Small brands often dream of the riches and success that will arrive when they start selling wholesale to big retailers. While it’s true that national chains can give you huge reach and volume, the relationship can come with high costs, especially for a fledgling business.
I’m not suggesting that you avoid selling wholesale to big retailers outright – they have the power to transform your business with a single order. However you should be aware of the pros and cons of going for the big sale through a national retail chain before you dive headfirst into any agreement.
The Downside of Selling Wholesale to Big Retailers
Decreased Profit Margins
Large chains are, by their very nature, numbers driven. They are looking for ways to maximize the revenue generated by a limited amount of shelf space. While the buyer may love your product, they are primarily concerned with capturing as much margin as possible, and will use increased volumes as a way to whittle you down on price. Before you go into a price negotiation, have clear profit targets established and know how your production costs change at different volume thresholds.
While increasing net profits is always the goal of a business, in selling to a high-volume retailer, you may find that you’re taking on a huge amount of new risk to finance larger manufacturing runs, while achieving much lower overall profit margins. Try to insure you have enough lead time on orders, so that you can ship the products directly from the factory and not have to carry the inventory. Even with “firm” commitments in place, you should always factor in a risk-to-return ratio, and insure that you are comfortable with it.
Lack of Negotiating Power
The biggest downside to selling wholesale to big retailers is the level of dependence you have on them. Should the relationship end, it could have serious consequences for the overall health of your business, especially if it means you are no longer able to meet your manufacturing minimums or your financing will be withdrawn. The more you are able to spread your sales around amongst multiple large or medium sized retailers the better.
The Upside of Selling Wholesale to Big Retailers
While your margins may take a hit, ideally this is more than offset by the increase in sales volume and overall profits. Try not to get into a situation where you are forced to meet certain sales thresholds before you are able to realize a profit.
Decreased Production Costs
With larger orders you will generally realize greater efficiencies in your production process. If you do your own manufacturing in-house, this means a lower cost of raw materials. If you are outsourcing to a factory, this will mean more negotiation power on your per unit cost. In either case, lower production costs may go some or all of the way towards compensating for the lower margins you are being offered by the retailer.
Increased Visibility and Credibility
Being carried by a brand name chain of stores brings instant credibility to your brand. You can leverage the relationship in your marketing, in order to raise financing, or as a way of generating interest from other retailers who don’t want to be seen as missing out. Just be sure that the chain that’s carrying your products is enhancing the overall perception of your brand rather than diminishing it.
Timing is everything when it comes to the strategic decision to try selling wholesale to big retailers. A young brand may find the process of dealing with a national retailer overwhelming, while at a later stage in your growth it may be the best way to continue growing the business. Just insure you are prepared and have a clear idea of your numbers before entering into any commitments.