Expert: Eric Hofer - 6/1/2010

Question
Hi Eric,

We have a juice product that has only recently launched.  We have been approached by persons who would like to act as distributors of our product.  Their expectations on profit vary largely and I need your expertise:

1) What is the expected profit, generally of course, in the Juice Beverage Industry?  I have been told that the answer is a  "margin", meaning remaining profit after subtracting the costs (i.e. shipping the product).  Is this true?

2) If the answer is a range, under what incentives would a distributor sign on for a profit on the low range and, similarly, what incentives would I expect from a distributor signing on the high range?

We are a small business and I just learned of this new obstacle to growing from a regional area to a national scale.  If shipping charges are added to the markup this will decrease the "margins" that distributors expect farther away from our warehouse.  Thus making distributions less enticing there.  Any leverage I could have in this scenario?

Thank you for your expertise.

Regards,
Day-by-day

Answer
The term "margin" is applied with a host of modifiers.  One definition is as you said, Gross Revenue less Cost of Goods, but in finance it's generally reported as percentage (though several reports I've written, its been used as the value title).  I think what you're talking about is Net Revenue - where there are still other costs outstanding.  The financial treatment and terms used reflect how you want to consider variable and fixed costs, where tax and financing comes in etc.  Please see http://financial-dictionary.thefreedictionary.com/

As to the term, "expected profit" - I'd take that to mean the return as one would "model" the revenue and costs.  I cannot see how the word "Margin" is the answer to the question as to what is the average, profit in the Juice segment.  One might as well answer "42" (see http://hitchhikers.wikia.com/wiki/42 if you don't know the significance of this answer).  

The reason I say this is that everything in the question is relative.  How much are you investing?  How big is your market?  What is the strength of your competition?  What are your costs?  What pricing can you achieve?  If there's somebody out there that can give you those answers, please pass me the contact...


Range
=====
I'm trying to understand your question.  If you're asking, "what would a distributor expect depending upon what their margin might be?" then what you're really asking is, what are the various items one might negotiate.  Here, I think I can help.  The trade offs are:-
- marketing support
- capital cost / carry %
- credit days
- returns policy
- rebates
- execution bonuses / incentives
- periodic targets
- delivery/shipping costs
- customs
- quality assurance / assessment
- renewal terms
- late payments
- volume related responses
- out-of-stock forfeits
- response times/lead time (e.g. 48 hrs, 1 week, etc.)
- sales / product commitment

Primary Transport Costs
=======================
As you start to transport longer distances, obviously fuel and time grows.  You can counter such by:-
- larger volumes
- fixed delivery schedules (that allow you to pre-book shipping)
- premium mark up (if people are willing to buy your product that must travel further, then it is usually because there's a perception of higher or unusual quality as you're not a "local" supplier); for example, why do people drink Perrier bottled in France, in New Mexico?
- co-shipping partnership - where the shipper piggybacks your product with other products to reduce cost; sometimes this comes through cooperative work with say a railroad, a large retail chain, etc.


I guess you're looking further afield as you've saturated the local market?  But are you sure there's not more mileage closer to home?

How are you developing your market locally?  Do you have your own sales team?  Are you direct or pre-sell?  Do you use non-visiting techniques to drum up sales?   Consider www.salessuite.net; its a team I'm working with and who've been able to help several small companies improve their local operations - driving efficiency and effectiveness.