Many small businesses need better distribution, and large retailers offer many advantages over hiring an expensive wholesaler. While SMEs can sell online, some items are ideally suited to supermarkets, pharmacies, hardware stores and other brick-and-mortar retailers. It is more efficient to ship to stores and have your product in a brand-name shop. However, you need a strategy for success.
In this fictional case, Cassola, a small-batch granola maker, secured listings in eight stores of a supermarket chain. Excited by the win, she assumed good sales would follow. Instead, weekly orders stagnated, and two stores threatened to delist. Her brand sat on the bottom shelf, its packaging did not stand out, and its price was higher than that of familiar brands. Shoppers didn’t understand why it cost more, and key benefits (low sugar, local ingredients like cassava) weren’t visible from a distance. Cassola had no promotional plan, no in-store support, and minimal data to reassure the retailer. Getting listed wasn’t enough to generate sustainable sales. In addition, Cassola had to wait beyond the 30-day credit agreement, which worsened their cash flow.
Retail environment
For this article, we will consider supermarkets as the retailer of choice. Supermarkets carry the most stock-keeping units (SKUs) of any other store format. They are the dominant form in terms of size and number of stores. While they attract many shoppers, grocery stores use thousands of vendors and hundreds of new products vying for shelf space. The Food Marketing Institute estimates that between 20,000 and 30,000 reach the shelves each year. While we do not have the same volume or number of products locally, groceries still face cramped shelves. How do supermarkets react to this?
Supermarkets have recognised that retail space is in high demand and that it is where the battle for sales and profits is fought. Since they have scanner data on each SKU’s performance, grocery management can set criteria and, in effect, require items to justify the space they occupy. Shelf space is so scarce that food retailers can rent space on either the front or back of gondolas. The premium space is always at eye level, as shoppers seldom look above or below it, which is why Cassola ’s granolas often go unnoticed.
Supermarket stores are not only getting larger in square footage, but also chains are opening more branches. The driver is economies of scale, as margins are razor-thin. Notice that there are a few medium-sized groceries. You either get big or become a convenience store, and pharmacies have entered this market space. This makes supermarkets powerful, enabling them to demand generous terms and conditions. Their focus is on cash flow; if they can sell their inventory before the vendor payment is due, the chains will have millions in extra cash. Notice the race to build more stores. Many vendors complain that supermarkets extend beyond the agreed credit terms, which can squeeze small businesses like Cassola.
One mega-trend is the demand for healthy foods. New categories (SKUs that are seen as similar or substitutes) have emerged. You have organic foods in the produce section, which did not exist a few years ago. Granola and yogurt feature prominently, with high profit margins that supermarkets love.
Most of the sales in your grocery store are seldom profitable. Basics like flour, rice and cooking oils are unprofitable. Therefore, stores have some tricks up their sleeves. Basics occupy the lower-level shelves, as shoppers will find them. Smart merchandisers will place higher-margin items, such as oven trays and baking chocolates, in the premium space above the flour packs. There is some psychology at work here—when buyers go after the low-margin flour, they first see the more profitable items at eye level.
Merchandising objectives
As a new product seller, Cassola’s first goal should be to build awareness. In a crowded supermarket, consumers get overwhelmed with the hundreds of choices. One tested and successful strategy is to offer samples. This approach reduces risk in the purchasing process, and if Cassola had an end-cap display (at the front or back of the gondola), it would attract granola lovers as they turn the corner.
Ideally, Cassola should buy shelf space, which might be expensive for a small business. She can, however, visit the stores regularly to ensure optimum inventory and products delivered go immediately on the shelf. Operations staff are very busy and seldom have the time to replenish. Some research shows that over 75 per cent of purchase decisions are made in-store, so an item at the back of the store with unattractive packaging will be overlooked.
Since firms like Cassola cannot afford national advertising, they should use shelf talkers and sales promoters. Social media support will help if it directs shoppers to the retail store. If you also sell online, it could be viewed as a channel conflict, so watch your pricing.
Merchandising challenges
What vendors and supermarkets want differs somewhat; therefore, vendors should know how to please store managers to achieve their goals. Your merchandising goal is to gain visibility in high-traffic areas. At the same time, the store manager wants to optimise store flow and customer experience. Management is concerned about reducing theft and shrinkage of high-priced items (notice where the alcohol and olive oil are placed). Many supermarket chains allow 0.5 per cent of sales as shrinkage, and store managers can lose their jobs if the rate exceeds that.
While sellers want premium space and lots of it, supermarkets want to maximise space to increase sales and profit margins. Grocers want customers to shop the whole store and use merchandising to encourage purchases of higher-grossing items, as very thin margins can quickly disappear. Merchandise management must support the self-service environment, where the shelves are the salesperson.
Supermarket executives are mindful of powerful brands as they can demand more space and squeeze their margins. As a small business, you can leverage your size to negotiate for a better deal and position your product as unique. Cassola has a unique product with local ingredients, which the global brands do not. Some chains have policies to support small businesses, so make sure you enquire.
Supermarkets are a universe apart. They offer the potential for higher sales and association with a store brand. However, they leverage extreme market power, so as a small entrepreneur, you should understand their objectives and develop a distribution strategy that accommodates them.
Sajjad Hamid is an SME & Family Business Adviser, Fellow of the Family Firm Institute and author--Build Your Legacy Business: Solopreneur To Family Business Hero. Find him at:www.linkedin.com/in/sajjadhamid entrepreneurtnt@gmail.com entrepreneurtnt.com
