Distributor margins for CPG brands

Distributors make money by purchasing your product at a slight discount and selling it at a markup. The distributor margin is the percentage of the sale price that the distributor pockets—but it’s not pure profit, since distributors also have several costs they must cover, such as:

    • Logistics

    • Warehousing

    • Sales

    • Marketing

Knowing these things, the distributor margin calculation is easy to calculate.

Distributor Margin = ((Sell Price - Purchase Price - Additional Costs) / Sell Price) * 100

Margin ranges for different types of distributors

Margins can vary a lot, depending on the size and location of your distributor. In general, you can expect distributor margins to fall between 3% and 30%. The actual margin depends on your product category and whether you sell to a national or regional company.

    • National distributor: National distributors are generally larger and have lower costs and thinner margins, which they can make up for by selling more products.

    • Regional distributors: Regional distributors are generally smaller and must price products higher because of their higher costs, which they compensate for by charging more and taking a higher profit margin.

Retailer margins for CPG brands

A retailer’s margin for CPG products is the percentage of profit they make when selling them. The retailer buys a product at a wholesale or discounted price (the cost of goods sold), sells it in their store at a markup, and keeps the difference.

Like distributors, retailers have additional costs beyond the purchase price, which affects their margins:

    • Trade promotions: CPG companies and retailers coordinate marketing events to encourage product sales. These promotions include discounts, rebates, and bonuses.

    • Allowances: Manufacturers give monetary incentives to retailers to encourage extra promotions of products. These incentives can involve advertising help and display/slotting allowances.

Knowing these things, we can calculate the retail margin.

Retail Margin = ((Selling price - Cost of Goods Sold - Trade Promotions/Allowances) / Selling Price) * 100

Typical margin ranges for various retail channels

The margin a retailer will see depends on its store type—different types of stores have different operational costs and order quantities that impact their gross margins.

    • Grocery stores: Grocery stores typically operate on thin margins, generally ranging from 1% to 3%, depending on the product category.

    • Specialty retailers: Because specialty stores offer more unique products, they can command higher prices and therefore higher margins, which generally range from 2.5% to 3.5%.

    • Supercenter retailers: Because of their scale, superstores can afford lower margins, typically falling between 0.5% and 3%.

    • Online retailers: Because of their unique circumstances, margins for online stores vary more than traditional retailers and range from 5% to 20%.

Factors that influence retailer and distributor margins

Retailer and distributor margins can vary greatly—even if they’re buying products at the same price. Here are a few factors that influence margins:

    • Retail channel: Different retail channels can have different margins based on operating costs. For instance, larger stores with more scale can operate on thinner margins because of higher volumes.

    • Product category: Different product categories can have greatly different margins due to factors like manufacturing costs and product size. Small, inexpensive products, for example, may cost little to make but can sell for higher prices at a higher markup.

    • Brand strength: A brand with more recognition can sell its products at a higher price and offer better margins.

    • Competition: Competitive markets have more price competition, so you may need to lower your margins to increase sales.

    • Current market conditions: Certain products, like non-vital entertainment products, are harder to sell in tough market conditions and may require lower margins to make sales.

    • Supply chain: Factors like shipping, the cost and availability of raw materials, and labor prices can increase production costs and decrease margins.

    • Order volume: Ordering products in bulk allows for discounts and higher margins for retailers and distributors.

Understanding and navigating retailer and distributor margins is a critical aspect of running a successful CPG brand. With these insights, you can better strategize for a profitable and sustainable business.

How to reduce costs and optimize distributor and retailer margins

Although many of the factors that drive retail and distributor margins are out of your control, there are a few things you can do to maximize your own profits.

Build collaborative partnerships

Building good relationships with your retail and distributor partners is one of the best ways to maximize the bottom line for everyone. When there’s trust, you can be more flexible with terms and work together to create win-win situations for each party. 

More info to come in future articles..... If you like this article please share and follow me Mike Levinson, RD