Are you a small business trying to get your products on Wal-Mart or Costco shelves? Or wanting to be one of Amazon’s prime sellers? Partnering with these big giants is definitely not a walk in the park.
These retail store clubs have been part of the American consumer culture for over fifty years. They have lured buyers with their large-sized goods, wholesale prices, big discounts that you can’t keep away from, and lots of great deals as a part of membership perks. Smaller companies see this as an advantage to up their sales and extend the reach of their brand to various customers across the country.
E-commerce has been increasingly popular today which prompts some established big box retail companies to move online. Amazon is one of the top online retailers that have received good feedback from consumers. Depending on the type of product and season, free shipping and big discounts are also enjoyed by their buyers. They promote accessibility and hassle-free shopping at its finest.
In general, research is conducted, goals are set, and deals are made to bring revenue to any business. However, not all deals are created equal, especially when working with massive retailers. When you think of it, you could be leading your company into a fragmentary flat-line break even situation, or worse – bankruptcy in the long run.
Here are some common disadvantages you might face when you decide to outsource your products to retail stores. It does not mean that experiencing any of these scenarios will guarantee your business’ failure. These are opportunities for you to focus on such as finding which aspects your business is most vulnerable to. These are information that will make you ask, “Can I do this?” and “How?”
1. High-Production demand that can result in low-quality products and fees for not being able to comply with regulations.
Large retail companies demand massive production as it expects a large movement of merchandise every day. If your manufacturing strategy is not proven and tested for heavy demands, then getting into retail stores may not be suitable for you.
There are scenarios in which vendors, particularly new business owners, are being fined for not meeting inventory deadlines. There are a number of ways production can go wrong but all these could be prevented with adequate research and an effective business management plan.
Another scenario is when the vendor consistently meets inventory, however, is not able to maintain the quality of the outputs being produced. It results in consumer complaints which prompt the retail company to do quality testing.
When they fail, their products are automatically taken off the shelf. The same is true when your products don’t sell. These companies will not think twice to cancel your contract.
2. The long and detailed process of setting up an EDI system that will work for the retail company.
Trading with big companies means following an extremely strict electronic data interchange (EDI) requirements. Since they move out a massive quantity of products every day, they need to have an effective system that will allow them to process orders quickly and deliver them efficiently to a large number of customers. This means enforcing deadlines and other compliance regulations that will incur fees when not met.
A specific map is required for each retailer which means they need specific information from you in a specific order. You need to coordinate your own EDI maps to your retailer’s in order to create a continuous flow.
Some vendors do not have a way to automate their business process. It results in orders being missed or entries being double which can cripple your finances.
3. Being forced to lower margins in order to fit retailers’ strict pricing strategies.
Retail stores are known to offer very low discounts as part of the advantage they sell to their customers. The one who gets hurt with their pricing strategies are the vendors.
You have marginal goals to ensure sustainability so why do you have to sell 2 pcs of your product to get the same profit from selling only 1 pc from your website? It does not make sense.
What smaller businesses don’t realize is the long-term effect of deflated margins. It may seem like a worthy sacrifice to get your business going at the start but you won’t be gaining any profit. In the long run, your company is bound to suffer losses.
4. Enormous overall cost from all kinds of fees.
There are many expenses involved before you can send that first batch of products to the shelves of your favorite department store.
1 – you have to pay for space you will occupy among the countless rows in the department/retail store. Don’t think that a small space on one shelf together with your competitors will cost less. Getting a big space but not selling is not what you want either.
2 – you are required to get insurance that can reach up to $5 Million.
3 – you have to pay chargeback fees from shipping to other costs that will incur you big losses.
4 – As a manufacturer and seller, you need to buy product codes for each type of goods you have. Aside from the paying an initial fee to be able to join GS1 US, there is another maintenance fee that you need to add in your annual expenses.
5. The chance of damaging brand reputation.
One of the main differences between smaller specialty stores and big retail stores is their customer service. Retail stores do not focus on building an interpersonal relationship with their buyers since they get their sales from lowering prices and offering big discounts.
As a vendor, you put your best salesman in a location where he is able to interact with your target market to build-up your brand’s image and create a lasting relationship with buyers.
A retail store is a giant pot of assorted products and buyers. Your salesperson may be promoting your brand in the best way possible to a prospective buyer who is only interested in the discount you offer.
Going back to inventory demands, if you are not prepared yet for massive productions, there is a high chance of losing the quality of your products over quantity. Your loyal customers from the retail clubs may end up losing trust in your brand.
So before getting into a contract with your preferred retail store, ask yourself these questions:
- Am I in the right financial position to partner with bigger companies?
- Am I financially capable to fund inevitable losses?
- Do I have the right resources to produce a high inventory of quality goods?
- What is the true essence of your brand?
- How does retailing affect your brand name long term?
The important thing is to understand your product and embrace the brand you want to convey to your customers. Weigh the advantages and disadvantages of partnering with retail stores. Research and propose an effective marketing strategy that will ensure a consistent flow of output and yield returns with the least cost.
The market is ever changing. There are many paths to choose from to build a great brand and sell it. Many brands found their way through the aisles of large retail stores and made their name. But it also does not mean that how they grew their business a decade ago will have to be the same way our businesses develop today.