Often, I get asked the question, “what is the right mark up to ensure we cover all of the ‘other’ costs?” The right answer is there is no ‘one size fits all’ solution. There are a number of costs you need to absorb to get your product on the shelf and keep it there with reliable sales.
As a food business sells product into more complicated customers the complexity and costs increase. Usually there is a correlation between the volume and the costs. As the volume goes up, so do the costs.
Some of the biggest costs can be in getting your product to market. Distributors fulfill an important role of selling your product and getting it to the customers. Most distributors buy your product from you and re-sell it to the retailers so it is not an out of pocket cost, but you do need to factor it into the entire equation that will determine the retail price on your product. Depending on whether your product is refrigerated or not and the market you are selling into the mark up or margin of the distributor will vary. Often this will be between 20-25%.
Join us Wednesday October 28th on our SKUFood Recipe for Success as we will have Anthony Battaglia from Newport Gourmet with us. Anthony operates this distributor in the competitive Toronto market and he will help us understand all of these other costs and also share his insights into the market. This is one Recipe for Success you will want to see!
Brokers are another cost that needs to be absorbed if they are the right option. Brokers will represent your products at the office of your customer and/or their retail stores. If your item is new to the market, brokers usually prefer to charge a retailer until the volume builds and they generate revenue. Depending on the services they are delivering, brokers will charge 3-5% of your sales into the retailer.
Once you determine the selling model for your products you will need to develop the program to get it on the shelf and into the shopping cart. Smaller retailers will charge free fill which is one case per sku per store and larger retailers will charge listing fees. Essentially, this is the cost of getting to the shelf. Once you are on the shelf you need to develop your promotion program. This is unique for each retailer and each category. A minimum would be 3-4 discounts of 15-25% per year.
Most retailers will want your product listed with GS1. This is an industry wide resource for unique bar codes and other product information. Retailers access this and when registered you will be able to generate unique barcodes that are associated with your business and your products. The fees are directly related to the number of SKUS you have.
Insurance is another cost your customers will require you to incur. They want proof you have the appropriate level of insurance to protect against any liability and absolve them of any responsibility related to your products. The level of insurance required is determined by each retailer.
Food safety is another non-negotiable cost that food businesses must incur. Retailers will have expectations that are unique to each department so it is important to understand these prior to even having the conversation with a retailer. Some will require minimum standards such as BRC or SQF and others are looking for a HACCP plan or other third party audited programs. Regardless of the requirements, they all include a cost and often it is an annual fee. Remember to include the out of pocket costs and the internal costs of labour and supplies.
Many products sell much better when they have certifications included on the label. Examples could be Non GMO, Kosher, Gluten free and many more. Each one will include a fee and work required to qualify. There will be initial work and fees to get the certification then an annual fee to maintain it.
All of these costs are part of doing business and need to be factored into the equation that will determine the right selling price. You should have a list of these costs to ensure they are all included. Even if you start doing your own distribution you should understand the cost and include it in your delivered price. There is a cost and some day as the item grows you will need to absorb it.
If you want some help to figure this out join us for our Recipe for Success presented by FCC on Wednesday October 28 at 2pm Atlantic (1pm eastern).
Last week we shared the different forms of temporary price reductions (TPR) in the food industry.
If you missed our SKUFood Recipe for Success presented by FCC last week you can view the replay here.
If you want to talk about the numbers or need some advice just send me an email at Peter@SKUFood.com or give me a call at (902) 489-2900.