Physical Products can be NECSTY

[G-Man]

So, it seems like many, if not most of the folks on the forum are in some kind of “online” work. I don’t see too many people that are selling a physical branded product into boring B&M stores, and none so far in food products. I love physical products, so I thought I’d share some thoughts about physical products (using food as an example) and CENTS for folks who are toying with the idea of going “offline”.

• NEED – Most of human life takes place offline, believe it or not. We all have products in our lives that we believe could be better. You probably have some in yours. Or maybe you’ve heard a relative say “I really wish they made a ____________ version of this” Do some research, what pain points do people have in the products they use every day.

• ENTRY – This is what I love most about physical products. When you work online, every idiot with a laptop tries to crowd your market. I’m not saying they can do what you can, or their value add is as big as yours, but they add a ton of noise to the market. You don’t find the idiot crowd too often in the supermarket. It’s too much work, and most people have the mistaken idea that you need a factory to get your product out there.

• CONTROL – This one, honestly, is tough. You are at the mercy of merchandisers at first. The way to overcome this is to aim big and shoot for a product so ubiquitous they can’t not carry it. Think Coke or Lay’s.

• SCALE – Everyone that walks into a grocery store/Walmart/convenience store. Everybody. It doesn’t get as much press as tech companies, because it’s not as sexy, but it’s not uncommon for food companies that get to 10+million in sales to sell at 15+ EBITDA multiples to the big boys. This is because the potential scale is everyone with a mouth.

• TIME – It’s extremely time intensive upfront, but the return on time grows geometrically as distribution grows. It’s just as much work to get a 100 store chain as it is a 1,000 store chain. You get to the point where you’re only taking time for the bigger calls, then all your little soldiers are on the shelf, calling out to the consumer, and turning back to the bank account.

This is by no means extensive, and there are definitely down sides, but I feel like a lot of people don’t even consider mass market physical products, and might be missing out on a huge fast lane

 

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[MidwestLandlord]

Excellent post!

Speaking of scale:

Grocery stores USA gross revenue 2015: $649.087 billion (1)

Amazon gross revenue 2015: $107.01 billion (2)

6.07x more than Amazon.


(1) FMI | Food Marketing Institute | Supermarket Facts
(2) MarketWatch.com Mobile

 

[amp0193]

• ENTRY – This is what I love most about physical products. When you work online, every idiot with a laptop tries to crowd your market. I’m not saying they can do what you can, or their value add is as big as yours, but they add a ton of noise to the market. You don’t find the idiot crowd too often in the supermarket. It’s too much work, and most people have the mistaken idea that you need a factory to get your product out there.

This is a really good point. I sell 90% online, and 10% wholesale to supermarkets/boutiques.

Online, there are tons of copy cats and people trying to enter the space all the time. Retail? I can count the competitors nationwide on two hands, and often the retailers aren't even carrying a similar product yet, and I'm the first to contact them.

Profits are about the same selling wholesale to retail vs. selling online at full price. Online, you either have to pay ppc costs or maketplace fees. Offline, there are no fees, just a 50% markdown for wholesale.


There are people here on the forum selling to retail, but I wish there were more. Here's a great thread by @JonnyC from last year.

https://www.thefastlaneforum.com/co...or-what-it-took-to-close-two-big-deals.67626/

 

[G-Man]

Got some great pm questions from @amp0193 and thought I'd do my best to answer them on the thread.

• Your lessons learned from doing trade shows. I've only got one under my belt so far. Were these worth your time from an ROI standpoint?
  • That depends largely on your time horizon. In the beginning you usually only pick up small accounts at trade shows. It depends on time horizon for the following reason: We paid 10k to go to a trade show, and got a customer with about 40 stores. We make about $1.50/unit. We will never sell enough to get our money back BUT, a buyer for a larger company walks the aisles of that small chain, and ordered our product for a major chain because of seeing it at the smaller stores. This has happened at least twice in the last 18 mos.
• Approaching and securing distributors. How the process of getting set up with that worked for you.
  • Horse trading with brokers mostly. The only way to streamline it that I’ve found is when a buyer at a large chain is breathing down the distributors neck because she wants the product.
• What did you do to generate leads for stores that you wanted to contact directly?
  • See above. Our big chain leads have come almost exclusively from seeing our product at smaller stores. You’ll find that there are chains that are merchandising trend-setters for the bigger chains. Do some research to find out who they are, walk lots of aisles to see who’s ahead of the curve, then try to target those guys. Buyers at big chains typically don’t stick their neck out till you’ve shown you can move units at smaller stores.
• Do you have any "big" or even medium-sized chains where you had to deal with corporate first? Any tips for nailing these guys down? The only multi-location store I'm in, is a franchise model, so I just deal with each store individually.
  • For us it’s liquor stores. They’re great for snack products, and the buyers are actually accessible. The key is giving them some sort of risk cover or other incentive for taking a chance on you. Offer a spiff or a buyback program, possibly. Devil can be in the details on that stuff, though.
• Stock forecasting. Stores re-order at such widely varying intervals. How do you plan for inventory on hand?
  
  • I’m a controller by trade, so I created a spreadsheet that tracks each component and feeds into a master for finished goods. The underlying logic is very simple. Know your lead time on each component, and keep a rolling usage for that on the last 6 mos (or whatever time period). For example, I have a 6 week lead time at our packer, and 6 months of rolling sales, so the sheet I created turns the cell for a sku red when I’ve got less than 6 weeks of inventory in stock. Obviously, this becomes more art than science with new customers, so there are times you have to make ad-hoc best guess.

 

[G-Man]

So, inspired by a conversation with @amp0193 I thought I might add a small suggestion for how to get started in small scale B&M if one were so inclined. We've added about 12 outlets using this strategy in the last 6 weeks, and amp has added significantly more in the time he's been doing it.

• Purchase moment - Are there moments in the day/week/month/year where people would be open to buying your product on an impulse. Would they be willing to pay a higher price?
• Location - where is your customer when they're having this moment? For us, it's while they're having a drink, but it's more specific than that based on who our customer is, and a few other factors.
• Search - Find locations that match where your customer might be when they have their purchase moment. A minimum wage person and google are your friend here. My assistant found 5,000 + outlets that approximate the criteria, and, while reaching out to them, has been using knowledge gained to winnow down the list.
• Call - email, write, call, smoke signal, turn up at their place. It's a pain in the a$$, but the types of people that own/manage these outlets are actually contactable, unlike, say, a merchandiser in Bentonville.
• Sell/Listen - Don't just sell. The owners of small venues often have a finger directly on the pulse of your customer, and are more than willing to engage in dialogue about what they/their customer are looking for. The lesson we learned from this: These guys are happy to pay $20, extra for a corrugate display that costs $7. Lesson learned: If you don't disrupt their existing shelf/counter space they're willing to give almost anything a shot to see if it sells.
• What's the point? - The goal isn't necessarily a network of 5,000 small stores that we have to pack and ship UPS boxes to every month, although if that were to happen, who cares, we make 30% on each sale and get prepaid with a credit card. The goal is to get your product in front of customers, without giving it away. You're also creating B&M proof of concept that you can talk about when you finally get that meeting with a buyer at a major retailer.

Good luck.

 

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[G-Man]

Where do I even start to learn about this B&M stuff and getting into chains and stores?

Honestly, I learned all this on the job. I don't really know. I kind of lucked out, and the founder of the business has been doing this for like 15 years, so I had an easy way to absorb it all.

Whats a spiff? What's buyback?

• SPIFF - it's an acronym, but I have no idea what it stands for. Basically, as a vendor you offer a commission to the employees at the B&M stores you sell at. You typically do it in periodic rotations. Employee sells item, get extra bonus in their check, retailer deducts from open AR.
• Buyback - typically it's when you just "buy back" an non moving or expired inventory. What I was suggesting for @Ultra Magnus was a way to give the merchandiser guaranteed revenue from a slot, to help them overcome the risk of taking on an unknown sku. It would go like this:
  • Ultra: How much revenue per month do you need from that slot?
  • Buyer: $800
  • Ultra: My item retails for $200, so I could give you that if I sold 1 unit per week, and my cost to you is $120, so I'm beating your 30% margin requirement.
  • Buyer: Sure, but I have skus that I already know can hit that target, why should I take a chance on you? I have quarterly targets to make.
  • Ultra: How about this - You buy 12 units for Q1, and at the end of 12 weeks, I buy back whatever is left over at $200

There are a dozen ways to do this, including just promoing, and often buyers will meet you half way (how about I buy back at $180?), but you're basically saying: No matter what, I guarantee you hit your revenue target, even if I have to buy it from you myself. It's a bold move, and you should make sure your balance sheet can take it, but it can be very effective.

 

[G-Man]

So our product recently got placement in Sam's Club, and I've learned a couple things that might be useful for anyone that wants to sell in club stores.

• Data can be deceptive. We chose our club stores based on the performance of a competitor's sku. We did not go to the clubs before we placed. Yuge mistake. So, when I walk into a club for the first time to try to figure out why the product isn't moving, I know the answer as soon as I pull in the parking lot, and it could have been avoided..... This leads me to lesson two:
• There's no replacement for boots on the ground. Your goal is to create wide distribution where your product sits on the shelf all over the country, selling 24/7/365 all by itself. This doesn't happen at first. Walking into individual club stores, we discovered they had the ability to change placement at the club managers' discretion literally overnight. Like, Tuesday it's deep in the middle of the rack, and Wednesday morning it's on an endcap, and for the small price of talking to the manager for 10-15 minutes.
• Data still matters. The goal when you're in B&M is to do everything you can, including standing in supermarkets handing product to people if necessary, to get your awareness and velocity up. Your goal is to show the stores you're in moving crazy velocities. That's the data merchandisers at other chains look for. Think short term micromanagement for long term no-management.

 

[G-Man]

Would you go directly to the merchandiser for sales, or do you go to a distributor? Both?

C-stores for instance, would you go directly to the chain of c-stores or to Amcon, McClane, Farner-Bocken, etc?

Both. It's easier to use a distributor like Kehe and C&S at first, because you wouldn't be able to get a meeting with a buyer if you paid for it. Problem is they stick it in you on the back end, and they're impossible to deal with. We've now gotten to the tipping point where buyers from major chains are seeing our product on the shelves at their competitors' and calling us directly.

We don't do C-stores, and have decided we won't start until we can get a chain with at least a few hundred stores to start out with. We're a small company, and don't have the time and money to come up with a new pack size if we're not getting volume right out of the gate. Really really want to be there, but have birds in the hand we need to kill and eat first.

 

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[acerseller]

As someone in specialty food as well, there are some other benefits - recurring purchases and high barriers to entry (especially in perishable food.)

In addition, I have managed to generate a couple million in sales all direct to consumer via sites, rather than through wholesalers. This keeps the control and the margins are huge (compared to wholesale). Ultimately though, retailers will be required to maintain growth.

 

[MidwestLandlord]

Mom & Pop - more willing, and no discount. I think they look at it, and you've removed the "Where the hell am I gonna put that?" reaction they have when they see new products. Also, if your display is nice, it actually adds to the overall atmosphere of their store.

I run "Mom & Pop" B&M's....

This is so true for me.

I don't get nearly the support that my larger competitors get when it comes to P.O.P (point of presentation) materials. So someone comes in with a nice display, a product that has a chance of selling, a decent margin for me, AND does not insist that I bump a known best seller off my main racks or front counter? Why wouldn't I try it?

 

[amp0193]

Is not wholesaling (selling to retailers) the simplest, most effective, easiest to organize and control, lowest risk and least expensive way to market physical products in the US? Sustainment, profit and growth potential is good without parallel cost increases.

I think selling direct to consumer is way easier, especially with the internet.

• Consumers don't ask me for net-30 terms.
  
• Consumers don't ask me for a free sample before they purchase.
• Consumers come looking for me, B&M stores typically don't.
• Consumers purchase your pre-made offer without asking questions. Whereas, every B&M sale is a conversation that takes time and multiple follow ups.
• Selling to consumers, I'm not as dependent on their re-orders. There's always more customers that will find you through advertising. There's only so many B&Ms you can tap.

If you can nail down a good distributor, B&M becomes easier and less time consuming, at the price of lower margins for you.

My preferred strategy is to build up a base of income from direct to consumer sales, and use this to bankroll the expansion into wholesale.

 

[G-Man]

Grocery stores USA gross revenue 2015: $649.087 billion

And the way that's categorized by IRI, it doesn't include stores that are mass merchandisers but also sell groceries, so you can stack walmart, sams, costco, target, meijer, etc all on top of that.

The market is yuge.

 

[G-Man]

This is a very eye-opening and interesting response. I hadn't even thought of it in terms of the long-term benefits.

The one show I did had a higher ROI than I would think a normal trade show would have, as it was an invite-only vendor show at the annual franchise-owner convention for a large chain of stores. I was already pre-vetted by corporate, so there was some added confidence in the store-owners' mind.

A big benefit I walked away with from doing it though, is knowing what questions store owners ask, and making sure I had answers to them for future stores that I talked to.

Yeah, you definitely have to think of it as an iterative intelligence gathering process as well. Any chance you have to interact with merchandisers has the potential to be worth it, if only in learning.

 

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[G-Man]

Well, now I've got to internalize the wants and desires of both the target user and the retailer AND make sure I don't go bankrupt in the process

The product has gotten positive reviews from influencers. However, since it's expensive I think people would really like to get their hands on it before purchasing. From the user's perspective they won't be motivated by a money back guarantee if they have to pack the product up and send it abroad, it's a pain in the a$$ (there is a guarantee, ofc). They are used to checking things out at the store though, so this would be the ultimate risk reversal.

But the store is a business and they have to turn a profit. Some might be persuaded by the fact that no one else in the area has this (as most stores carry the same merchandise that can also be gotten online much cheaper). So far, I think I'm just going to send introductory emails along the lines of: "Hi, I'm X, would you be interested in Y? Here's my website, if you think this could sell for you let me know and we'll settle the details". I'll see where this takes me.

I'm learning a lot here guys and I really appreciate your feedback. I'm going to dive into this and report back with my findings. Hopefully, someone will be able to benefit from my experience.

Good news bad news here, but I have an idea.

Sell it to them directly. Promise a velocity. Offer to cover lost revenue. We have to do this in supermarkets occasionally. It sucks. Only had to pay once, though.

 

[G-Man]

If you can nail down a good distributor, B&M becomes easier and less time consuming, at the price of lower margins for you.

It's not just lower margins. Once you get really going, you gotta pay someone a staff accountant wage to keep all the throughput and billbacks under control. Some of that shit can take 6 months to make it through and hit you with a payable.

I think your strategy of DTC to small retailer to major chain is the way to go. It will also get the product out there so that there's brand awareness by the time you hit the shelves at a chain, so you have pull from day one.

 

[amp0193]

With selling to retail you can get the orders in hand before you even make the items.

I actually used to do this, but you gotta have fast lead times. They start to get pissed if they don't have their order in 2-3 weeks.

You can pre-sale direct to consumer as well, which is how I am going to launch my next business this year.

I have found that anyone asking for a "free sample" isn't serious about buying so in general either they are interested or they are not.

Nearly every store with multiple locations sends copy/paste templates to handle the sheer number of new vendor requests. They won't even talk to you until you do their paperwork and send a sample.

 

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[G-Man]

Just a small update, I'm currently talking to the contact @amp0193 sent me. I've also had one other positive reply regarding logistics in the US, from a referral I got at a company recommended to me by @Walter Hay a year ago when I was looking into Free Trade Zones (far too small for that option, unfortunately).

We'll see where this will go as individual parcels avoid customs fees since the value is too small (under $800 USD), but a bulk shipment would incur entry costs. I assume those would be calculated based on the retail value of the goods.

So here's a question, assuming in the future I found some stores in the USA that'd like to sell my products, would the declared value be the price I'm getting from them (which would be significantly lower), or the retail value? For the purposes of customs fees, would the units going to stores have to be separated from the same goods at the same warehouse but sold to individuals?

Declared value what you paid the vendor.

 

[amp0193]

Damn straight. In our space there's only about 4 real competitors, and they're sleepy and ineffectual.

I should have said that too. Of the ones I can count on my two hands, only 2 or 3 of them are serious. And even then, not that serious.

 

[amp0193]

We will never sell enough to get our money back BUT, a buyer for a larger company walks the aisles of that small chain, and ordered our product for a major chain because of seeing it at the smaller stores. This has happened at least twice in the last 18 mos.

This is a very eye-opening and interesting response. I hadn't even thought of it in terms of the long-term benefits.

The one show I did had a higher ROI than I would think a normal trade show would have, as it was an invite-only vendor show at the annual franchise-owner convention for a large chain of stores. I was already pre-vetted by corporate, so there was some added confidence in the store-owners' mind.

A big benefit I walked away with from doing it though, is knowing what questions store owners ask, and making sure I had answers to them for future stores that I talked to.

 

[G-Man]

Also, I should add, the shipper comes with the "shelf" portion already packed for display, so all the receiver has to do is cut open the overbox, plop it on the stand, and put the header on top. The customers love this. It's as close to plug and play as you can get low-tech, and it's the kind of detail you have to think about when selling to these people. If a busy shop owner has to spend 15 minutes trying to figure out how to build the damn thing, it decreases the odds of a re-order.

 

[G-Man]

I think this is the biggest reason to pursue small B&Ms. You get the kinks worked out, find out what they want, have a history of B&M success to make bigger stores more comfortable taking you on, and so you don't F up your first (and maybe only) go at the big guys.

Gonna rant and rave here a little bit. I just spent the afternoon digging through 18 months of billbacks from an Albertson's region plagued by an incompetent broker.

Get as many sales to small B&M as possible. The cash cycle is way better, and they don't rape you with billbacks. I sometimes wonder if we shouldn't have spent an entire year doing nothing but selling shippers to small venues. I think if done right, you could easily create 30k/mo in prepaid, low-maintenance sales,... but the glory of being able to say "my product is in _______" is too tempting

 

[G-Man]

Thank you for the answer! Is there any spiff range that's kind of customary, or is it all situational?

My idea was to give potential buyers the ability to see and test the product in store (since it's unique in its category) before ordering one for themselves. After all, no one can judge the quality of what you're selling unless they see it in person. Also, I've got a stack of the stuff in the garage where it's only got spiders and other small insects for an audience.

I thought that a store might be happy to keep one on display to showcase it, if they get a cut for customers who place an order.

On Spiff amount, I don't know. We sell food products, so that's way out of my wheelhouse for a product like that.

Also, if you're gonna go through all the trouble of getting the product into stores, and into a customer's hands, I wouldn't want them to have to turn around and order. They need to leave with that shit in their hands.

If you're gonna make the sale, make the sale.

 

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[MidwestLandlord]

I thought that a store might be happy to keep one on display to showcase it, if they get a cut for customers who place an order.

Floor space isn't free. Besides the overhead costs of the floor space, there is opportunity costs.

In other words, if I have a product sitting there not selling...it is costing me sales on a product that would sell in its place.

(there are exceptions though)

 

[G-Man]

So maybe just ask them if they'd like to stock one unit and see how it goes? Since it's not going through a wholesaler I guess their cut would be decent.

I think you're misunderstanding @MidwestLandlord here, and it's an important thing to learn for selling B&M. A retailer has a fixed amount of real estate, so their goal is to turn that space into dollars. There are three basic elements to this: margins, ring, and turn.

• Ring: All other things equal, they will prefer and item with a higher ring. It increases gross revenue.
• Margin: All other things equal, they will prefer higher margin. It increases profit.
• Turn: All other things equal, they will prefer higher turn, it increases both revenue and profit.

By telling a retailer "just put one out there and see how it goes" you're telegraphing that it won't move.

It sounds like your item has a high ring and good margins. Those are both great things, but they don't matter if it doesn't turn.

there is opportunity costs.

This is the internal mental language of the merchandiser. You have to internalize it.

 

[G-Man]

Good idea, G-Man. It might just be what's needed to seal some deals.

I'm reminded of Jay Abraham's tip regarding taking ideas from other industries and applying them in your own business. Can the experience of a food vendor be applied to a problem of a manufacturer in a nerdy niche? Of course it can. Finding these connections, thinking laterally, and discovering the business worlds inhabited by others is to me one of the chief joys of entrepreneurship.

I think it's really for you going to be about understanding the economics of B&M. Once you really understand the circumstances the retailer faces, you can come up with tons of possible creative solutions. Retail is tough. I learn new stuff every day.

 

[amp0193]

Gonna rant and rave here a little bit. I just spent the afternoon digging through 18 months of billbacks from an Albertson's region plagued by an incompetent broker.

Get as many sales to small B&M as possible. The cash cycle is way better, and they don't rape you with billbacks. I sometimes wonder if we shouldn't have spent an entire year doing nothing but selling shippers to small venues. I think if done right, you could easily create 30k/mo in prepaid, low-maintenance sales,... but the glory of being able to say "my product is in _______" is too tempting

I was thinking about this yesterday.

The other benefit of smaller stores is increasing your income resiliency. If you have 800 small stores, and lose 100 accounts, you're way better off than if you have a few huge chains, and losing one of them.

 

[G-Man]

I have found that anyone asking for a "free sample" isn't serious about buying so in general either they are interested or they are not.

Not to put words in @amp0193 mouth, but I think in the context of what he's saying, that's not true. Typically, when you sell to large chains, you are sending everyone and their brother samples of the products before hand, and in the case of CPG, if you finally do get on the shelf, oftentimes the first round of product that actually stocks the shelf you have to give them for free. The call this "freefill". When you sell directly to the consumer, they don't expect you to stock their F****** warehouse for free.

With selling to disty, a lot of people just leave all that loss in their margins and never really track it, because it's not worth it. Because we're building this company with an eye to selling to a publicly traded multinational from day one, we can't do that.

 

[G-Man]

I figured I'd wait a bit for a response before following up

If you're waiting longer than a week, you're waiting on someone that 100% has forgotten you exist. Keep after it. You'll get one.

 

[Walter Hay]

Declared value what you paid the vendor.

That's right, but you will find that it's not only the amount paid to the vendor (FOB value), but also freight cost. That means FOB + Freight paid is the declared value on which duty and taxes (if any) will be paid.

There is no difference after the goods are landed. Wholesale sales and retail sales will still have cost you the same unit price including duty and tax.

Walter

 

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[G-Man]

So what was it that you learned in the parking lot?

TLDR: None of the people in the parking lot were my customer.

Disclaimer: I cannot explain this in a PC way. Anyone that's done marketing knows customer profiling is not PC.

In the parking lot I saw mostly large Hispanic families and Asian men who had the cut of shop/restaurant owners. The first thing I saw on an endcap in the store was plain 50lb bags of rice... on a freaking endcap, and the store was full of store owner types with flat carts.

Alternatively, in a club we do well in, if I walk in there on a weekend, I see young families stocking up. On a weekday I see semi-affluent looking housewives. The endcap displays are household products or specialty food items, not bulk food staples.

This is why you gotta go to the stores. If you're in there for 30 minutes and don't see but maybe 1 or 2 people that meet your customer profile, you can ignore whatever those spreadsheets seem to tell you.

 

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