This is a question I received via a discussion thread and I am reposting my contributions to the thread here.
As a rule of thumb, natural.organic is always a 50% margin. If selling through UNFI, Tree, etc. there might need to be another 15% added in for them, for a total margin of 65% to WFM, or maybe higher, depending upon the product and category.
I say might because other factors go into whether WFM carries your product and their markup. I once sold products only to natural distributors – UNFI, Tree, etc, but did not sell the retailers direct to purchase from UNFI. I was more focused on club, mass, grocery, drug and was also running a national TV campaign. I found my products in natural channel stores at a 50% margin, which means they must have a margin of only 35% to account for UNFI’s 15%. In this case, because I was running a national TV campaign, I think the retailers in natural were willing to take less margin because the product was likely to turn more from the marketing.
So that is why margins are not so cut and dry…many other factors can affect it, but as a rule, I always use 50% for WFM, plus 15% for UNFI. If there is anyway you can approach WFM from a position of strength – i.e. – you’ve got external marketing, or an aggressive demo plan scheduled, etc, then you might be able to negotiate better margins.
And…
I see natural brokers asking for 7% plus draw of $250-$750/mo. All other channels is 5% and possibly no draw. For tradepsend (ad supports, samples, shelf fees, etc), I use 3% for natural and as high as 20% in first year for grocery and drug (13%-15% per year thereafter). I do not see as high a tradespend costs in natural as I do in grocery and drug. But, demos cost $150 a pop (not including product samples) at WFM, which I estimate then on top of the 3%. They can get very expensive. I try to amortize all tradespend over 1 year to really know what my costs vs revenue is and how bad I might be in the hole that first year. It is very hard as Josef says to figure out all of that in a proforma, but still worth doing upfront so you have a ballpark of what to expect.
And…
Growing in CPG is a challenge because it takes cash to fund inventory and entry to retail, if you go the retail route. This is especially the case for natural/organic products with high COGS sold to WFM and that natural channel. And as along as you are growing, you will generally need more and more cash (unless your expenses are so low that its easy to turn a profit and you can use them to fund growth). In my experience, the first few million in sales, at least, is about surviving and minimizing cash flow burn.
As a result, I highly encourage companies to maximize their online sales (and SEO, PPC, email, social and content marketing), even before going to retail, because amazing sales and brand awareness can be driven here before pushing into retail, and there is usually less of a cash drain with an online-only strategy
Or, if you do have the cash, consider direct response marketing (DR), along with online, before retail (DR won’t work for all products). If you build your brand awareness and demand for your product first, either through online or DR or some other method (viral, direct sales via consultants – think Avon), then it may be an easier sell to category buyers and you might negotiate better terms.
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I post what I see and do in consumer products. But I am just one person with my own perspective. I want your opinion and observations from your point of view. Please comment below so I and others can learn. Thank you!
I’ve worked for Whole Foods for over 30,000 hours and feel that an all organic is a better avenue than the current 365 stores geared towards the millennial group. What’s your opinion if I may ask?
I purchase all organic and rarely do conventional unless I have no other options, so I naturally prefer WFM with its current format. But organic has become more mainstream with Costco now the biggest seller of organic items. WFM no longer has the distinction of offering the highest quality food products on a national scale and they are overpriced compared to other offerings. I shop only organic at Natural Grocers and their quality is just as good as WFM, but at much less. Granted, they do not have the selection or as nice a store as WFM, but that is not what I want. As a result of shoppers like me, they are having problems trying to grow, so the 365 concept is a stab at a different concept where growth may occur. It does not interest me as a consumer, but from a business standpoint, it might payoff for WFM.
I’m pretty new to the whole food distribution system, but would it be feasible for grocers like WFM to work directly with manufacturers and bypass the food distributors? This would increase their margins by 15% OR lower their prices by that amount. Perhaps it’s too costly to implement?
The natural channel and WFM is not setup to work directly with all of its vendors. Perhaps if you are a large vendor serving the majority of their stores, then that is a possibility. There are so many small vendors in the natural channel and it is highly fragmented with 5000+ stores so the distributors have emerged to serve that structure with their own warehouses. They have the capabilities to bring product to their warehouses, split cases and handle logistics through the whole process. Mainline grocery, on the other hand, is able to work directly with vendors.
Hey Ed,
I was wondering how you calculate the mentioned margins. Buying for 100$ and selling for 200$ as a retailer, would that be 50% (to go with the number you’ve mentioned above) or 100% margin?
I think I know the answer but since the US market is completely new to us I wanted to ask.
Thank you,
Hendrik from fairafric
http://www.fairafric.com
Hendrik: See this post for more guidance: https://edsoehnel.com/correct-way-specific-equation-use-determine-markups-margin-resellers-retailers/
Please define unfi
https://www.unfi.com/
Hi Ed. I’m looking at reentering the Nat fd industry in the baked goods and cooked cereal space.
Back in my day, 1994, the general markups were 25% to the distributor , store took 50% for supplements, 40% for cosmetics and i think, generally 33% for food – not sure here because I was in supplements only.
And often the chains would pickup themselves and take 15% for that. So is a food producer really looking at receiving only 35% of retail. That # would completely price me out of baked goods.
Would welcome your feedback
Don: Margins are summarized here: https://edsoehnel.com/retail-margin-markup-consumer-packaged-goods-cpg-consumer-products-infographic/
You’re generally looking at 15 to distributor and 35 to the retailer, but it could be higher and depends on a lot of other factors (category, retailer, you’re tradespend committment, etc). Plan for 50 and another 5-10 in tradespend for the specialty/natural channel.
Consider selling direct-to-consumer, as retail is really hard to work in these days.
Hello Ed,
What kind of markups have you seen in specialty beverages such as cold-pressed juices and kombuchas?
I have not worked in these sub-categories so do not know for sure. You can start with rules of thumb from here which will get you in the ballpark https://edsoehnel.com/retail-margin-markup-consumer-packaged-goods-cpg-consumer-products-infographic/
Thanks for the article! So if you assume 35% margin for the retailer, 15% for the distributor, plus another 5-10% in trade spend, (and possibly another 5%+ for a broker), what type of gross margin for your business should you be targeting for consumer packaged goods company? And should you be willing to give up gross margin during the start up phase due to higher costs on smaller production runs, or start off with a higher SRP, and come down to your target SRP later on as you gain economies of scale with larger production runs?
My goal is to shoot for 40% GM and 30% net profit margin. That is unlikely on startup, but after you achieve some economies of scale, especially if you sell in retail. If you sell direct to consumer, these goals can be achieved even on startup (which would eliminate the distributor, trade spend and broker fees). I do not recommend droping SRP over time. Only do that on discounts or promotions. Costs/inflation goes up over time so you want to stay ahead of that as best as possibly with higher SRP. If you sell to retail on startup with low economies of scale, you will have to absorb the low or negative margins until you get to a larger size. Retail is not built for startups but for large volume CPG, which is why going to retail at startup usually requires so much cash and a longer payback period. That is why I always sell direct-to-consumer to start to help gain traction and still possibly earn a profit that helps me get to some volume to be able to afford retail.