Selling to supermarkets: costs and payment terms

Selling to a supermarket costs more than the margin it keeps on each sale. There can be a listing fee, contributions to promotions, in-store merchandising, returns of out-of-date stock and a payment term that has you funding the stock for weeks. None of those costs is a problem if you know them in advance and put them in the sum. The problem is signing with a margin that only covers the product and finding the rest in the first invoices. Before you say yes, get every cost and every term in writing and work out what you keep each month.

Costs that can appear on top of the margin

Terms vary by chain, by product and by what you negotiate. Not every retailer charges for everything. These are the types of cost worth asking about one by one:

• Listing or slotting. A payment to set your product up in their system and give it a place on the shelf. It can be cash, free stock for the first fill, or a deduction from your first invoices.
• Promotions. Offers, leaflets, special prices, end-of-aisle displays. Often the supermarket cuts the shelf price and you fund part of the cut through a discount on your invoice.
• Merchandising. Someone has to fill the shelf and face your product forward. That may be you, someone you pay, or a service you pay for.
• In-store tastings. If you want shoppers to try it, the product, the person serving and the materials are on you. The guide on samples and tastings shows how to cost them.
• Returns and waste. Stock that expires, gets damaged or does not sell. Depending on the agreement, it comes back to you or gets deducted.
• Logistics. Delivering to a distribution centre or to each store, in cases of set sizes, with booked delivery slots and paperwork. Short or late deliveries can carry penalties.
• Product requirements. Barcodes, labels that meet your local rules, any registrations your food authority requires, and whatever extras the retailer asks for, such as insurance. The guide on label and barcode costs shows how to turn them into a cost per unit.

On top of all that comes the supermarket's margin on its selling price. The guide from your price to the shelf price explains how to work out what you will be paid starting from the shelf price.

The payment term is money you put in

When you sell to a supermarket, you deliver today and get paid later. Meanwhile you have already paid for ingredients, boxes, labels and your time. You fund that gap, and it grows with every order.

To know how much you need, add up what it costs to produce everything you deliver before the first invoice is paid, plus any listing costs paid up front. The guide on working capital shows how to work out the cash you need to operate, and the one on selling on credit and payment terms covers how to handle the risk of late payment.

Also ask when the term starts: counting from delivery is not the same as counting from invoice approval.

Worked example: shortbread in 30 stores

Every number in this example is made up to show the sum. They are not fees or terms from any real chain; use the ones you are given in writing.

You bake all-butter shortbread in 200 g boxes. Your loaded cost is $2.30 a box. A regional chain offers to stock it in 30 stores. All figures are before sales tax.

What you make per box. The supermarket would pay you $3.80 a box. You keep 3.80 − 2.30 = $1.50 per box sold.

Expected sales. If each store sells about 2 boxes a week, that is around 240 boxes a month. Contribution: 240 × 1.50 = $360 a month.

The other costs, from the example offer:

First-year result: 360.00 − 507.60 = −$147.60 a month. You are paying to be on the shelf.

Second-year result, once the listing is paid off: 360.00 − 257.60 = $102.40 a month.

What you would need to sell. Leaving returns aside, in the first year you need to cover 250 + 80 + 150 = $480 a month. At $1.50 a box: 480 ÷ 1.50 = 320 boxes a month, about 2.7 per store per week. With returns, a little more. The break-even calculator does this sum per month and per day.

The cash you put in before you are paid. If the example term were 60 days, you would deliver two months of stock before the first payment. Each month you deliver 252 boxes (240 that sell and 12 that come back): 2 × 252 × 2.30 = $1,159.20. Add the $3,000 listing if it is paid up front and you need $4,159.20 before the first dollar arrives.

With these numbers the supermarket is not a bad deal in the long run, but the first year costs you money and asks for over four thousand dollars of cash. If you do not have it, the problem is not the product. It is the timing.

What to ask before you sign

Take this list to the meeting and ask for the answers in writing:

1. Is there a listing fee? Is it paid in cash, in free stock or as an invoice deduction?
2. How many promotions a year are expected, and what share do I fund?
3. Who fills and faces the shelf?
4. What happens to stock that expires, gets damaged or does not sell? Is it returned or deducted?
5. What is the payment term and when does it start?
6. Where and how do I deliver: distribution centre or store, case sizes, delivery slots?
7. Are there penalties for short or late deliveries?
8. What rate of sale do you expect, and what happens if I fall short?
9. What registration, labelling and barcode requirements do you have?

With the answers, redo the table above with your own numbers. If it does not work, you can propose starting in fewer stores, with a product that already sells well in smaller shops, or waiting until you have the cash to carry the term. The guide on how to price a packaged food product has the full method from batch to shelf.

Do it with the calculator

In the cost calculator you get your loaded cost per box. With that number and the supermarket's offer, you can build the monthly table and see whether the first year makes you money or asks you for it.