Working with a distributor is often a necessary piece of selling into grocery stores. However, the relationship is a complex one and, as most brands will tell you, leaves a lot to be desired. Deductions are typically the main point of contention between brands and their distributors. In this post, we’ll outline the key things you need to be thinking about as a brand.
What is a deduction?
When a brand incurs a cost and the distributor “deducts” it from their invoice. Some deductions act as a profit center for distributors while others are "passed on", with the distributor acting as a clearing house for their retailers. Most are commitments a brand made to the distributor or a retailer and are being collected upon.
Deductions can be disputed when a brand feels they have been taken in error or without prior approval. Brands should know that regaining funds through the dispute process takes high levels of organization, persistence, and a great deal of PATIENCE.
What are distributor agreements?
Deductions should be spelled out in the agreement you sign with your distributor. These agreements outline things like financial terms of the partnership and set clear performance expectations on both sides. Find an expert who can help review your distributor agreement, prior to signing.
All too often, early-stage brands get excited about the opportunity of working with a new distributor and don't read the fine print.
While you may not have leverage to change the agreement, understanding the costs associated with a specific distributor is key to making decisions around your pricing and retail strategy.
What are the most common promotions that result in deductions?
- Off-invoice promotions
- Published ads
- Distributor trade shows
If you agree to any promotions, they will be deducted from your invoice. Many times, brands end up owing distributors extra money so it's critical to plan your programs appropriately.
What is some of the lingo used with deductions?
When a discount is deducted straight from a brand's invoice with a distributor. Typically, off-invoice discount amounts are around 15% of the regular case sales price in 2-3 separate months a year. More on these + MCBs + scans here.
MCB (Manufacturer Chargeback)
When a retailer buys a product, at a discount, from a distributor and the distributor deducts the amount from a brand's invoice. Typically these deductions come with an added fee or upcharge from the distributor.
When a discount is taken at the final point of sale. Typically measured in dollar amounts and not percentages, "scans" offer the most transparency to the brand since they’re linked directly to the end transaction of an item and are often accompanied by supporting documentation.
PLC (Product Loss Claim)
When a retailer charges back the distributor for products that are spoiled/unsellable and those charges get passed on to the brand.
EDLP (Everyday Low Price)
When a brand agrees to a discount that's ongoing.
TPR (Temporary Price Reduction)
When a brand agrees to reduce the price of an item to a distributor, for some period of time, and the distributor then passes that along to the retailer.
3rd Party Billing
When a distributor acts a clearing house for the retailer to collect money owed by a brand.
When a retailer buys more product at a discounted price than the distributor had in stock. For example, a brand agrees to an OI deal of 20% off. The distributor buys 80 cases from the brand at that price, but the retailer ends up purchasing 100 cases from the distributor. As a result, the distributor issues a deduction to the brand for those 20 cases.
Unfortunately, this isn't a two way street. If the distributor, buys too much product on discount they will not issue a credit.
When brands don't invoice price correctly (often while on discount) and the distributor issues a deduction for the difference between the invoiced price and the correct price.
When a brand gives away a free case of product to promote a launch or new placements. These cases usually get charged back to the brand at a "wholesale" price, which is higher than the price the distributor paid for it. See 2:20 for an example of how this plays out.
When a brand doesn't ship enough product to meet the distributors request on their PO. Shortages can incur several different types of deductions
What does a sample check stub with deductions looks like?
Here's one from a real company. Let's break it down.
Third party billing - As mentioned above, the distributor was used as a clearing house to collect money owed by brands.
Original invoice amount - Standard terms are usually 2/10 net 30. This means the distributor can get a discount of 2% on what they owe, if they pay inside of 10 days. In this case, that's what the distributor did (see the discount amount column).
Quarterly advertising agreement billing - Fee for advertising space in distributor's monthly specials catalog.
New item activation billing - Fee for activating a new item in one warehouse - equivalent to a distributor slotting fee.
Fair share agreement - Fee for merchandising at Wegman's.
Third party auditing fees - Distributors have third party auditing companies look for mistakes that were made, as far back as the past 2-3 years, and charge them back, often unexpectedly.
Week Ending MCB chargebacks - Each week, the distributor compiles all of the account-specific deals that the were passed along to Publix and charges the brand for the total.
A Little More About Gregory
He is the co-founder of Deduction Resolution Services, a full service team offering up expertise and resources to help solve, research, qualify, and dispute distributor deductions. Before launching Deduction Resolution Services, he founded Natural Food Ally, a company focused on helping brands successfully navigate the natural distribution channel. His expertise comes from working at the natural foods distribution powerhouse UNFI, for over a decade, in various departments from purchasing and sales to supplier/category management. He has worked closely with some of the largest Natural Food brands in the country such as Hain, GTs, Bragg, Daiya, and Justin's however his passion is helping the smaller up and coming natural brands manage their growth and scale their distributor relationships.