Guide 4: Food Money Machine - Distribution
The Food Money Machine is the foundation of all growth. A Food Money Machine is a specific consumer market opportunity combined with your company’s food product to capture the market demand.
A Food Money Machine Consists of Five Key Components:
1. A target customer who’s aware of his or her problem or need.
2. A promise that your company makes to prospective shoppers and consumers.
3. A distribution channel for reaching and transacting with the target shopper.
4. A food or beverage product that fulfills the promise made to the consumer.
5. A branded sustainable competitive advantage.
In this article, I’m going to focus on the third component: distribution channels.
Distribution (the ability to communicate and transact with a shopper) is consistently the most underestimated factor and missed opportunity in most food and beverage companies. In my experience, distribution is more important than product development. If you have good distribution, there will be an endless line of companies wanting to partner with you to take advantage of it. The opposite, however, is much less common.
Wal-Mart doesn’t manufacture a single product. It is, however, the single largest distribution channel for food and consumer packaged goods in the world. They have direct access to more customers, than any other company in the world.
In the beginning of my career, it did not occur to me the gargantuan opportunity that was before me as I learned the food business first from the loading docks and pulling food orders in warehouses. This training in distribution became the catalyst for $100’s of millions in new value for multiple brands globally. Every brand needs distribution.
Nestlé leverages and has an enormous distribution channel through its retail, online, Nestle branded Amazon pages, and wholesaling partners. They’ve also opened new distribution capacity and invested in third-party distributors. Through these extensive relationships, Nestlé has no trouble introducing new products to consumers into these channels.
In addition, recognizing the importance of controlling distribution, Nestlé has made efforts to market directly to consumers buying direct-to-consumer brands like tails.com—bypassing third-party distribution channels. Through its online efforts and hosted versions of all its key products, it is building direct relationships with customers on an increasingly large scale. It’s all about distribution—because without it nothing happens.
The same is true with door-store-delivery only branded food companies. The largest of these companies, like Frito-Lay and Blue Bell Creameries, dominate because of their massive, installed base of customers. On-going relationships with their direct channels allow Blue Bell and other DSD operators to communicate with their customers with ease and at low cost introduce, deploy new products for tests and national roll-outs. In short, they have distribution.
When a company like Frito-Lay wants to introduce a proprietary or third-party product they can reach a surprisingly high percentage of the supermarkets, all club stores, and convenience stores in America in less than 45 days. That’s the power of distribution.
In the pizza world, Dominoes, Papa Johns, and Marco’s have enormous distribution power and reach. These companies have prospered, in part, because their bosses recognized that they’re really are in the business of distribution.
Over the past few years, Amazon.com has added food product after food product and Whole Foods to their website; providing more products for their existing shoppers to buy. (Incidentally, this is precisely what you do when you have strong distribution; you cram as many high-quality, relevant products and services as possible through your distribution system.) Amazon has capitalized on their distribution system extremely well.
The home food delivery company, Schwann’s has done the same. In addition to introducing an ever-increasing array of desserts, proteins, entrees, and even seafood (Alaskan Sockeye Salmon, Vegetable Fried Rice, T-Bone Steaks, and Bagel Dogs), Schwann’s has continually worked to grow its distribution—including adding UPS delivery to its network of depots and neighborhood delivery freezer trucks.
One of the reasons distribution is such an enormous asset is because of the economics of distribution. Here’s how it works. Acquiring a first-time customer is expensive. If you’re like most companies, 80% of your sales and marketing resources get consumed while trying to acquire new customers. These customers and their shoppers don’t know you, don’t trust you, and can’t tell you apart from your competitors.
To get your message across, you need to blitz them with your message. Market to them, sample them, drop millions of coupons, and do whatever it takes. In contrast, you could place it on your next delivery to the store, pick up the phone or send an e-mail to your best retailers to let them know about a new product and get an order within minutes or a few weeks—depending on the category and size of the account.
So, in the distribution game, selling to a new retailer or channel is the least profitable part of the business. It’s necessary, but not nearly as profitable as selling more to existing customers. The companies that are smart with distribution recognize this and are extremely focused on selling more to existing customers. I’ll quote my friend John Soares. “I’d much rather sell multiple items to 500 retailers as compared to 1 item in 5,000 stores.
Dominate New Customer Acquisition by Selling More to Existing Customers
To dominate the war for new customers the single, biggest, most unstoppable advantage is a superior ability to sell more to existing customers. This linkage isn’t initially obvious to many food entrepreneurs, but if you fully appreciate this relationship, you will never look at your business in the same way again.
When a company does a good job selling to existing customers they can afford to spend more money to acquire new customers. Taken to the extreme, this simple mathematical relationship has enormous strategic and competitive implications. If you can lead the category in sales to existing customers you will have the largest marketing war chest in your niche, bar none. This isn’t a marketing theory; it’s a mathematical fact.
Here’s a simple example: Let’s say you’re trying to sell your grandfathers bbq sauce recipe bottled to Kroger and are competing against a big company like Sweet Baby Rays BBQ Sauce. Owned by Ken’s Foods, they supply over 400 sku’s to retailers and restaurants nationwide. In contrast, your product line might only have 3 flavors and your marketing budget is heavy on the one item.
The way the math works is Ken’s can afford to invest 100 to 400 times your budget to secure any account and still make a profit, whereas you can only afford to spend based on your limited line and geographical area. In that situation, who is going to win?
When you’re at a 400:1 marketing investment disadvantage it’s very tough to come out ahead. Once again, this illustrates the power and importance of distribution.
Distribution is hands down one of the most important aspects of creating a Food Money Machine. It is also the factor that is consistently underestimated and is often considered only as an afterthought to food product development.
Among many food and beverage startups, the mentality is: “Let’s build a product and then figure out how to sell it.” Wrong! You are much better off considering how you intend to distribute a product before you build it. Before developing a product, you want to verify your assumptions about your distribution channel.
Why? For one, the food or beverage product packaging will be slightly different for almost every channel, purpose will depend on the distribution channel. It’s tempting to keep distribution as an afterthought. After all, the product changes required to be compatible with distribution are often minor. However, just because the differences are minor from a development standpoint, it doesn’t mean the revenue impact is minor.
When you build a product that is fundamentally incompatible with your distribution channel you can’t sell it. A product is either compatible with the channel or it is not. It tends to be a binary, black or white situation rather than “maybe we can convince ‘em to buy it.”
Let’s walk through some examples. Assume you run a snack-food company. Your company is launching a new product to be sold to your existing retailer base. To be compatible with your channels and target customers you need to provide appropriate product sizes, acceptable ingredients, existing company brand, and the right promotional offers. This will enable your existing customers to leverage your brand, their stores and consumers for your new product. This would be 100% mandatory if the product is to be compatible with any one channel. (And, with regard to creating “proof” of your promise, you’d probably want to have several documented case studies of successful retailer and consumer market success. In particular, you will need to offer each account the channel appropriate product offering for your branded food product. Otherwise, these customers won’t buy.
However, if you were selling the product primarily to new consumers or new channel that don’t own your branded products you might take a different approach. In this case, you might offer a new brand or better for you brand to leverage new qualities or highlight new benefits for consumers.
Different distribution channels have different requirements, which impact how the product should be developed. It’s important to know this in advance and not as a last minute, “Oh darn, they won’t buy this size or ingredient list.”
The point is that you need to figure this out early in the process or at least consider the needs of the consumer for the specific channel.
A Frequently Ignored Source of Additional Revenue
There’s another reason why distribution is typically underestimated and overlooked as a major source of food revenue growth. Chefs and food product developers are notorious for a “my baby, my creation” attitude (secret recipe, family and friend favorite, unmatched flavor). The underlying belief is that we can only sell food products to our customers that we personally create. But, why?
Once you have an established, trusted relationship with a customer, you can sell all kinds of food products and even third-party packages to them. There’s no need to be restricted to only those products and even categories your manufacturing plant or co-packer can produce.
If you’re truly concerned about the recipe or brand reputation then don’t bring in the product under their label. You might consider engaging in white labeling and private labeling their manufactured food and beverage products for your customers.
If you have even a modestly sized customer base, you can leverage your distribution channel by selling other company products and even possibly services to your customer base.
Once again, the behind-the-scenes impact of selling more in-house and third-party products to existing customers is that you can afford to invest more to acquire new customers. Your marketing budget gets larger and your ability to target consumers and new markets is improved in the process.
Now that we’ve gone over the basics of distribution, let’s look at some common problems with distribution and how to solve them.
Distribution Problem #1:
How to Expand Self-Distributed Food Products
Solving distribution problems is easy to do conceptually, but implementing solutions is not always as easy. To expand your in-house distribution, whether it is via a direct-store-delivery team, field sales pre-sell trucks, telesales, UPS, or other method, the principle is the same.
Work relentlessly to get your in-house distribution working on a small scale in a market. Figure out what you did right. Make sure the math works, standardize it, and duplicate it.
The key to scaling up distribution is the concept I call a “repeatable unit.” A repeatable unit can be a sales rep who’s hitting her numbers out of the park, a marketing program that’s working like crazy, or a sales script that performs unusually well. The key with a repeatable unit is that you can, well, repeat it.
So, if you have 10 salespeople and one is outselling the other nine combined, then you’d darn well better figure out what that one salesperson is doing to be effective that the others are not. Is that salesperson qualifying prospects in a different way than everyone else? What’s driving the person’s success? Is she more successful at getting more initial meetings with clients? If so, what’s she doing that your other salespeople are not doing.
Or, does that salesperson get the same number of meetings, but converts those initial meetings into closed sales at a much higher closing rate? If so, what did she do differently? You have to figure out what that person did right. You’ve got to break it down step-by-step. Take apart each step of the process and examine each piece separately. Try to isolate what went right.
This is similar to someone in the food plant troubleshooting or repairing some piece of production line. They systematically check each station and step of the baking process until the problem is isolated and fixed.
I propose doing something similar, but instead of looking at this as a “troubleshooting” exercise (find the source of the trouble and fix it), look at it as a “treasure discovery” process (find out what went right so you can deliberately do more of it).
In a “treasure discovery” process you systematically isolate and check each component of the process until you isolate the primary factor that went right. This is important because if you cannot isolate what went right you cannot duplicate it on a consistent basis.
You can use this exact same process for any type of distribution channel. If you have a great marketing campaign, do a “post-mortem” analysis and figure out what went right. Take the same campaign and cross-test it with a different mailing list. Take the same list and cross-test it with a different campaign. What drove the campaign’s success? Was it the target audience you chose, the communication pieces, or a combination of the two?
If you got the audience right, what’s the specific demographic and psychographic profile of the people in that audience? Who are they? Where can you find more people exactly like them? Analytically isolate what works and duplicate it. That’s the key to scaling up distribution.
Good Results Are Not Enough:
You Must Have Good Results that Can Be Duplicated
There’s a big difference between achieving Food Money Maker growth temporarily or in your home market and sustaining it for decades. In the former, all your team has to focus on is generating more revenues. But, for a Food Money Maker company, delivering strong revenue growth is simply not good enough. You must have revenue growth that can be duplicated on an on-going basis.
If you can’t duplicate a good result it only means you got lucky. I don’t mind having luck on my side, but I’d much rather have a proven, repeatable process. You must personally focus your team on this “duplication” aspect of revenue growth because they won’t do it without your constant involvement.
You need to make this your mantra: “We don’t need revenue growth; we need revenue growth that can be duplicated.” That’s the key to building a Food Money Machine.
Turn Growth in Distribution into a Self-Financing Activity
The other key to building a Food Money Maker is to make sure expanding distribution is a self-financing activity. Here’s what I mean. Let’s say you run a company that sells via a direct-store-delivery model. After extensive “treasure discovery” you’ve isolated and duplicated what’s working well in your distribution channels. You have a “repeatable unit” in the form of a route that follows your well-honed sales system.
Let’s further assume that every time you add a new truck and route, you pay $120,000 a year in overhead, the new route consistently produces $2 million in sales each year for you. How many routes do you add to your food business?
Of course, you add as many as you can finance that meet your criteria. This is an example of making expanding distribution a self-financing activity. Each time you replicate your “repeatable unit” of distribution it pays for itself, with money left over to fund the next repetition.
In this case, adding one new route generates enough revenue to pay for the next three DSD routes via margin. The new three, in turn, provide the cash flow to pay for the next four and so on. When you get the “micro-economics” of the repeatable unit to work on a small scale it makes scaling up distribution incredibly easy. This is another key for creating and sustaining a Food Money Machine.
This is also true for your supermarket business. Let’s say you systematically “treasure find” your retail sales process and have gotten your numbers to a pretty good level. Your numbers show that it costs you x amount of dollars in advertising to support a market of a certain size. On average, for every new consumer that purchases your food products, your marketing budget expands by certain percentage amount of the revenue. How much should you invest in marketing? As much as you possibly can, while maintaining the quality level of the prospects you attract and your performance metrics.
In both examples expanding distribution is completely self-financed. You take a well-honed, well-understood “repeatable unit” and multiply it. The greater the difference between the costs of putting an additional repeatable unit in place and the revenue it generates, the faster you can grow, completely financed from internal operations.
The repeatable unit is critical to scaling up. It’s not enough to get your distribution channel to produce revenue; you must understand why it is working well so you can replicate it.
Incidentally, one of the reasons many fast-growing food companies can’t sustain growth is because they don’t really know, analytically, what they’re doing right.
You need to understand your sales and marketing process at a numerical level, the way someone running a massive cookie factory line knows precisely how each segment of the line is performing at any second of any day.
Distribution Problem #2:
Your Distribution Channel’s “Repeatable Unit”
Shows Only Modest Performance
So, what happens if you’re in a situation where the performance of your “repeatable unit” is mediocre? Your sales routes costs $120,000 but only produces $300,000. This is enough to put a little dent in your overhead but is not really a major contributor to your gross revenue. Or your recent consumer trade campaign shows that it costs you $1.00 to get a shopper to purchase your product, but you make only $1.20. It’s a tiny profit hardly worth attempting to replicate on a wider scale.
Repeatedly, I share with food entrepreneurs in situations like these, you’re better off not trying to replicate or scale up your distribution. In this case, your focus needs to be on two specific areas: troubleshooting your sales and marketing process and increasing your revenues per customer. I put the brakes on expanding distribution in hopes the increased revenue will fix the lack of massive profits. It’s not a scale problem!
If your sales and marketing process is not performing well, you have to continually adjust it until you can get the numbers up to a level that’s worth replicating. Here’s how to do it.
Break down your sales and marketing process into specific steps: Measure the performance of each step, systematically A/B test each step of the sales and marketing process, and look for the alternative that generates more sales.
I’ll provide some examples in a second, but first, let me define an A/B test. In an A/B test, you alternate between two versions of a particular step in your sales and marketing process (e.g., package claims and branding content, promotions, direct mail pieces, demo scripts, taglines, online and social media messaging, etc.) and carefully track which one worked better.
This, frankly, is how 80% of all sales and marketing should be done. It should involve a systematic, analytical approach to continuously improving the results from your in-house distribution channel. Perry Marshall in his book 80/20 Rule in Business brilliantly maps out this process of testing and narrowing down to your best success. Let me share several examples for you to consider in your own business.
For one client in California, I reviewed their product portfolio and pricing structure. Once I completed the analytics it appeared we had a significant opportunity to introduce products and packages to consumers far beyond the sub-$10 price point. We introduced an $89 version and it began selling in days. We are now testing even higher priced products in the 3 and 4 figure price points with higher values for the shopper.
My client in Virginia also tested higher price points for her direct-to-consumer website and successfully transitioned her entire business from $40 retail product to $150 product and we are now looking at a $200+ and a custom $1,000 version of the $40 product. It all begins with testing. It’s not just pricing but everything associated with the process of sales and marketing must be reviewed and tested.
This sounds like a pain to do, and it is, but it systematically and continuously increases revenues. The math is compelling, as evidenced in the following example.
The A/B Split-Testing Math:
How a 3% Weekly Improvement Generates 150% Annual Revenue Growth
One of the keys to creating and sustaining a Food Money Machine is to look for high return on investment opportunities in your business. These are opportunities that require only modest effort but increase revenues at a level substantially more than the effort required. Or, phrased differently, the key to Food Money Machine growth is to look for the “little hinges that swing big doors.” A/B testing is, without question, one of the highest-leveraging revenue growth opportunities you have in your business. The math is exceptionally compelling.
Here’s an example: Let’s say you run a test every week in either a marketing campaign, product, or in your sales process. On average, you find one version outperforms another version by an average of only 3%. As far as A/B testing goes, this is a tiny level of improvement. It’s common to get 15 to 20% improvement per attempt, particularly early on in the process.
You repeat the process of taking a new action or changing an element in your efforts again next week, and again the week after and so on for each week of the year. You will find some good improvements and other weeks there will be no improvement. If you stay with the process, you will generate a return over each week with your sales and marketing process. If you keep at it for 52 weeks or 104 weeks, you’ll see a tremendous overall impact of 150% increase in sales for the year or two – with almost no additional costs in your marketing, it actually should cost less.
Not just marketing, but you can find areas throughout your business to leverage, exploit, test, and improve that when compounded with these small changes in sales and marketing will have massive impact on your business success. The areas I like to investigate include marketing, strategy, capital, business model, relationships, distribution channels, products, procedures, and even ideology of the team.
It’s almost unimaginable the amount of exponential growth that can be found when seeking minor adjustments in multiple areas for success. If you can pick up a 5% improvement each week, you’ll double revenues every four months. If you can get only a 1% improvement each week at the end of a year it will be a 50% increase in revenue. Details matter and we are not seeking home runs, but instead disciplined approaches to seeking daily wins throughout the months and years.
At this point, you can double your sales force or double your marketing effort every 12 months on a completely self-financed basis. By combining a 150% increase in revenues for each “repeatable unit” with a 100% increase in the number of “repeatable units,” you’re posting a 250% annual growth, year after year. So, if you can hit $1 million this year your run rate next year is $3.5 million with system improvements and duplication.
Having gone through these efforts repeatedly in my over two-decades consulting career, I know from experience the easy 10% to 30% growth hits can come easier in the early part of the process. As time progresses and testing continues, it gets harder and more difficult to find even a 5% improvement.
The point of these tests and my review is to illustrate that the key to improving the revenue productivity of the “repeatable unit” in your distribution channel is to continuously rack up a series of tiny wins. You do this by employing disciplined testing as part of every operation in your Food Money Machine.
Distribution Problem #3:
How to Expand Third-Party Distribution Partners
Show them the money! That’s the most important thing to keep in mind when trying to scale up distribution through partners. Partners want to increase their revenues in a way that’s consistent with their values and quality standards. The more you can match that, the more successful you’ll be with partners.
In general, there are two ways you can show them more money. First, they can profit by reselling your products (or by you paying them a fee or commission). Second, you can show your partner how every time a customer buys one of your company’s food products they automatically want to buy more of the partner’s product or service.
In food categories, it’s a relatively simple exercise to show retail, foodservice, leisure segment operators how they can benefit from adding food and your product to their category mix. In Guide 7, we share an exception template and process on sharing your value equation with partners.
The classic example of selling desserts, you demonstrate to the restaurateur how valuable selling desserts to guests will be on his bottom-line. If only 10% of guests will add a dessert to the check it will have a massive impact on profits and guest satisfaction. So, either way, it’s important you show partners a path to more money. Spell it out for them.
When a retailer or operator partner makes significantly more money partnering with you versus a competitor it becomes much easier to get more of them. Not only can you afford to invest more in partner acquisition, but you will also find that a higher percentage of prospective partners become actual partners. This, of course, accelerates your Food Money Maker and increases revenues from additional channels, which, in turn, provides you with even more resources to attract more partners. The process steadily cycles upward.
Distribution Problem #4:
How to Increase Revenues from the Distribution You Already Have
The key to maximizing revenues and profits from an existing distribution channel is straightforward: Sell them more stuff. Sell them more of your food products and sell them more of other people’s stuff either in your brand or the supplier’s brand.
Your effective margins on sales to existing customers will always be substantially higher than sales to new customers. So, selling more to existing customers drives top-line sales and improves bottom-line profit margins, all at the same time.
This seems like such a mundane way to increase food revenues. There’s no magic bullet, no super-sexy partnership deal, no whiz-bang marketing campaign—just sell more to your existing customers.
In my advisory work with food clients, I routinely focus on this technique to generate an immediate surge in my client’s food revenues. For smaller food clients with flat sales, I’ve repeatedly doubled revenues within the first year. It often is a very simple process. Let me share with you one example how I did this for Dyson Limited, a United Kingdom technology and vacuum company.
When approached by Dyson’s business development specialist, I was intrigued with the idea of helping their division focused on restaurants to achieve massive growth and found it. In the first year, the division achieved an 83% growth from a very simple process.
Initially, I requested that Dyson all invoices for the prior 30 days. After review and much to my surprise the larger orders came from healthcare and the top client in the restaurant division was a hospital! I immediately built a database of all hospitals and healthcare facilities and emailed it to the group. The list generated massive growth and success in existing accounts already a part of distribution but lacked focus.
Here is another example that maximizes sales revenue from existing accounts – displays. There is likely no better opportunity for Food Money Machines than building and deploying branded displays of your products into your customer and distribution channel segments. The display becomes a defector retailer within the retailer.
I’ve seen displays generate anywhere from 200% to 1,000% increase in sales volume and you do not have to deploy them into food stores. In many instances they work even better in locations that are not accustomed to merchandising your food product category.
One of my former employees went on to work for Mrs. Fields Cookies and we were discussing his best-selling locations for his cookie brand. Surprisingly, he shared that Best Buy was his brands #1 selling location nationwide. There were no other cookies in the set and employees along with shoppers would purchase his cookie at a higher sales rate per location than any convenience or supermarket in the country
So, here’s the key rule to remember: When you have an established distribution channel and customer base, bring them more value, and use them often!
© FOOD MONEY MACHINE 2019