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The Hidden Costs of Food & Beverage Distribution

Posted by: The Kitchen Coop | Posted on: March 24, 2014 | 0 Comments

Local Distribution

When it comes to growing your food business at what point does it make sense to work with a distributor? Aaron Perry of SOURCE Local Foods breaks down some of the costs of self distribution v. working with a distributor.

We live in such an exciting place and time – an incredible community of Colorado natural food entrepreneurs are responding to the growing consumer demand for natural, nutrient dense, delicious food and beverage products. My colleagues and I at SOURCE Local Foods have the opportunity to talk with, work with, and learn from hundreds of you as we go about our business of building sustainable food systems – central to which is providing an excellent distribution channel in the Colorado region. One of the things we’ve been learning is that people’s understanding of and attitudes toward distribution, distributors, and the associated costs varies substantially. Some view distributors as the “middle men” – often assuming they are taking a large cut from the value-chain. Other food entrepreneurs insist on providing their own direct delivery to grocery customers, and do so usually assuming that they are saving money in the process. While direct delivery can make sense for some producers at a very small scale – particularly if “making deliveries” is also an opportunity to get out of the office or production facility, visit with some customers, and enjoy the social value that our retail markets provide throughout the region; this obviously doesn’t scale very well. SOURCE Local Foods interacts with a number of producers who understand that there are both obvious and non-obvious costs when it comes to self-distribution. Let’s run through a few of the obvious and not-so-obvious costs of distribution.

 

Opportunity Costs

Every hour spent behind the wheel is one of a limited number of hours in the week that could be invested in product improvement, production management, marketing, finance, team development and all of those myriad activities that are so essential to growing a business.

 

Asset Depreciation

In addition to a time cost, there are the physical wear and tear on your vehicle as well as fuel, maintenance, and insurance.

 

Transactional Efficiencies

When it comes to transaction and customer relations management, distributors also perform significant work on behalf of food producers. There is a significant amount of work involved in invoicing, tracking, collecting payment, making credit adjustments as needed, and working with customers’ accounts payable departments on an ongoing basis. When food producers work with distributors a significant amount of “back office” administrative, book-keeping and record keeping work is efficiently outsourced. These transactional efficiencies are another way distributors provide real value to food producers, and allow producers to focus on their core businesses.

 

Scaling Distribution

Even when taking all of the fuel, maintenance, insurance and administrative costs into account, some small food producers still find it cost effective to hire labor for self-distribution. This can often make economic sense when the company is at the stage of having a handful of customers in close proximity to its manufacturing facility. It doesn’t usually scale very well, though, for several reasons. Distributors not only realize efficiencies by carrying thousands of products to a diverse mix of customers, thereby reducing the direct per-unit distribution cost at scale, they also perform customer service and supply-demand balancing value. By providing the sales and customer service infrastructure to handle customer requests, not to mention to bring on new customers, distributors provide a significant service to their suppliers – one that is very difficult (and expensive) for producers to replicate in-house. At the recent Local Food Summit hosted by the Mile High Business Alliance in Denver, a panel discussion involved a small-scale producer advocating “to cut out the middleman.” Understandable, perhaps, when providing a small volume of product to just a handful of customers. Many there, though, seemed keen to consider the reasons why it makes sense “to cut the middleman in.”

 

Middleman vs. Value-Added Partner

Not all distributors provide the same value to food producers. Geared for different scales, providing different levels of service, and very different levels of transparency in their fee structures, very large national distributors cannot always provide food producers the same value that smaller food hubs and regionally-scaled food distributors can. The two main differences in value-add between large national distributors and local distributors are simple: customer service and pricing transparency. Smaller food hub teams can provide significant time and attention to your brand and products, and they will stand out for their uniqueness instead of getting subsumed in the cacophony of the larger distributors’ product lists. Pricing transparency is just that – straight forward, honest pricing that isn’t shrouded in a maze of charge-backs, marketing fees, and other “off the back” costs. What might at first seem like the best (lowest) “margin” taken by the large distributor ends up being a very different number once all of these additional and hidden fees are taken into account. As local food distribution and food hubs continue to develop in Colorado and around the country, they are providing thousands of emerging food producers more than just a distribution channel. They are providing a partnership focused on growing their mutual businesses. And unlike the large-scale distributors, with their hidden fees, charge backs, and 90+ day initial terms, many local food distributors are eager to provide you great service in a transparent economic structure that is designed to be truly win-win. When it comes to how you get your products to your customers – don’t underestimate the costs, and the benefits, of the different distribution options you have!

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Aaron Perry, CEO & Chief Fungi SOURCE Local Foods

Aaron co-founded SOURCE Local Foods in 2012 and is thrilled to be deepening relationships with growers, ranchers, food manufacturers, chefs, facility managers and other Jedis throughout the region. Aaron envisions a future in which all of the company’s facilities and activities are located on an integrated campus, in part because he believes that this will enhance the creativity and innovation among the team and the outside stakeholders, customers and suppliers who will flock to the homebase campus. He looks forward to vertically integrating in food production, renewable energy supply chains, and organics recycling. When he’s not working, Aaron loves to hang out with his kids, to write and paint, and reads voraciously. He loves music too – anything from classical to dub step, from jazz to hip hop. Feel free to contact Aaron to discuss your distribution needs.

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