Expert: Eric Hofer - 9/16/2009

Question
Hello Eric…  I am in the early stages of starting a beer and wine importing business and have a couple of questions.  

Currently I am not sure if I will start off trying to sell to distributors or wholesale the product myself or both.  In your opinion, what is the best way to start such a venture?  What obstacles should I expect to run into when dealing with distributors as well as wholesaling myself?  Does the importer set a suggested retail price?  

How much does the beer and wine distributor want to make on the product when wholesaling it, and how much does the retail outlet (restaurant, gas station, grocery store) want to make when selling to the consumer, eventually establishing the retail price?

The last question is very important to me because this will help me determine my negotiated price with my suppliers as well as volume needed , when considering all of my costs, to make a profit.   I need to know how the pricing structure and markups in this business work.

Any advise is much appreciated.  

Answer
Joe,

Answering your questions in order of appearance...

1. How to go to market depends on many factors:-
- the end consumer profile
- general knowledge, appeal and interest in your product by your target consumers
- cost to serve - infrastructure you have, capital you can put, the duration
- geography, density of consumers, reach of your selling team
- internal capabilities - do you have sales reps, contact with outlets, etc.
- competition - how entrenched are the competitors with your target outlets
- local infrastructure - are there local distributors through whom you could work, making you the importer.
- supplier presence - are the products you want to import already in the market?  are there exclusive deals, etc.

You'll have to elaborate more on many of the above factors to identify which approach(es) is(are) best to consider.

2. The obstacles with distributors are:-
- not getting paid
- not getting any or accurate sales channel data
- iability to focus / lack of control of sales reps (if they have them)
- not being able to control your promotions as you would like
- being in conflict with the distributor's agenda / objectives (you want to sell, the distributor wants to optimise operating capital costs)
- cut through pricing - where you expect a certain price and the distributor, whose agenda differs bundles your product, dumps your product etc.
- lack of knowledge of floor inventory, days of sales, etc.
- obfuscation as to customer base
- differing priorities when it comes to logistics - for example you send in an order but the distributor doesn't think making the drop is worthwhile


3. Anything is possible.  The importer can amend the label to show a RRP; of course, that is open to abuse and can also dilute the brand if not policed.  Setting an RRP is sometimes necessary, however if you're not the market leader, then you're at the mercy of whoever is - and if that company decides to "take pricing [down]" you're stuck with your RRP.

Starting up, you may not be sure of the RP - and might paint yourself into a corner.  

On the other hand, if you sell to cheaply, the brand owner might cancel your contract.


4. Distributors and wholesalers want to make as much as possible.  But that's not easily calculated as you have to take into consideration warehousing, pilferage, coded (stale), cost of capital, promos, alternative allocation of capital / space for other products, how your products compliment the distributor's portfolio (e.g. if you're the only Merlot from Chile that the distributor offers, and he sells based upon offering all there is from South America vs. you're 17th Merlot he's got in the back of the warehouse), how much you contribute to marketing, how much competitors contribute ...  Considering just Trade - COGs is simplistic.  You'll have to do some research here to get a better idea of what the expectations would be.

4A. I would think that like what I mentioned on point "4" the same applies to the retail outlet.  End consumer pricing is usually relative to other products in that channel and territory.  If you have a "known" superior product and demand, you can charge more.  If you're a "also ran", mediocre bottle of plonk, then your price is on par or below your other products in the same field.

To induce sales usually you do promotions.  Tastings, events, in-store give-aways, meal-deals, sponsorship (though I'd leave that til later), exclusivities (another later), displays, etc.  You also have to have field staff executing; these are people working the outlets to ensure that the promotion(s) you run are being expedited and that you're getting what you paid for.  You need to know how to connect to your target.  What would motivate them to lift their hand towards your product?  Is it cause it's at eyelevel, at the checkout, related to something they find agreeable?


5. To figure out the pricing you're going to have to go and survey the market.  That means visiting your "target" outlets, recording their prices for a period, asking to see invoices from the distributors in the area; interviewing the distributors to see what they would offer and can deliver, and what their expectations would be...  You also need to assemble what you're going to offer and determine the lowest value that you can charge and the terms you'll be able to give.  That means talking with suppliers, determining the territory arrangements they already have, the marketing materials / spend they'd be willing to offer (if any!).  In truth, your very first steps here are research about the market and then modelling what it'll cost.

- - -

One of the major learnings I've had is that it's in field execution that can make or break a product.  that means knowing what's going on in the market as quickly as possible and responding; keeping your field staff motivated, organized and methodical; getting the most out of every outlet visit.  If you're managing your team, their in-store execution and the outlet relations you reduce your risk.

When it comes to this area, then you need coaching and systems; trying to evolve this is on the fly while building a new business is a challenge to say the least ...  There are a couple of consultancy out there.  Salessuite (www.salessuite.net) offer both systems (which they offer on a rental, pay as you go basis making it more than reasonable) along with consulting, tools, training materials, procedures for your infield and back office teams.  With their tools and support you'd improve the odds as they'd help you to develop your back office and manage your distributors, infield execution and presence.

Eric