July 1, 2014

What a great problem to have! No, really – it can be a problem.

Last week, I was at Target HQ to present a line that recently launched in market. How they were invited to Target for a line review is actually a crazy story. They launched in Spring 2014 at a trade show at which a Target buyer stopped by their booth and collected information. Fast forward a couple months later, out of the blue, they received a call from (a different) Target buyer inviting them to Minneapolis to present their line for consideration for the 2015 assortment.

Let me be clear. This rarely happens.

So what does a new brand do when a huge retailer is knocking on their door?

I’ll answer that in a second.

While my clients were excited by the prospect of selling in Target stores in their first year in market, I was afraid for them. As we prepared for the meeting, they began to realize what selling to any large retailer would entail. They had to figure out:

How to negotiate lower ingredient costs to meet Target’s margin requirements
Get a new manufacturer who could handle Target volume and do so with short order lead times.
Get a new warehouse, fulfillment, logistics and distribution system set up without any shipment history to base price quotes on. And get those costs down to meet Target’s margin requirements.
Get an expert in supply chain and inventory management on staff to manage operations.
Get EDI compliant.
How to battle the low brand awareness typical of new brands and how to scale up their marketing quickly in order to support national retail distribution
$$$$ to: fund these large inventory orders, pay for all supply chain partners, fund their marketing plan, and to hire their supply chain expert.
And after all that, their profit margins were shockingly slim.

All of a sudden, selling to Target sounded like a scary and financially risky idea to my clients.

And this is why it is rarely good to sell to a large retailer immediately. In fact, not only does it behoove brands to hold off on big retail, but to scale up smartly, slowly, and be choosy about which retailers you sell to and when.

What is a smart way to prioritize retailers? In short, a smart way takes into account:

Diversifying your cash flow so that you are not dependent on one retailer to be providing your cash flow
A retailer that allows you to grow your brand building momentum and is well matched with your current brand awareness levels
Retailers that will give you sales history, which is the “currency” needed to sell to larger retailers.
Retailers that are within range of your infrastructure and operational capabilities.

I have a framework called a Strategic Retailer Roadmap that is appropriate for brands 0-3 years old. One feature of the Roadmap is that it breaks retailers into 3 broad categories orAccount Types:

Prestige builders (retailers that are pre-trend and get your product in front of influencers, but may not have high store count)
Revenue drivers (retailers that have a lot of doors AKA store count but may not be brand enhancing for your products. They are not brand diluting either)
Key accounts are retailers that hit the sweet spot between the above two categories.

I’m simplifying things here for the blog. In reality, the Strategic Retailer Roadmap has more facets to it. But each brand needs to identify the right level of penetration within eachAccount Type for each stage of growth (e.g., Phase 1, Phase 2, etc). I create these Strategic Retailer Roadmaps for clients who are getting tons of calls from retailers but don’t know how to prioritize them or for brands trying to decide which retailers to go after first. It has helped provide them with clarity, has broken the growth stage into smaller digestible steps, and minimized the feelings of overwhelm.

Example of a brand’s growth plan. These numbers are for illustrative purposes only and do not apply to all brands.

So brands, if there is a takeaway from this blog post, let it be this: Build a plan for how you will grow your retail distribution and reference it often. When a retailer calls, see where they fit in the plan and do the math to see if you can handle the financial risk of taking on that account. And do NOT be afraid to say no. Ultimately, saying “no” is the defining difference between smart profitable companies and companies that seem like “overnight successes” but then crash and burn. Which one will you be?