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Setting the right price for the grocery shelf

Canada’s grocery stores are eager for more producers to fill their shelves with great straight-from-the-farm products. To win, though, you’ve got to price them right

From the outside, it looks likes a huge opportunity just waiting for you to grab hold of it. And maybe it really is.

We’ve all been there. You already have an idea of what it costs to grow your crops and raise your livestock, and one day when you’re pushing your cart down the aisle of your grocery store, you get shocked by the prices on the store shelves and do some quick math.

“Sheesh,” you say to yourself. “That’s three times what it would cost me!”

And your math might be accurate, says Jeff Fidyk, business development specialist for Manitoba Agriculture. But, he says, understanding why that price spread is so big will go a long way to helping you figure out whether you’re really ready to make the jump.

Fidyk knows, because he has been on the other side, having spent 20 years developing and managing brands in the private sector and selling to a range of stores from local grocers’ retailers to the giant chains like WalMart.

It isn’t impossible to win in retail, Fidyk now says. In fact, many retailers actually hope you’ll come calling. They want more local product, for all sorts of reasons.

But first, you need some insight into their world:

What’s your price?

Your price has to be fair to you, but it also has to give your retailer enough room to build in multiple costs that are invisible to most shoppers.

The chart below will help. But equally important is to start with a business attitude.

“It doesn’t sound like it would be a complex thing, yet a lot of people don’t put the cost for their own labour into their cost of goods,” Fidyk says. “But what if you injure yourself and you have to hire a stranger? You’re going to have to pay them real money.”

Don’t imagine though that you could simply phone your contacts at the stores, and that they’d understand why you’re bumping your price, Fidyk warns. Retailers have minimal tolerance for unexpected price increases, especially in today’s competitive marketplace.

And that’s just one example of many. It’s equally important to get a handle on all the other costs associated with selling at a grocery store too.

Again, check the chart. Fidyk refers to the amount of money a reseller makes off a product as “the gross profit margin from the shelf.” If you’re trying to assess whether your product would be competitive in the store, and you don’t build that margin, you can virtually plan to fail.

In addition, you should also budget for something called “program” or “inside” monies.

According to Fidyk, “different retail chains have different names for it. Essentially, if you want to get listed with a corporate chain, the real Canadian Superstore, Canada Safeway, etc. you go present to them. And, they will always ask about program monies.

“And it’s not insignificant. It can add up to about 13 percentage points. So, in addition to what a retailer is making — let’s say 35 per cent gross margin on your product on the shelf — the corporation wants to make 13 percentage points at the head office level. A lot of that is cost recovering towards their cost of doing business.”

This money goes toward their advertising allowance, like co-operative advertising paid by the company and the vendor. Then, there are the central building allowance, warehouse allowance, and freight allowance. Again, each retailer may have different names for the various types of allowances for which they would like a vendor contribution, but ultimately what really matters is the total cost to the vendor that must be included when formulating your pricing. Otherwise you will either be at a significant disadvantage when it comes to negotiating with these retailers if you have nothing to offer, or you will have to take a big hit on your gross profit margin to pay for them at your own expense.

Another of your costs is the annual volume rebate, which is a program the vendor builds with the intention of giving a rebate at the end of the year based on how much volume is purchased. As the volume grows with more sales, the retailer will get more money via rebates.

“These are things that most people aren’t aware of,” said Fidyk. “So if they were to think they’re all ready — rushing out to present to these stores — they get a huge shock and surprise and will be totally unprepared for these program monies.”

On top of that, there are also costs for dealing with the different channel partners. There are different folks along the way, and there are people you need to employ, pay, and other costs, says Fidyk. “Some you pay out of pocket, others you don’t, but they all make an impact on the final cost of the product when it hits the shelf.”

The key, he says, is to do your homework. Manitoba, for instance, offers courses for individuals hoping to break into the food market. Such opportunities, Fidyk says, can be a big help in ensuring you arrive at the retailer not only with the right price, but with the ability to explain your price in terms the retailer can relate to.

Get your sell sheet right

While setting the price is an obvious first step, it is only one of many if you want store owners to take you seriously.

In Fidyk’s course, for instance, students learn how to make an effective sell sheet, which most retailers require to even consider carrying your product.

“That’s pretty common,” said Fidyk. “It’s a sheet that shows a picture of your product with some enticing language that will tell the retailer why they should be listing your product, and how well it will do for the category.

“You’ll also want to include key information about your product, like the UPC, base cost, and your trade terms. You use this to present your product.”

The best approach to a grocer

There’s also a science for knowing who to call in a company. And there’s another science to knowing what legwork you need to invest in before making that call.

Start with a visit to the store to check out the section that your product would fit into to figure out where to suggest the grocer should place your product and why.

Take notes. Even take photos with your phone, because it’s important information.

“I teach people to look at a section,” says Fidyk. “So, there’s a breakfast category and, within that, maybe a jam section. A store may have eight feet of jam.”

That’s where you have to live, Fidyk says. “If there is eight feet of jam, the store does not have more space for your product. So you need to suggest which product your product will replace.”

That means that when you meet the store manager, you need to be ready to tell them what product needs to go in order to make room for yours, and why that move will make them more money.

Fortunately, if you’re a local producer, you have a built-in advantage, Fidyk adds. “A weak item is one that potentially may be no better than what you offer, and the fact that you’re a local producer will pull you further than the other item. It’s something I see as a selling point, being locally produced, and because this store is in your backyard, you therefore have a competitive advantage in servicing that store, something that most products lack these days, especially when it comes to rural stores.”

Start small and grow

“Start in your rural community, then go down the road to the next community,” Fidyk says. “Start in the small stores and practise. I have clients who think they’re ready to fly off and talk to Safeway right away, but they haven’t even penetrated any individual stores yet.”

It’s important not only for making the first contact, but also for monitoring your performance once you get on the shelf.

For many farmers, it’s a key reality check, Fidyk says. “They need to have some sort of infrastructure in place — their own or hired people to monitor their business and all these stores, because, as I know from personal experience, if you’re not monitoring the stores, the product will sit there on the shelf.”

Features versus benefits

Features are the physical properties of a product, like its size and container details. They’re essential, but if you hope to get shelf space, you need to go further.

You need to make a convincing case to the retailer about why your product is going to attract consumers. “What is it going to do for them as business people? How will it be THE thing that makes it a great product? But most importantly, what trends does it follow that are unique to the other offerings already being carried and how is your product going to help grow the category?” Fidyk asks.

“Of course, there are benefits a retailer cares about, and there are those that a consumer cares about. You would change those depending on who you’re speaking with.”

Promotion template

Fidyk also suggests his clients come up with a template that sets out a schedule of promotions for the next two to three months, including ideas for what promotions you can offer a particular store. Be specific about what wholesale promotion you are willing to offer, and what the retail promotion will be, as well as any in-store demos.

Again, being local can help. “Go armed with that, in terms of saying, ‘Well, I’m local, so I can come here all the time… every two to three weeks… to grow the business of my product with your customers,’” says Fidyk.

“The retailer gives us a lot — providing the space, allowing promotions, maybe setting up a demo station or displays. They do a lot for us. But, it’s really incumbent upon us, as the owner of that product, to be out there doing the work to get it into the hands of that store’s customers.”

Live in the real world

And then indicate that you understand the real world that retailers live in.

Let them know that if you can’t prove within 12 weeks that you’re a good fit for their store, you’ll expect to get dropped from the shelf.

But also say, “I’ll prove that I’ll make this product successful in your store. I’ve got a plan here with some promotions to give your customers a chance to purchase the product at a discount. And, I’m going to come and do some demos here for them to try the product.

Then, deliver on your promises.

“I’d hope before the end of the 12-week trial period you can go to the manager and say, ‘We’re almost out. Would you like to order more stock?’”

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