So you think you’re ready to jump into the deep end of the pool and sign your first retail distribution contract. Good for you! Before you do that, though, you’ll want to be sure you understand all the terms, negotiation opportunities, and relationship ‘must do’s’ to be financially successful with our retail partners.
In this post we’ll share with you what we learned at Beauty X in Dallas recently from retail buyers from across the country.
And while all retailers are not created equal— and contracts can be as casual as an email or as formal as a multi-page legal document — you’ll be expected to deliver on what you’ve agreed to do.
Types of Retailers
Not all retailers are the same. National department stores will have different requirements and pricing structures than specialty retailers who focus on Clean Beauty or spas and salons.
As you develop your retail strategy, be sure you understand what each of these categories need, the benefits, risks and of course, the fit with your brand.
- Big Box Stores (Target, Walmart)
- National Department Stores (Neiman Marcus, Nordstrom, H&M)
- Regional/Local Department Stores (Hudson Bay Co., Barney’s NY, Dillards)
- Home Shopping (QVC)
- Grocery and Pharmacy (Wholefoods, CVS, Walgreens)
- Specialty Stores – Beauty Focus (Credo, Detox Marketplace, Ricky’s NYC, Ulta, Sephora)
- Online Marketplaces (Amazon, Jet.com, Bonanza)
- Lifestyle Stores (FreePeople, Urban Outfitters, Tommy Bahamas)
- Spas (destination, Medi-spa, day spa)
- Salons (national, regional, indy)
Contract Terms – 6 Elements to Master
Every retailer has ‘red lines’ they cannot cross, such as ensuring a supplier provides the ordered product quantity within the set ship window, the level of product and indemnification insurance needed, etc.
Before you go into any negotiation, know which of these areas you can give on and don’t get too hung up on any one of them. The price point may seem like the ‘must have’ but if you don’t negotiate on marketing, samples, or training expenses, you’ll potentially end up losing more money than if you had given up 5 points on your price.
Most importantly, we heard over and over that you must know what you can and can’t manage. If you agree to a set fulfillment process, but don’t have the systems in place to do that, you’ll end up eating your profits with charge backs and also damage your relationship. If you can’t fulfill a large PO, be honest and let the retailer know so together you can develop a successful strategy for rolling out your product. We were told again and again that communication with your retailer is key, and the best way to handle new issues. Let’s review some key terms:
- Revenue: (MSRP)-(Wholesale Discount) =price you sell to the retailer
- Cash flow: Terms (Get paid Net 30-90 or negotiate for 2/10 — a 2% discount off the invoice in exchange for being paid faster)
- Profitability: Revenue less Shipping, Insurance, Marketing, Samples, Training, Unsold Merchandise and Charge Backs
- Growth: Exclusivity vs. No Exclusivity
- Fulfillment: EDI expsenses, fulfillment houses
- Penalties: Charge back fees for violating retailer rules for how orders are shipped, labeled, packaged, etc. Late shipments can incur a charge of 1-2% of the whole order per day late.
Do Your Homework
When you present your products to any retailer, you’ll want to know three key things:
1. What is your market strategy? How does Retailer X fit into your strategy and why are you a good fit for them. Know if you plan to focus on social media as a way to build your following or do you plan to rely on developing in store experiences that will win over new cult followers.
2. Know your retailer. Visit their stores. Talk to customers, sales associates, and if available, personal shoppers, treatment providers, and front desk team members. Know who their customer is, what they want, and how your product meets an unfilled need within the retailer’s product offering.
3. Understand the balance of power. We heard from almost every retailer that they want indie beauty brands to be successful. So most contract terms are negotiable, but … don’t try to force your hand if you have a few products, minimal sales and are trying to pitch to QVC or Nordstrom. If you’re pitching to a specialty retailer, like Credo, who really wants your clean beauty brand, you’ll have a more level playing field for negotiation.
What can you expect to Negotiate
- Price – 40% to 50% of MSRP
- Will vary by volume
- Can vary by SKU
- Can vary on repeat orders vs. initial order
- Terms – Net 30 to 90 days
- You can give up 1% to 2% or more off the invoice for faster payment
- NOTE: this is all about cash flow and being sure you can manage your supply chain while waiting to get paid
- Shipping – Brand Pays
- May require you to use their shipping company
- May require you to pack in specific size cartons/pack out
- May require you to drop ship if web-based
- Must understand what will create a charge back (i.e. label in the wrong place; not adding the PO on the label, etc.)
- Marketing – varies greatly
- Brand provides testers (every two months on average)
- Free or at greatly reduced price
- Samples for customers, employees
- Don’t be stingy
- Samples to the staff so they use and love your brand
- Focus on your HERO SKU
- Be sure they match your brand expression
- Negotiate how samples are used
- In store events
- At check out with every purchase
- Gift with purchase of $$ value
- Online stores need samples, too
- Don’t be stingy
- In store events
- Couponing/discounts
- Gifts with purchase
- Promotion to drive early adoption and new customers
- Co-op dollars for print/radio/tv/flyers/online
- Social media campaigns
- Other as negotiated
- Brand provides testers (every two months on average)
- Merchandising – collaboration is key
- Differs by retailer – many want to do their own, but want good digital assets and content from brand
- May have to pay for shelf space (grocery/pharmacy)
- May have to pay for labor and installation
- Returns – typically see 2-3% of sales returned
- Brand pays or you can negotiate a lower margin up front
- Buy-back of stock balance
- Do this to control what happens to your overstock
- Can limit the open order budget if you don’t buy it back
- Can negotiate to ‘swap’ old stock for new
- Markdowns
- negotiate if you agree to markdowns so you can control your retail price
- Don’t want your product as a ‘give away’ or in the ‘cheap bin’
- Helps you manage your brand positioning and image
- Helps keep retailers from seeing your brand cheaper somewhere else
- negotiate if you agree to markdowns so you can control your retail price
- Destroy in Field (DIF)
- Negotiate to have unsold product destroyed in field rather than discounted etc.
- If you don’t, store can do what they want
- Exclusivity
- Can be limited by time or SKU
- 3 to 9 months
- Regional exclusivity
- ”Launch” exclusivity – all new products first at a particular retailer
- Can be limited by time or SKU
- Fulfillment
- Know requirements to the T
- Educate your fulfillment house
- Be prepared to work with EDI (setup and month fees)
- Stay on top of requirements
- Shipping Windows
- Part of your fulfillment negotiation
- Usually 5 days to 2 weeks – can be extended prior to the deadline if in good communication
Summing it Up
No one size fits all when it comes to negotiating your contract. The basic rules are: do your homework, know what you can and can’t actually deliver, treat your retailer as a partner, and communicate, communicate, communicate. Transparency and authenticity will go a long way in helping you negotiate contracts that help both parties be successful in launching your brand.
