Foreign Food, Without Indigestion
My home-based startup aims to sell imported tea to health food and organic food stores. What kind of margins can I expect at the wholesale level? What markup will retailers add to the items on their shelves? I'm trying to decide whether to sell direct to retailers or through brokers and distributors.—S.B., Dallas
For several reasons, there are no hard and fast rules regarding margins at the wholesale level or markups at the retail level, experts say.
First off, every product is unique, and thus can command its own price. Second, a lot depends on existing customer demand for similar products already on the market, if there are any, says Robert Wemischner, who teaches baking and entrepreneurship at Los Angeles Trade Technical College and is the author of three food books, including Cooking With Tea. And finally, retail environments themselves vary greatly depending on their location, product arrays, size, shelf space, and the retailer's willingness to take on new products.
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That said, startups in the food industry are seldom, if ever, in a position to sell directly to retailers. Large, well-financed corporations like Kraft (KFT) and Kellogg's sell directly to supermarkets and grocery stores because of their huge product volumes and sales.
These megacorporations must first have their products approved for sale by the retailer. Then they pay "slotting fees" in order to get their products on the shelves. Such fees may run between $35 million and $60 million per product or product category, experts say. If an approved product does not perform as anticipated in terms of sales, it will typically be yanked from the shelves within one year.
As a startup importer, you will likely need to be represented by a distributor, whose margin will probably range from 25% to 35%. "Brokers and distributors already have systems in place to get your product out to the logical markets," Wemischner says. "They also may have experience dealing with imported products in general."
You should expect to wholesale your products for about double what you pay for them, including all importation fees and other costs, Wemischner says. The retailers who stock your products will most likely triple that base cost to arrive at a retail price, though each product's price is individual and can be negotiated. Depending on where your products are sold, you may also be asked to pay slotting fees and other expenses.
Be careful to do accurate calculations about your imported products' costs, including freight fees, duty, and other importation charges that you may incur. "It is especially tricky to get clearances from U.S. Customs and the FDA [Food & Drug Administration]," Wemischner says. Make sure you have settled those issues before you start setting your pricing.
A great resource for you would be the National Association for the Specialty Food Trade, a nonprofit trade group organized in 1952 to represent domestic and foreign manufacturers, importers, distributors, brokers, retailers, restaurateurs, caterers, and others in the specialty foods business. The group sponsors educational programs for entrepreneurs in the industry, publishes a magazine, and hosts three Fancy Food Shows annually. The next one, coming up in July in New York, would be a wonderful eye-opener for you if you want to learn more about the nuances of importing and selling food products.
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