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.
- Does the distributor serve the market you want to directly target? Obvious question but needs to be asked.
- 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.
- 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.
- 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?
- 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.
- 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).?
- 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.
- 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.
- 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.
- 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)?
- 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.
- 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.