In the food and grocery industry, large retailers, distributors, and brokers wield absolute control, leaving food manufacturers to bear all the risks. The current system prioritizes profit over quality, with retailers and distributors emphasizing high-margin products, often at the expense of food quality. This results in consumers paying more for inferior products. Small manufacturers, known for their commitment to higher-quality offerings made from fresh ingredients, struggle to compete in this competitive environment. The industry's profit-driven approach has led to a reduction in both the diversity and quality of food options available to consumers. Here are six critical challenges that every food manufacturer faces, challenges that often require accumulating substantial debt to overcome.
The Problems in Relying on Others in Distribution
Food manufacturers frequently rely on distributors to bring their products to market. However, distributors often mark up products by 20-30%, making them less competitive compared to products sold directly by the manufacturer. Distributors also have control over the price in retailer stores and the distributor markup can lead to significant price discrepancies, resulting in a loss of market share.
Manufacturers Take in All the Cost and Risk
Distributors typically add an additional 20-30% margin, and food brokers take another 5%, along with their monthly fees. Retail margins in grocery stores can range from 40% to 60%, and are even higher in specialty shops. Moreover, retailers impose annual listing fees, averaging $15,000 per SKU, with no assurance of product retention on shelves. Compounding these challenges, manufacturers are often required to guarantee product expiration, leading large retailers to overorder and push the financial burden of expired products onto the manufacturers.
Tolerating Large Retailers’ Unethical Demands
Retailers like Loblaws and Tim Hortons are infamous for their treatment of small manufacturers. Loblaws, for example, is known to delay payments for up to six months, which strains the cash flow of small businesses. Additionally, retailers often overorder products, mismanage expiry dates, and return unsold items, expecting manufacturers to bear the cost. There are also instances where large retailers copy successful products from small manufacturers, producing cheaper versions and selling them at slightly lower prices.
Difficult to Increase Market Visibility
Reaching out to buyers and gaining access to retail shelves are expensive and challenging. Retailers prioritize relationships with distributors and brokers, making it difficult for small manufacturers to reach category buyers directly. Food shows and trade exhibitions, which are funded by manufacturers, are often unproductive as getting ghosted is a common occurrence. Manufacturers have reported spending significant sums—sometimes over $200,000—just to meet potential buyers. Retailers, distributors and brokers are not incentivized to work with small manufacturers.
The Cost to Promote New Products
Manufacturers bear significant costs to promote their products in retail stores. They are required to provide four annual promotions, which are funded entirely by the manufacturer, not the retailer. Additionally, retailers demand free product samples, known as free fills, for use at their discretion. In-store product sampling, including hiring a sampling crew, is also financed by the manufacturer. This system places immense financial pressure on manufacturers, who must absorb these marketing costs. This inequitable structure has discouraged food manufacturers from investing in developing new and improved products.
Solution Requires Large Capital
To address these challenges, food manufacturers have two viable solutions, both necessitating substantial investment. However, with the current era of high interest rates, securing funding presents a formidable challenge for small manufacturers.
- The first solution involves vertical integration, wherein manufacturers manage Direct Store Delivery (DSD) themselves. This strategy requires significant capital outlay for acquiring trucks, potentially refrigerated ones, and hiring drivers. While vertical integration offers greater control over distribution and potentially higher margins, it also introduces complexities and financial burdens that can divert resources from core manufacturing activities.
- Alternatively, manufacturers can focus on increasing productivity and efficiency to mitigate costs and enhance margins. This approach involves optimizing production processes, reducing expenses, and identifying distributors willing to assume some of the inherent risks. Finding efficient distributors is crucial as it allows manufacturers to streamline operations and concentrate on improving product quality and market competitiveness.
