As a brand integrated into a distribution network, you may legitimately wonder how your resellers define their margin rate. Moreover, the balance of power, often in favor of distribution, may lead you to believe that you are powerless against your partners.
Well, no: you also have levers at your disposal to influence discussions with your distributors in your favor! Sidely takes you through the techniques you can use to get supermarkets to lower their margins on your products.
But before we look at the tools available to you, let's take a look at the definition of mark-up, then consider its impact on your retail pricing strategy.
A few basics to get you started.
Gross margin is the difference between the cost of purchasing or producing a product, and its selling price.
The margin rate is therefore an indicator of a product's profitability. It is obtained by dividing the sales margin by the purchase or production cost.
Here is the formula for determining your distributor's gross margin on your product:
Be careful not to confuse gross margin with :
It is therefore essential to differentiate between gross and net margins. While supermarkets can sometimes achieve gross margins in excess of 50%, only an in-depth analysis of the associated costs can accurately measure the profitability of a particular product. For example, supermarkets generally have higher costs for fresh produce, as handling perishable goods involves additional personnel costs.
In the end, the net margin for supermarkets is likely to be between 1% and 3%, depending on the products concerned.
But what impact does this have on your product sales?
In the complex dynamics of the retail industry, your brand's pricing strategy plays a decisive role in maintaining your sales volumes. Many brands opt for price stability to maintain their market share, but this approach can come up against the pricing policies of distributors. Indeed, the latter may be tempted to raise retail prices, directly impacting consumer perception and, potentially, sales volumes. So, how can we avoid this pitfall?
A reduction in your distributor's margin rate could result in an increase in sales volumes, provided that this reduction is well calibrated and does not affect the brand's overall profitability. It is also essential to work on the marketing visibility of your products. A well-targeted, differentiated marketing strategy can help boost your brand's appeal and maintain demand, even in the face of price fluctuations.
It is crucial to note that, in the consumer's mind, it is often the brand, and not the retailer, that is perceived as responsible for price variations. This perception can have a significant impact on brand image and customer loyalty.
It's up to brands to work closely with retailers to align pricing strategies and ensure transparent communication with consumers, thereby dispelling misunderstandings and boosting brand confidence.
But let's get to the heart of the matter and look at how retailers determine their mark-up.
In 2019, an article in Le Parisien revealed the high mark-ups charged by supermarkets on certain products, but also the surprising variation from one department to another, or from one product to another. The newspaper had already pointed the finger at the phenomenon of excess margins on organic fruit and vegetables, 75% higher than on other products, and even noted totally different variations from one product to another within the organic sector, demonstrating the ability of supermarkets to interpret purchasing reasoning and adapt their margin rates to maximize sales. It's a level of information that you, as a distributed brand, are often deprived of, for lack of access to checkout data - the grail of data sharing.
The same year, still on the subject of organic food, Que Choisir considered that the gross margin of distributors had a considerable impact on the final price of foodstuffs, pointing out that these differences were not justified by any figures relating to "distribution costs between organic and conventional products".
In France, below-cost selling has been prohibited since 1963, which means that your distributors are not allowed to resell your products for less than you paid for them.
Since 2019, the EGalim law has obliged retailers to apply a minimum mark-up of 10% on the resale of foodstuffs. EGalim also lays down a more solid framework for promotions, prohibiting "two products for the price of one" operations.
On the other hand, there is no legal maximum mark-up, as there is no legal provision on the subject. Distributors are therefore free to margin as they see fit.
So - as we'll see below - determining the mark-up on your products depends more on factors outside the regulatory framework, such as demand and competition.
For products in high demand and distributed by competitors, such as Nutella and Coca Cola, retailers tend to lower their margins, lest customers prefer another brand. However, even a low margin can be profitable for the distributor if the sales volume is there! What's more, retailers are making up for this by offering much higher mark-ups on products that are on the rise, as in the case of organic produce in 2019.
So, from one product to another, the variations in margin rates can be gigantic, ranging from 1% on some products to over 50% on others! It's clear, then, that the margin rate depends to a large extent on the "law of the market", a subtle blend of competition and demand.
In the final analysis, there is no single way to determine a margin rate, and companies tend to keep these secrets from prying eyes, as competition dictates. However, we can mention the main criteria that enable distributors to establish a margin rate:
The variation in margin rates from one product to another is not insignificant for brands. Consumers are not well equipped to interpret price levels in supermarkets. For example, the high price of organic produce suggests that production costs are at the heart of the high price, when it is clear that the retailer's margin is also significant. And when consumers feel that a product is being sold to them at an unjustified price, it is primarily the brand's image that suffers the consequences.
But when you consider the elements listed above, you can see the factors you can influence as a brand.
Not everyone is Coca Cola, of course, and in most cases your distributors will try to impose their terms on you. Faced with this situation, one option is to rethink your distribution strategy.
Indeed, opting for a more intensive form of distribution could have the effect of increasing pressure on retailers and reducing the impact of the distributor margin on the consumer price.
In the case of an exclusive distribution strategy, you will try to control the margin rate through the clauses of your distribution contract.
There is therefore a strong correlation between your strategic choices in terms of distribution channels and the margin rate applied by your distributors.
Measuring how much your typical customers are willing to spend can help you reverse-engineer your costs. If your analysis is solid and based on a consistent set of data, share it with your distributors, showing them the gap between your internal costs and the known psychological price.
As part of a win-win collaboration, encourage your distributors to apply a margin rate that promotes sales maximization. In this way, rather than simply delivering a recommended retail price after surveying competitors' shelf prices, you demonstrate to your partner a genuine ability to listen to the market, and a logic of virtuous collaboration from which he too will reap the benefits.
As mentioned above, when consumers buy a product sporadically, they are less likely to have a price in mind. If your products fall into this category, be prepared to broach the subject on your rounds, and have your arguments ready!
Finally, as we saw above, the margin rate is strongly correlated with the laws of supply and demand. This means that a pricing strategy only makes sense in the light of your competitors' prices. Whether it's a question of monitoring the selling prices charged by your distributors or the strategic price changes made by your competitors, optimizing the collection and feedback of price-related data in stores requires the use of a CRM application designed for the supermarket sector.
The mark-up charged by retailers is a well-kept trade secret. That's why we've deciphered how your distributors can determine it. It's vital for you to measure the impact of margin variations on your products, and you now have a number of tools at your disposal to rebalance the supplier/retailer relationship and encourage your partners to avoid over-margining. You can now work on your arguments and try to develop cooperation to achieve your commercial objectives collectively!
