Understanding the Costs of Going into a New Food Retailer

Securing product placement on the shelves of a new food retailer can be extremely exciting. But, before signing a contract with a retailer, manufacturers should gain a clear understanding of the costs associated with selling products with that retail partner. This is because underestimated or surprise program fees run the risk of derailing the products’ profitability with that retailer.

On the other hand, when they understand all associated costs of working with a food retailer, manufacturers can factor fees into the products’ budget and pricing and promotion strategy to ensure a healthy profit margin. In addition, it’s possible to negotiate some terms for a more mutually beneficial relationship.

All retailers have different requirements, rules and language in their contracts related to doing business with them. However, there are some similarities and overlap among them.

Keep reading to learn a handful of common program fees food retailers charge new manufacturer partners to sell in their stores. And, if in doubt about the commitments outlined in your particular contract, rely on a reputable retail food broker, like Bay Food Brokerage, to review the document – including the fine print – with your best interest in mind.

Slotting Fees

A “slotting fee” is a one-time upfront fee charged to have products sold on the retailer’s shelves. It’s called a “slotting” fee because the product is taking up a slot in the retailer’s distribution center. This fee helps cover the retailer’s logistics, warehouse and operations costs to bring in new products.

Some retailers do not charge a slotting fee, while others charge a flat rate or even a per-store rate. It’s especially important to take note of and do the math on a per-store slotting fee, as this total can add up, depending on how many items are being sold and in how many stores.

On a side note, distributors may also have one-time slotting fees, which manufacturers should also take into consideration when budgeting and planning.

Fair Share or Reset Fees

Typically, retailers calculate this annual fee by the number of items a manufacturer has in stores and the annual sales amount. It’s used to pay employees to reset the manufacturer’s cases every year.

Some retailers call this “fair share” or “reset fees.” At Publix, this program is called In-Store Execution (ISE). These fees should be built into manufacturer’s budget to avoid any miscalculations down the line. As an aside, Bay Food Brokerage has a dedicated team for managing fair share/resets/Publix ISE.

Promotional Fees

Different retailers have different marketing and promotional activities manufacturers can participate in. This could include omnichannel shopper marketing and trade spend in the store and print ads. Some retailers do not require an added cost to participate in promotional activities (beyond the scan rate fee), but some will charge an upfront fee, such as for being included in a print ad.

A manufacturer who’s considering marketing and promotional activities that have an added cost besides the scan rate should consult with their broker partner to understand the estimated cost-benefit ratio of participating in the program. An experienced broker will be able to give a reasonable prediction of what to expect, in terms of short-term and long-term impacts of a promotional campaign.

Off-Invoice vs. Scan Rate

Most retailers manage promotions by using a “scan rate.” For example, a retailer buys a manufacturer’s products at full price, and when the product is on sale and purchased at the register, the retailer charges the manufacturer for the total amount discounted for that product during the promotion. In this scenario, manufacturers are only charged for the items sold.

However, some retailers don’t use a scan rate and instead use a method called “off-invoice.” In this case, the retailer purchases inventory from the manufacturer at the already discounted rate. What’s important to understand here is that all of the product purchased may not sell during the promotion. In this case, the retailer is benefiting from being able to sell the inventory they had bought at a discounted price for full price later.

Understanding Contracts

A trusted retail food broker partner can help manufacturers educate themselves on the fees associated with going into a new retailer. In contracts, they can identify the nuances that may not always be apparent to manufacturers. They also tend to know what terms may be open to negotiation.

The bottom line is the right broker partner will help put together a profitable program for both the manufacturer and the retailer, helping to build a successful long-term relationship.

Unsure of what costs to expect when selling products with a new food retail partner? Contact us today for help navigating this process to ensure a profitable endeavor.