07: Distributors
Distributor Deductions and Chargebacks
When you partner with a distributor like UNFI or KeHE, deductions and chargebacks are part of the territory. These financial adjustments can significantly impact your bottom line if not managed properly. Understanding the types of deductions and chargebacks, why they happen, and steps to avoid them is crucial for maintaining profitability and fostering equitable relationships with your distributors.
How expensive is it to work with National Distributors? Here are my real numbers from running TeaSquares. Jewel-Osco (an Albertson’s Company) launched TeaSquares in their Chicago area stores through their distributor, KeHE, which we thought was an awesome way to launch. Jewel brought us in under their “Local brands” program, so we thought we’d have their support as we grew. After getting into stores, we couldn’t get a hold of anyone at Jewel to coordinate marketing and promotions. Turns out our buyer left, and we had no other contact person. We tried calling Jewel HQ dozens of times, e-mailing everyone we could, and even tried working through KeHE to get in touch with their team so we could run marketing plans to move the product off the shelf. Nada. No response.
After nine months in store we started getting chargebacks from Jewel for unsold inventory. You see, as a brand in distribution, you’re basically selling your product on consignment, and if the retailer doesn’t sell your product, they can return it at full cost. So we stopped fulfilling orders and eventually pulled out of KeHE altogether. Here’s a financial breakdown:
Amount Invoiced to KeHE: $32,000.
Amount Paid: $21,000.
Difference: $11,000.
That’s $11,000 in chargebacks, fees, and returned product from Jewel.
That’s 34% of everything we sold them, meaning we lost all of our profit margin and barely broke even.
Be aware of deductions when going into distribution, as the fees can be incredibly high.
What are Deductions and Chargebacks
Deductions and chargebacks are common in the distribution industry and can impact your bottom line if not managed properly. Here’s how to navigate them effectively:
Deductions:
- Definition: Deductions are amounts subtracted from your invoice payments for various reasons, such as promotional allowances, damaged goods, or return credits.
- Common Types: Promotional discounts, slotting fees, spoilage or damage allowances, early payment discounts.
Chargebacks:
- Definition: Chargebacks are penalties imposed by the distributor for not meeting certain terms or standards, such as late deliveries, incorrect labeling, or non-compliance with agreed-upon promotional support.
- Common Reasons: Late or incomplete deliveries, inaccurate labeling or packaging, failure to meet promotional commitments.
Types of Deductions and Chargebacks
Slotting Fees:
What They Are: Payments made to retailers to secure shelf space for new products. Often in the form of free case(s) of product.
Why They Happen: Retailers charge these fees to cover the cost of adding new products to their inventory and replacing existing ones.
Avoidance: Negotiate these fees upfront and ensure they are clearly outlined in your contract. Keep case pack size of your product low.
Promotional Allowances:
What They Are: Discounts provided to retailers and distributors to promote your product.
Why They Happen: These deductions are taken to cover the cost of in-store promotions, advertisements, and special displays.
Avoidance: Plan your promotional activities carefully, aligning your distributor and retailer promotional allowances accordingly, and ensure all terms are agreed upon in writing before executing promotions.
Spoilage and Damage Allowances:
What They Are: Deductions for products that are damaged or spoiled during transit or in the store.
Why They Happen: Retailers pass on the cost of unsellable products to suppliers.
Avoidance: Implement robust packaging and handling processes to minimize damage. Regularly review and dispute any incorrect deductions. Extend shelf life whenever possible.
Early Payment Discounts:
What They Are: Discounts provided to distributors and retailers for early invoice payments.
Why They Happen: Retailers and distributors incentivize early payments to manage their cash flow better.
Avoidance: Clearly outline the terms of early payment discounts and monitor payments to ensure the discounts are applied correctly.
Shortages:
What They Are: Deductions for shipments that do not meet the ordered quantity.
Why They Happen: Retailers deduct costs for any discrepancies in the number of items received versus ordered.
Avoidance: Implement rigorous inventory and shipping controls to ensure accurate order fulfillment. Keep detailed records of all shipments.
Non-Compliance Fees:
What They Are: Penalties for not adhering to retailer-specific guidelines or requirements.
Why They Happen: Retailers impose these fees for issues like incorrect labeling, late deliveries, or non-compliant packaging.
Avoidance: Familiarize yourself with and strictly adhere to all retailer requirements. Regularly audit your processes to ensure compliance.
Why Deductions and Chargebacks Happen
Deductions and chargebacks occur for various reasons, often related to the costs and risks retailers incur when dealing with suppliers. They help retailers manage their operations efficiently and mitigate losses from damaged goods, non-compliance, and other issues. For suppliers, understanding these reasons is crucial to implementing measures to avoid them.
Steps to Avoid Deductions and Chargebacks
Understand and Negotiate Terms:
Clarity in Contracts: Ensure that all terms related to deductions and chargebacks are clearly outlined in your contracts. Negotiate terms that are favorable and realistic for your business.
Communication: Maintain open lines of communication with your distributors to address any potential issues before they become deductions or chargebacks.
Implement Robust Processes:
Quality Control: Establish strict quality control measures to minimize damage and spoilage. This includes proper packaging, handling, and transportation protocols.
Accurate Order Fulfillment: Ensure that all orders are accurately fulfilled by implementing rigorous inventory management and shipping controls.
Regular Monitoring and Dispute Resolution:
Track Deductions: Monitor all deductions and chargebacks closely. Use accounting software to keep track of all financial adjustments and ensure they match the agreed terms.
Dispute Inaccuracies: Proactively dispute any incorrect or unjustified deductions. Keep detailed records of all transactions and communications to support your claims.
Foster Relationships with Distributors:
Engagement: Actively engage with your distributors to build strong relationships. Regularly communicate with purchasing managers and sales representatives to address any concerns.
Feedback: Encourage feedback from your distributors to understand their expectations and improve your processes accordingly.
The Process of Managing and Disputing Deductions
Managing and disputing deductions involves a systematic approach to ensure accuracy and fairness. Here’s how to effectively manage this process:
Discovery and Implementation:
Understand the Process: Begin by examining various deductions such as slotting fees, spoilage, sales discounts, vendor fines, shortages, non-compliance fees, and cash discounts.
Set Up Processes: Work closely with your accounting team or service provider to understand the specific processes behind each distributor relationship.
Tracking and Disputing Deductions:
Monitor Deductions: Track all deductions to validate those incurred and dispute any that are not valid.
Expected Refunds: Keep track of expected refunds or credits from each distributor.
Documentation: Maintain detailed records of all transactions and communications. This includes copies of invoices, delivery receipts, and email correspondence.
Dispute Submission: Submit disputes with all necessary documentation to support your claim. Clearly outline why the deduction is unjustified and provide evidence to back up your case.
Ongoing Management:
Continuous Service: You can opt to continue managing deductions with the help of an external service provider or bring the process in-house with trained staff.
Internal Management: Create a process and tracking mechanism that your team can manage internally, allowing for flexibility and ad-hoc solutions.
Managing distributor deductions and chargebacks is a complex but crucial aspect of running a successful food and beverage brand. By understanding the types of deductions and chargebacks, why they happen, and implementing effective steps to avoid them, you can maintain profitability and foster strong relationships with your distributors.
Need Help Managing Deductions and Chargebacks? (Sponsor)
Managing your trade spend and deductions can be a huge headache, but Floret has the solution. Specializing in consumer packaged goods (CPG), Floret offers a streamlined platform that automates and categorizes chargebacks, making it easier to track and dispute deductions.
Why Use Floret?
- Automated Deductions Management: Automatically categorize and track all chargebacks by SKU, retailer, and distributor.
- Increased Transparency: Get detailed insights into where your money is going and recoup what’s rightfully yours.
- Dispute Support: Easily manage disputes, or get assistance from a deduction dispute specialist.
Floret offers a free pilot where you can visualize your brand’s chargebacks in detail. They’ll even walk you through the best opportunities for you to improve your bottom line with the distributors.
Visit Floret to book a demo and take advantage of the free pilot!