Selling To Major Chains And Large Distributors May Not Be Good For Your Business

Selling to large chains is frequently fatal to small businesses and is most always painful and costly. It seldom provides the intended additional profits envisioned from anticipated increase in gross revenue when attempting to do business with the major distributors or chains. In short-selling to the major distributors in most retail or wholesale markets, or direct to the major chains, the following issues must be successfully navigated in order to survive, let alone succeed:

1. Net 45 is a promised illusion, the reality being net 60, net 90 or whenever. You end up financing their growth with net 60-90 day terms. You’re left supporting the increased overhead, cost of goods, etc., while waiting for the big check to arrive.

2. Everything is a guaranteed sale whether you agree to it or not. When they feel justified, they will simply deduct the remaining inventory from the past-due invoice and send back what didn’t sell. They’ll also deduct a handling fee, shipping costs and other add-ons while still postponing the remaining payable.

3. They will demand bone-crushing terms, allowing them to enjoy their enormous markups at your cost.

4. Samples will be required for the various buyers, stores, etc. Occasionally, a distributor will require a significant load of free merchandise, say 3-5 pallets, to disburse as samples to buyers, all at your cost, of course. It’s not a bad idea but a costly one. The distributors and chains will both want additional opening order incentives like one item free with every three purchased, or whatever they can beat out of you to sweeten the pot for themselves on the first order, decreasing your profits further and further.

5. I love this one–they will require contributions for supporting the printing of your product in their catalogs. The more you are willing to pay, the larger your display will be. You pay for their advertising. Less margin for you, more for the distributor/chain.

6. The dreaded slotting fees that began in the supermarket industry but have been spreading to other industries. You pay to insure your product goes on their shelf. You are now investing only in your customer’s profit as yours is long gone by now. You are now losing money and the customer is getting it all. But according to the broker (to whom you lose an additional 5%), this is what you have to do to sell into this chain or that distributor, and once you do, the others will follow and you can make better deals… but the individual chain buyers will all repeat the same song.

7. Should you miss a delivery date, they either threaten cancellation or fine you, further increasing your investment into this transaction.

8. Then, there is the automatic deduction for waste and spoilage, irrespective of whether or not there actually was any.

Don’t forget, you are building inventory with expensive payroll and cost of goods, and you must absorb these additional investments for approximately 90-120 days from the point in time when you began to build inventory, thus you’re spending your own money on the order right up until the moment you get your invoice paid, approximately (hopefully) 120 days later. Yet, since there may not be anything remaining to pay, you may simply get a credit notice telling you how much you owe them!

Can you imagine that? It’s all happened to me. So what is the conclusion? What should we do when contemplating doing business with the big dogs? The predatory habits of chains and distributors must be evaluated and demands made to meet your needs, or, refuse to do business. Your terms or no deal. Do not fall into any traps that promise you future business that will be profitable despite the lack of profit on this order. They are ridiculous. Either do business profitably and safely or just say no. Better you should do more smaller business than to take the extreme risk.

Another extremely common theme occurring in the construction trade that I have witnessed too many times is when the small subcontractor reaches for the moon, bidding and winning a large job, and the general contractor fails to pay the sub until the sub eventually goes broke and never has to be paid at all. This usually happens near the end of the job so by that point most of the work has been completed and the sub hangs on, doing everything he can to remain alive, waiting for the check which never comes. In fact, what also may happen is when the sub finally says they will not continue, the general hires a replacement to complete and charges the sub payable for the replacement work. There goes all the cash owed. The sub tries to fight it and the general claims they failed to show up so they had no choice. Meanwhile, the subcontractor has paid huge payrolls, purchased much material and rented many large expensive machines for the job while investing in the contract and waiting for the check, and eventually fails to pay his 941 taxes or just runs out of cash. I have seen this too many times to count.

Stay smaller, grow profitable and enjoy life. Big suppliers should handle large jobs, small business should stay in their own arena. You can reach your gross revenue and profitability goals in the market you are best suited for. Growth and development is fine, but accepting a large contract requires huge stamina and lots of cash. It may be profitable if you have the cash, but I have seen too many good small businesses go bust chasing the big dogs and unfortunately, catching them. For most, it’s the worst thing that ever happened to them. It’s not a good bet. Grow within your means.