The question usually arrives from a buyer: "Who's your distributor?" A grocery chain, a food-service operator or a hardware group has told you they will not set up a new vendor for one product. They buy from their distributor, and you either get on that truck or you do not get in. That is the moment a small maker has to decide whether to go through a distributor or keep selling direct.
The short answer: use a distributor when it puts your product in front of far more buyers than you can reach yourself, and sell direct when your accounts are few, close by, and worth more per unit to you. The waterfall below puts numbers on that for one product, so you can run your own.
What a distributor does, and what it takes
A distributor buys from you at a discount, stores the product, sells it to many retailers or operators, delivers it, bills them and takes the credit risk. It has a sales force that already calls on your buyers and trucks that already go to their doors. In return it takes a margin, often 25 to 30 percent over what it paid you, and it usually expects marketing support: introductory discounts, promotional allowances, samples. It also reduces your control. You do not set the price to the retailer, and you may not know who your buyers are.
The margin waterfall on one product
Take a jar of hot sauce (illustrative numbers). It costs the maker $2.20 to make and pack.
- With a distributor: the maker sells to the distributor at $4.00. A 5 percent promo allowance ($0.20) comes back out. Maker net: $4.00 minus $0.20 minus $2.20 = $1.60 a jar.
- The distributor adds 25 percent and sells to the retailer at $5.00.
- The retailer prices the jar at $7.99, a margin of about 37 percent on the shelf price.
- Direct to the retailer: the maker sells at $5.00, but delivers small orders itself at about $0.55 a jar. Maker net: $5.00 minus $2.20 minus $0.55 = $2.25 a jar.
On a per-jar basis, direct wins by $0.65. The question is how many jars each route moves. Suppose you can personally keep 8 stores supplied at 24 jars each a month. That is 192 jars, or $432 net a month. A distributor with 120 accounts that each take 24 jars a month moves 2,880 jars, or $4,608 net. Your selling time is the limit on the direct route, not the margin. The distributor route wins whenever it moves at least about 1.4 times as many units as you would have moved yourself (the ratio of $2.25 to $1.60). Almost every real distributor clears that if it carries you at all.
When selling direct wins
Direct is better when you have a few big accounts that buy in volume, when you sell to buyers who do not use a distributor (specialty shops, farmers markets, your own site), when your product is perishable or fragile in a way that a warehouse would hurt, or when you are still learning what sells and need to talk to buyers. It also wins when a distributor would require exclusivity that blocks accounts you already have. A region where you have strong local relationships is a reason to hold it back in your agreement.
Distributor, rep or direct: how they compare
| Route | What it costs you | Time to first order | Best fit |
|---|---|---|---|
| Go direct | Your time, delivery, credit risk | Weeks | Few, close, high-value accounts |
| One regional distributor | 25 to 30 percent over your price plus promo support | 1 to 3 months to be set up | Many small accounts, a territory to cover |
| Manufacturer's rep or broker | A commission, often paid on sales | 1 to 2 months | You ship, they open doors |
If a rep fits better, see how a manufacturer's rep works from the rep's side.
How to find the right distributor
Ask your buyers. The grocer, restaurant or hardware store that wants your product will name the distributor that supplies them. Ask competing makers' retailers who delivers the products next to yours on the shelf. Then find the category manager or the new-vendor contact by name, using how to find decision makers at a company, or ask a mutual buyer for an introduction with how to ask for an introduction.
The first-meeting pitch
A distributor wants to know three things: whether buyers are asking for the product, whether it sells through, and whether you can supply it consistently. Bring proof of demand (letters of interest from two or three of their own customers are strong), your sell-through at current stores, your case pack and lead times, and your pricing with the margin they would earn. Don't ask for exclusivity of the whole country. Say what you want: a defined territory.
Territory, exclusivity and minimums
The first agreement should be small. Offer a defined territory for 12 months with a minimum order to keep it, such as a minimum of 100 cases per quarter. If the distributor misses the minimum, you can reopen the territory. Put payment terms, promo funding, return rules and what happens to unsold stock in writing. Have a lawyer review it; distribution agreements can be hard to exit, and some states have laws that make ending certain distributor relationships difficult, particularly for alcohol. This is general information, not legal advice.
How to measure whether it is working
Track four numbers every month: cases shipped to the distributor, cases sold through to retailers (ask for their depletion report), the number of new accounts, and your net per unit after allowances. If shipments are high and depletions are low, you are stuffing the channel and will get returns later. The test at month six is whether depletions grew without you adding a promo. If not, talk to them about it, or consider ending the arrangement at the end of the term. A buyer who says "we already have a vendor" is a different problem; see the vendor objection. For selling to stores directly, wholesale customers is the companion guide, and selling to retailers covers the store buyer meeting.
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