.  This area might not be a problem now, but its a sleeper land mine because it could become a problem if internal processes and systems are inadequate.

All other operating costs

I usually don’t dive into any other cost areas. The above is what I really need to get to my 3 goals.

Net

What is the EBITDA?  Goal is 20%.  Now, let me say that 20% is my goal.  It does not necessarily mean that is the goal of other companies.  I like 20% because it gives me room for error, because there will always be error. In general, if its less than 10%, that’s a problem, because errors will eat into that fast.  If not at 20%, then what is going on above to impact this?  Based on the above discussion, I would be able to understand better what is needed to get to 20% EBITDA and if the company has the expertise to make it happen.  However, I see opportunities all the time that will never get to 20%.  Does not make them bad ones, just maybe not ones I would consider.
Put the above into a simple excel model and as you play with all the variables, you will see its impact on EBIDTA.

Cash Investment

What will my cash investment do for the company to get it towards 20% EBITDA? Or, if it’s at 20% now, what will my investment do for growth?  If my investment won’t get it there, will the company need more investment?  If so, can they raise money from other investors besides me?  Do they have a differentiated opportunity and a good team that would be attractive to other investors?

Growing CPG companies, especially those in retail, even at positive EBITDA, often need more and more cash to growth.  So, even if goal EBIDTA is reached, growth still means more cash will be needed.  Can they get it?

What’s the exit?  How do I get my money back?  Because growing CPG companies, especially in retail, need cash to fund growth, don’t expect your investment to come from EBITDA distributions to investors, at least any day soon. And selling a company is really hard and very few are able to do that.

This is a Quora question I was asked about setting up a relationship between a CPG manufacturer and distributor.  My answer is below.

I know and work in food, so I can only respond from that context.

  1. Does the distributor serve the market you want to directly target? Obvious question but needs to be asked.
  2. How big of a market are you targeting? Are you staying local, regional, or nationwide. If you are a startup and starting locally, then smaller distributors might be best because they may be able to serve your retailers better. Also, you may not be able to get into large distributors to start.
  3. Will the distributor pickup from your warehouse or do you have to ship to their distribution center(DC)? Factor these costs into your ROI analysis.
  4. What sales activities will the distributor do on your behalf? Do they put you in their catalog, do they have a sales team that will promote your product, is there a cost for those sales promotional activities and is there a positive ROI on that (ask the distributor for past comparables to help you determine that), do they have a field sales force that would be selling your product?
  5. Many distributors don’t do much in terms of sales promotion or activities for you. They will put you in their catalog and handle logistics between you and your retailers. You will have to sell to retailers/account directly. Factor this into your ROI analysis.
  6. Have a sales deck ready to sell to the distributor. You will likely need to sell the distributor on your product, its value propositions, sales history, and your own sales efforts/broker network. Even for distributors that can help you with sales, they will almost always want to understand what direct retail sales efforts you are undertaking to help move your product. In addition, what external marketing are you doing to help sell your product? What retail marketing are you doing or supporting (marketing you are doing in retail to sell your product – demos, promotions, in-store advertising, etc).?
  7. What promotions are required of you by the distributor? Are there certain times of the year they want to see a promo from you? Do they have tradeshows they want you to support with promos and product samples? Do they have marketing they want you to support (catalog ads, for example). Factor all of these into your ROI analysis.
  8. What are the terms for doing business with the distributor? Key ones are payment terms, guaranteed sales terms, opening order discounts and manufacture incentives offered to retailers through the distributor. Factor these into your ROI analysis.
  9. What kinds of sales data will you get from the distributor? Ideally, you want to know timing and quantities of buys from specific retailers. That data helps you in your production and inventory forecasting. However, you ultimately need store-level sales data (units/store/week) to really have robust forecasting. You are forecasting sales movement on shelf, but then also forecasting the shipments. The former tells you how well you are doing relative to the category and your sales goals and consumer interest/uptake, the latter is used for forecasting production and inventory levels.
  10. What happens if product does not sell? How much time do you have to prove sell-through before you have to take the product back (guaranteed sales component in the terms analysis – see above). Is there any kind of reverse logistics costs you have to absorb (costs to ship product back to you but also administrative costs the distributor imposed to pull product out of their system)?
  11. Do you want to enforce MAP (minimum allowable pricing) pricing with the distributor’s accounts? If so, you need to have that policy in place before talking to the distributor and ask them how they handle that on your behalf.
  12. Regardless of your sales activities to retailers, ask the distributor which accounts they think will take in your product earlier rather than later. In food, many e-commerce accounts are usually the first types of accounts to take in new products before the brick/mortar accounts. Are you OK with that? It gets harder to enforce MAP pricing with Internet-only retailers.

To sell in retail for your CPG or consumer product is still usually pretty important, since more than 90% of sales happen in retail, especially for food/consumables.

What follows is a general checklist and methodology for bringing a CPG product to retail.  It helps to determine what kind of product you bring to retail, where it will be shelved, its pricing, packaging, competitive differentiation and more.  This is not hard to do, but is time-consuming and there may be costs associated with gathering the data.  You start by doing primary research at retailers where you intend to sell your product.

Login to access the rest of this article. Click here for registration

 

Use this list to guide you in legal and organizational steps to launch a CPG or consumer product company.

Login to access the rest of this article. Click here for registration

Answer these 10 key questions to understand the market, industry and competitors before launching a CPG or consumer product company.  These questions take time and research to properly answer.  Don’t rush through them.

Login to access the rest of this article. Click here for registration

This infographic is my digital marketing infrastructure for CPG and consumer product startups.  I use this exact setup in my own company selling products and services direct to consumers and through retail.

My marketing approach is to use content marketing and direct response/inbound marketing to drive growth in customers, revenue and profits. This infrastructure is designed to support that, although if you do not use either in your marketing, then a large percentage of this infrastructure will still be appropriate. This infrastructure is 100% responsive to any device or browser.

I include the tools I use to create marketing content, where that marketing content gets deployed in online marketing channels, the infrastructure to handle the incoming traffic and the analytics tools I use to improve my marketing content and overall digital presence.  I also include my productivity/personal CRM tools.

At the bottom of the infographic, I include detail costs on each tool.

In summary, this setup costs approximately $6800 to implement and $1800 annually to maintain and operate (not including hosting, which can vary quite a bit based on site traffic). Other than initial website design and graphics development, I don’t include any ongoing developer costs. This setup is designed to be run by a marketer, not a developer.  I include costs to upgrade tools for more functionality, and include where costs can be cut (with less functionality) to reduce the annual operating expense.

My infrastructure is constantly evolving.  As I find better tools, I may add them and remove others.

See the infographic below or download from the files folder.

Login to access the rest of this article. Click here for registration

The direct response campaign analysis model is my primary tool for analyzing direct response campaigns.  It’s fairly simple, but has a lot of data that can be viewed on the same screen, along with my immediate goal metrics and long-term goal metrics.

Login to access the rest of this article. Click here for registration