I’ve spent a lot of time in the last few weeks doing promotional plans, discussing pricing with my clients and how best to control every day and promotional retails.  Managing your landed cost might be the most important external factor in achieving the right retail on shelf.  While you cannot control the margins for distributor or retailer, you can control or at least manage the landed cost.

Landed cost is the everyday price at which the distributor owns the product in their warehouse.  If you deliver your product to the distributor, then the price you sell it to them for is the landed cost.  If the distributor picks up the product, then the landed cost is your price plus the freight burden they add to the product to move it their warehouse. 

For the last 20 years, the large distributors have been both consolidating at a furious rate, following retail consolidations, and ratcheting down their own margins through negotiations with these larger and larger retailers.  The result is that they have talked themselves into contracts with the largest of retailers which are not profitable.  Backed against the wall, they are looking in every direction for revenue streams to return to balance. 

Logistics has always been a profit center for these companies, but in recent years they have gotten more aggressive in padding freight burdens and hiding revenue below the landed cost line.   Freight burdens have miraculously gone up even as fuel prices have gone down.  To reap these revenue rewards, distributors have been pushing manufacturers to let them pick up.  In many cases, the distributor should be able to move goods more efficiently than a manufacturer.  They operate at greater volume and can get better rates from carriers when not using their own trucks.  Arranging freight, dealing with late loads and delivery appointments can be both frustrating and costly for vendors.  That said, it is critical manufacturers have a watchful eye on pricing and underlying freight burdens.  I have seen several cases where new brands and products have nearly been killed by the heavy hand of a distributor’s transportation department.

Even if a manufacturer holds steady with their pricing, creeping freight burdens can create unplanned price increases and upend your retail pricing strategy.  Each time these minute increases happen, retailers take the opportunity to review your pricing; often adding their own margin padding.  In the last year, we have seen several examples of key account retails moving from competitive price points such as $1.99 or $2.99 to less attractive pricing due to freight changes alone.  This can be deadly for sales and very difficult to correct.

So, what is a manufacturer to do?  Delivering your products is the only way to truly control landed cost.  It may not however be your best solution; especially if you are a new vendor or have low volume.  Do your homework and know what it takes to move product to each distributor warehouse.  Engage your distributor to review costs; matching these up with your own calculations.  If they seem out of line, say something.  If you are polite and persistent, your buyer and their transportation team will usually be helpful in finding a fair solution. It might not be the sexiest thing you do to build your brand, but the success of your products may depend on it.