2012

Expanding into Grocery

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So, you are dying to get into the grocery business. And why not?  Think of all that great exposure. It is like having free billboards and retails stores without employees. You roast it, they sell it. What could be easier?

They should post a big sign on the grocery buyer’s door like the ones at amusement parks – “WARNING:  THIS RIDE IS NOT RECOMMENDED FOR THOSE WITH A HEART CONDITION.” Doing business with grocery stores can be a roller-coaster ride. If you decide to get on, be prepared for soaring highs and violent drops that might just put your stomach in your throat.

Our company has been roasting coffee in the Northwest since 1971 and I have personally been in the business 20 years. I have seen my share of the peaks – customers happily greeting our tidy display of freshly rotated product – and valleys – the dreaded DSC (“discontinued”) tag on our grinder – of being in the grocery business.

In the spirit of learning from our mistakes, I offer you some of the land mines we have stepped on and some of the things we just did not understand out of the gate. I have omitted names to protect the innocent, or guilty, as the case may be.

Damage to your reputation as a “grocery brand”

For many reasons – some real, some imagined – the upper tier of coffee roasters don’t have much of a presence on grocery store shelves. The common perception (deserved or not) is that great quality coffee is not found in the grocery store. Ergo, if you are found in a grocery store, well, then you must not be great quality. We would love some help carrying the “there is high quality coffee in grocery stores” banner ‘cause it is getting pretty heavy.

Start up costs

If Benjamin Franklin had been a vendor to grocery stores, his famous quote would have been “In this world, nothing is certain except death and ad fees.” They come in all shapes and sizes, but rest assured you will pay “rent” for that space on the coffee aisle. They go by names like “Set up fee” or “stocking fee” (payment for introducing a new item), “shelving fee” or “free fill” (payment or product for new product placement), “equipment load” (rent on a fixture), “bill back” (pre-arranged % for the “house”), “rebate” or “off invoice” (price reduction rebated on each lb. sold), “promotional program” or “ad dollars” (money to support the stores advertising budget), “spill credits” (compensation for lost, spilled or stolen product), “buy backs” (credit for returned/expired product). Grocery stores are not in the business of taking a risk on selling your product. They want a guaranteed sale, a healthy margin, and you to support their advertising budget. Shelf space is their primary asset and use of that space is not free. Oh, and it’s helpful to keep in mind that in most stores, the competition for that rent and advertising is usually a large, publically traded company with a massive marketing budget.

Freshness issues

It could be worse. We could be selling fresh-squeezed orange juice or fresh fish. We are all aware of the importance of freshness. We might not agree exactly on the actual shelf life of our product, and packaging can change the equation dramatically. But we all know the clock is ticking. Finding the appropriate balance of frequency of deliveries and volume of those deliveries is tricky business. At what volume does it makes financial sense to make a delivery to an individual store?  How often does that store move that break-even volume? If it is a couple weeks or more, your product is not going to be fresh. Using third party distribution can be a good answer, if you have significant volume and your pricing can support the additional distribution costs.

A/R and Bankruptcy 

Grocery stores generally require that you provide them with credit, unsecured business credit. Many string out vendors – turning 30 days into 45, or 60 into 90. Often despite appearances, grocery stores are struggling financially. Some inevitably can and do fail. In the past couple of years, we have had two multiple store, long-standing, high-end grocery chains suddenly file for bankruptcy. We do our best to keep track of our receivables and not let customers get too far away from us. But with high volume, multiple stores, even 30 days of sales can add up fast.

The K-Cup invasion

Finally, there are well funded national brands who are betting heavy on the growth of the convenience-driven K-Cup brewing method. In the past couple of years, a significant percentage of the coffee aisle has been converted to supporting K-Cup products. Does it have staying power? Will bulk and pre-pack coffee sales be a thing of the past? Something to consider.

After all that, we do continue to concentrate on the grocery segment. We do have some wonderful and mutually profitable relationships with grocery stores. The key is in finding and nurturing strategic partnerships with stores whose customers actually value what you sell. Stores whose management understands that a company like Tony’s does not have the marketing dollars like the national brands. When we can work out a healthy promotional program, find the right balance of margin/price/pull through; it can be worth getting back in line to ride the roller coaster again. Just remember to take your blood pressure medicine.

C

 

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