Dire predictions of the future often have one dominant company controlling the world.  Discussions of Whole Foods Market and Amazon this last week at the Austin Kehe Natural Show ranged from sorrow to highly concerned agitation.  There is no doubt that the centralization of WFM is a major shift in how the natural channel will be structured or that traditional retailers have been marching toward a showdown with online retail for nearly a decade.  But despite all the sadness and hand wringing with these impending changes, we will get through this.

We have seen such consolidations of major retailers and key distribution before.  These cycles are always followed by breakouts of innovative retailers attuned to their customers.  As WFM grew its power and then isolated itself, new retailers and buying groups such as Natural Grocers, Lucky Markets, Sprouts, Fresh Thyme, INFRA and NCG have grown significantly. And in the wake of recent WFM neglect of their customers, they have gone into overdrive.

I must agree with many of my colleagues who see this time as opportunity for independents and small chains.  Customers still want their retailers to make them feel special.  They want what they want when they want it (at a price they are willing to pay) to paraphrase Joe Albertson.  Our best independents are masters at customer service and building community.  They know their customers, understand and respond to their needs and are not afraid of writing a special order.  They are more than two clicks and a UPS truck pulling up at the house.  That doesn’t mean the path will be easy for independents in the coming years.  They will have to become proficient at innovative technologies, learn to communicate differently, and be diligent in creating experiences for their customers.  But their high-touch connection to the consumer and deep local relationships should shield them from the pain large traditional grocery chains will certainly face.

Growing brands should build a diverse customer base.  Large retailers are part of the package, but there is significant risk in being too dependent.  The big chain stores, including WFM, are notoriously fickle and brands are often one buyer change, shift of strategy, or reorganization away from being discontinued. Additionally, planogrammed placement in hundreds of stores doesn’t necessarily translate into significant volume.  With the right product, promotions and relationship, a handful of stores can sell more in a month than a whole region of Kroger.  New placement investments are also often less at independents and working closely with them also can give a brand insight that years working with chains cannot.  The buyers are just closer to the consumer and most are happy to share what they know. 

As an industry we should help them.  I am all for building relationships with big retailers, but I have said for years that if we don’t support small retailers, all the retailers will be big retailers and then there will be hell to pay.  The same is also true of distributors.  The anxiety for most natural brands is that WFM represents a large part of their sales; in some cases over 50%.  With the coming sku reductions, this means painful days ahead.  Focusing on independent retailers is a great way to offset the losses and diversify; while at the same time getting a better return on investment.  If your goal is to grow sales and build a sustainable brand, then independents are critical to your success. 

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.