5 How should your product be distributed?

Main points in Chapter 5
How should your product be distributed?

Agroprocessors have a number of options for distributing their products. Market research can identify the most appropriate.
Distribution can be ...

• direct to consumers, which may be a suitable option for smaller processors covering small areas;
• to all suitable retailers in an area;
• to supermarkets, if they find the product acceptable and sufficient quantities can be delivered;
• to wholesalers, suitable for larger processors;
• to institutions and the catering trade.

Factors to be considered in deciding on the marketing channel(s) to use include ...

• quantities processed and quantities required by distributors;
• transport arrangements;
• margins and mark-ups;
• payment arrangements.

When deciding on which retailers to supply, you must be sure that you can keep their shelves stocked at all times

POSSIBLE DISTRIBUTION CHANNELS

By now you should have covered the issues related to the product and to the potential consumers. You have surveyed the market size and consumer tastes and identified those categories of consumer likely to buy your products. You have decided on the packaging and unit sizes. You have chosen a brand name and identified what needs to be printed on the packets or labels. You have found out what prices competitors’ products are being sold at to consumers and what the shops are paying for them. With this information you have concluded that you may be able to sell your products profitably. However, you still need to consider how the items you produce are to get from your processing facility to the consumer. This requires further research. Possible distribution channels are selling:

• directly to consumers;
• to retailers;
• to supermarkets;
• to wholesalers;
• to institutions and the catering trade.

Selling directly to consumers

This can be done from a small shop, usually attached to the processing facility, or at the local retail market. It is usually only an option for very small-scale processors although, in some countries, medium and large-scale producers do sell directly to consumers by using mail order or teams of door-to-door salespeople. The advantages of selling directly are:

• you can keep the full retail selling price and do not have to pay the margins of wholesalers and retailers;

• in other retail shops your products will just sit on the shelves waiting for someone to buy them, but in your own shop you can actively “promote” your products;

• you may not have to provide packaging for some types of product;

• you have few transport problems;

• you can talk to your customers and find out what they think about your products. They may even suggest ways in which you can improve them.

On the other hand, if you are going to sell directly to consumers you will:

• have to do it yourself, in which case the time you have to spend selling is not available to you for processing. This limits how much you can produce and your ability to expand your business; or

• have to employ someone to sell for you. Unless you are confident of selling a large number of products in a shop or market, for example if your shop is on a busy main road, this may cost you much more than paying the margins of the shopkeepers;

• have trouble expanding your business, as selling in just one or two locations limits the total quantities you can sell.

Selling to retailers

The advantages of using shops to sell your products include:

• you can sell greater quantities because your products are on sale in many more locations than if you were doing your own marketing;

• you can devote most of your time to processing, which is what you are best at.

Offsetting these benefits are the facts that you do not receive all of the retail selling price and that you have to organize transport of your products to the retailers and ensure that they do not run out of stock.

Selling to supermarkets

Supermarkets are a particular type of retailer. Some are independent companies with just one or two shops. These can be considered as large retailers and you can usually distribute to them as you would to other retailers. However, supermarkets are often part of a large chain. Selling products through such chains can cause considerable problems for small and medium-sized processors.

Reasons include:

• supermarket chains are often reluctant to sell other than popular, well-advertised brands and, occasionally, their “own brands”. They give priority to brands with a high turnover;

• chains often require their suppliers to supply all their shops and may specify minimum quantities, which can be difficult for smaller processors;

• chains may require deliveries to a central warehouse, which may be a long way from the processing factory;

• chains can sometimes be very slow to pay!

Selling to wholesalers

In your discussions with retailers you need to find out whether there are wholesalers operating in your area and, if so, who they are. You can then contact the wholesalers to find out which areas they supply and to obtain other important information, as discussed below. The advantage of working with a wholesaler is that you usually only have to make one delivery to one location. For example, you may be able to make a delivery to a wholesaler once a week, for which you could hire a vehicle and driver for a few hours. Supplying lots of individual retailers who are spread out over a large area may mean that you have to operate your own vehicle every day, which can be costly. Another advantage is that wholesalers visit, or are visited by, a large number of retailers and are thus able to give your products much greater exposure and sell them over a wider area than you could do on your own.

The disadvantages of using wholesalers are that they may require large minimum quantities that may be difficult for you to supply. Also, of course, they need to make a profit from their activities and need to take a margin. This further reduces the share of the retail selling price available to you.

Your sales need not only be through shops.
Restaurants and fast food restaurants may also be possible outlets for your products.

Selling to institutions and the catering trade

For ventures that are neither very small nor large enough to finance an expensive promotion campaign, selling to institutions can be an attractive option. Institutions, such as schools, hospitals, prisons and military bases, can be supplied under fixed agreements which permit you to know in advance how much you will sell. Also, if you can supply institutions you do not have to worry about promotion. One drawback is that governments are often very slow to pay their bills. However, you should certainly visit all the institutions in your area to see if they are interested in your products.

Similarly, you should survey restaurants and fast food outlets to identify their requirements for processed foods. The questions you need to ask are very similar to those you would ask retailers.

DECIDING ON THE CHANNEL OR CHANNELS

This should be discussed carefully with retailers and wholesalers. Combining some limited direct sales with sales to retailers should cause few problems. For example, for a small dairy it should be possible to sell milk and dairy products directly to consumers in your village as well as supplying retail shops in neighbouring villages. Combining sales to both retailers and wholesalers may be possible, but it may also cause problems. In some cases, for example, very large supermarkets may not want to deal with wholesalers and will expect you to deliver direct to their shop(s) or warehouses. Even small shops may prefer to get all their supplies from one wholesale source, in preference to dealing with individual small suppliers. Where there is more than one wholesaler in an area, each may demand sole distribution rights for that area. This means that for one of them to agree to stock your products you have to agree not to supply retailers and other wholesalers. No wholesaler will want to do business with you if you also want to supply retailers directly, unless you have a clear agreement from the beginning about which retailers you can supply.

During your discussions with wholesalers and larger retailers you need to find out what conditions they will attach to selling your products, as discussed below. On the basis of this information and an understanding of the mark-ups that particular retailers and wholesalers require, you can begin to work out which channel, or combination of channels, is likely to suit you best in terms of maximizing the sales you can make at prices that will be profitable.

DELIVERING YOUR PRODUCTS

Wholesalers and retailers may not have much storage space available. Very small retailers, for example, may only have the space they use for selling to consumers, with no additional storage room. In such circumstances they will not be happy to sell your product if you only want to deliver once a month, as they have nowhere to keep it. Also, they probably have problems in paying for a month’s supply in one go. They may ask for weekly deliveries or, if you insist on delivering once a month, require you to offer them credit for that period, so increasing your costs.

When you are delivering non-perishable items to small retailers in urban areas you can agree to sell them quantities that reflect what they sold in the previous week. For example, if a small retailer normally takes two cartons of your potato chips but didn’t sell many in the previous week, you, or your salesperson, can deliver one carton instead. This clearly doesn’t apply to rural areas as you may drive 20 km to a shop, only to find out that it wants nothing! When your products are perishable, particularly when you have to make deliveries on a daily basis (e.g. milk), you want to be sure that you can sell everything you produce. You need to discuss with retailers their willingness to take delivery of an agreed quantity every day. Without such an arrangement you could face big problems in disposing of the surplus.

Many shops can only take small quantities at a time ...
... be careful not to oversupply them.

If your research makes you believe that it would be uneconomic to supply small shops directly, or if you find that small shopkeepers buy all their supplies from wholesalers, then you have to look at the delivery requirements of larger stores and/or wholesalers. It is important to note that supermarkets do not like to have empty shelves and wholesalers do not like to tell their retail customers that they are unable to supply a particular item. You need to be sure that you can supply the minimum quantities that they require. If you start delivering to a supermarket or to a wholesaler and are unable to continue to supply the agreed quantities, then those buyers are unlikely to want to buy from you again. If you later increase your production capacity so that you can meet their minimum quantity requirements you will have a lot trouble persuading them that you are reliable.

Supermarkets and wholesalers do not like having “old” stock even if it is not past its “sell-by” date. Thus, for some more perishable products they may insist that every time processors make a delivery they take away any unsold stock, even if it has not reached its “sell-by” date. This can mean a considerable cost for agroprocessors. Under these circumstances you will need to be careful that you only supply such companies with quantities they are likely to be able to sell.

Shipment or distribution containers

By “shipment or distribution containers” we refer here not to the packs or containers that go on the retailers’ shelves (see Chapter 4) but to the packaging in which those containers are delivered. You need to find out what sizes of carton, sack, bag, barrel, etc. your competitors are using and whether the wholesalers and retailers are happy with these. Remember that the containers you use should not be too large, particularly if you plan to supply small shops, or wholesalers who sell to small shops. In northern Iraq, for example, one factory ran into problems because it was supplying retailers with cartons containing 15 cans of tomato paste. Competing factories were all supplying six cans per carton.

In deciding on the size of the containers to use, you need to refer to your estimates of the quantities different types of retailers are likely to order (see above). Wholesalers usually prefer to deliver to retailers in the packaging that the producers provide. Therefore, the number of units you provide per carton, etc. must be consistent with the quantities retailers are going to want to buy at any one time. For example, very small retailers who sell eight or nine cans of pineapple every week will probably want to buy either one or two cartons containing six cans every week. They will not want to buy a carton containing 36 cans.

Transporting your products

Having decided to where you want to deliver your products and having learned of the requirements of those you hope will buy from you, you now need to identify your transport requirements. As noted above, if you think you will have to supply a large number of small retailers with daily or weekly deliveries, you may need to buy and operate your own vehicle. On the other hand, if you intend to supply just a few large shops or one or two wholesalers you may be able to make arrangements with a local transporter to deliver your products once a week.

It is important to make a detailed study of your transport costs. Although supplying small retailers may be your preferred method of distribution you may find that the costs of supplying small quantities to some or, indeed, all small retailers are so high that the prices you have to charge will mean consumers will not want to buy your product.

In your discussions with wholesalers and/or large shops you should find out at what times they accept delivery. Some, for example, may only receive goods between certain hours or on certain days. You also need to identify the delivery procedures. Does the wholesaler assist with the unloading or does the company expect you or your transporter to unload everything?

Once you have all this information then you can approach transporters in your area to find out whether they can provide the service you require at the times you require it. You can also get some idea of the likely costs. Transport for food products must be sanitary, covered and preferably only used for food products.

PRICING, MARGINS AND MARK-UPS

This subject requires detailed discussion with potential customers. The ways in which you can work out your selling price are discussed in Chapter 8. However, at this stage of your research you need to find out from wholesalers and retailers what their approaches to pricing and margins are. You need to get as much information as possible about the prices that wholesalers and retailers presently pay for those brands that would compete with your planned products, and the mark-ups they apply. You need to discuss whether they would pay the same prices and apply the same mark-ups for your products or whether they would expect to pay less and charge higher mark-ups because they would be taking a risk by stocking new products. Figure 4 illustrates the concept of margins and mark-ups.

The price that wholesalers and retailers are prepared to pay and the mark-ups they require are likely to depend on several factors.

Some of these are:

• speed with which the product is sold;
• quantities that can be sold;
• range of products to be stocked;
• the strength of the manufacturer;
• the strength of the retailer.

Speed with which the product is sold

If businesses expect to stock products for a long time before selling all of them, then they require higher markups. Low mark-ups are required for products shopkeepers are sure they can sell quickly (e.g. carbonated drinks).The more often shopkeepers can buy and sell, the more profit they can make.

Quantities that can be sold

Wholesalers and retailers often accept a lower mark-up for products that can be sold in large quantities. This may be a condition imposed on them by the manufacturer, but they may also find that lowering the price can increase overall sales and, hence, their revenue.

Range of products to be stocked

The range of products is a factor contributing to the speed with which they are sold. Shoe or clothing retailers, for example, have to stock a large number of items so they have available the style and size that everyone wants. They therefore expect higher mark-ups.

Figure 4
Margins and mark-ups

From the above it can be seen that the “margin” is calculated with reference to the final selling price. It is the percentage of the retail selling price retained at each stage of the marketing chain. The “mark-up,” on the other hand, is calculated with reference to the buying and selling prices at each stage of the marketing chain. It is the percentage difference between the price a company pays for a product and the price it sells it at. Thus, in the example above, the retail margin is [(120-90) ÷ 120] × 100 or 25 percent, while the retail mark-up is [(120-90) ÷ 90] × 100, or 33 percent. The concept of “margin” is useful when you are looking at the profitability of your business. However, in dealing with shopkeepers you will nearly always be discussing their “mark-ups,” i.e. by how much they want to increase the price when selling your product.

The strength of the manufacturer

Larger companies, particularly those with well-advertised and well-known brands, can often negotiate very favourable arrangements with distributors. Some brands are so famous that shopkeepers have no alternative but to sell them if they want to attract customers. In this situation the manufacturers can often dictate the maximum retail selling price, and hence the mark-up, although in some countries this practice is illegal. Small agroprocessors, on the other hand, are in a position of some weakness when negotiating with distributors, particularly when there are several other suppliers of the same product.

The strength of the retailer

Large supermarket chains are extremely powerful in many countries. They sell a high proportion of foodstuffs and are able to buy from manufacturers at very favourable prices. As a result they can retail the products at prices much lower than can smaller retail shops and charge profitable mark-ups. Even in rural towns, a large supermarket is in an extremely powerful buying position in dealing with a local agroprocessor, because of the quantities it can purchase.

TERMS AND CONDITIONS OF PAYMENT

This is an extremely important subject. Payment terms and conditions can make the difference between profitability and bankruptcy, particularly in countries with high inflation or high interest rates. If you have to wait for payment from the businesses that you supply you may:

• have to delay payment to your suppliers, for example the farmers or wholesalers who sell you the raw materials;

• have to borrow money from the bank to pay your suppliers and staff; or

• have to use your own money to pay your suppliers and staff when it could be in the bank earning interest.

All over the world companies that are basically profitable occasionally run into “cash flow” or “liquidity” problems. This means that what they must pay out to their suppliers is not being matched in the short run by what they are receiving from their customers (if it is not matched in the long run they will, of course, go bankrupt). This is discussed in more detail in Chapter 8.

Small retailers may pay in cash when you deliver to them. Larger shops, supermarkets and wholesalers, on the other hand, almost certainly will not. They normally expect you to post them an invoice and undertake to pay within a certain period. In some cases this period can be up to 90 days. You need to clarify with these businesses the exact length of credit they require. It is also a good idea to check with existing suppliers to wholesalers or shops in order to find out whether those businesses do in fact pay within the agreed period. When a company is very slow in paying there is little you can do about it. You can stop supplying the company but taking legal action will often cost more than the sum you are owed.

REACHING CONCLUSIONS

You should now have a good idea of the channels that are likely to be the most profitable for you. Such information should include:

• the advantages of selling direct to consumers compared with through distributors;
• the benefits of supplying retailers direct compared with wholesalers;
• the advantages of selling to caterers, small retail shops or to large supermarkets;
• how to deliver products, when and in what quantities;
• pricing and payment arrangements.

You can then make some informed conclusions, such as:

• the quantities of orange juice I shall produce will be too small for wholesalers and the local supermarket chain to handle. I shall have to concentrate on supplying small local retailers and one or two restaurants and fast food shops;

• I can deliver my weekly production of tomato sauce to the wholesaler in one morning, using a hired truck. Delivering to retailers will take five days a week. I need to calculate whether the cost of delivering to retailers is greater than the margin I will have to give the wholesaler.

• I can produce sufficient jam to supply my local supermarket chain. Although this company will pay less than smaller retailers, I can deliver to all its shops on one day in a week and my costs will be much less. The local wholesaler requires larger quantities than I can supply.