Sticker Shock

Before becoming an absolute food industry nerd I regularly experienced sticker shock. Holy sh*t. That jar of tomato sauce is $10!!??

Now I’m on the other side, and I spend most of my time working (almost always begging) grocers and distributors to keep the price of our popcorn as low as possible.

If we had the clear mind to understand the below in the early days, it would have spared us much anxiety, questions, calls, and the madness that comes with realizing our food product was not going to land on the shelf for what we thought it would be.

This importance of this basic math cannot be over stated.  It’s super simple, but it took us a year and half to really nail it down.

For a minute, let’s pretend that you have created your own corndog company. You use way better ingredients than other brands because that’s what matters to you. Let’s call it CornyDogs. The journey to the shelves would be pretty similar to the below:

For $2.25 you created a three pack of CornyDogs. This cost of goods covers your ingredients, your materials, the labor to prepare and package, warehousing, shipping, and more.

COGS (what it cost you)
$2.25

Ideally a food company’s manufacturing margin should be between 40%-50%. You need to make some money to keep the company a-float and pay for all the promotions that you will be required to run. Hitting a good margin is very hard when you are just starting out. Kudos to you if you are doing this! If your margin is half this amount you need a clear plan of how you are going to eventually get there.

COGs + 40% margin = Distributor Price (what you sell it for)
$3.75

The distributor then likes to make between 26%-30% margin on a product.

COGs + 40% margin + 26% margin = Whole Sale Price (what they sell it for)
$5.07

But wait, there’s more here. When a distributor picks up your product, they tack on a freight fee. Let’s say they charge $0.10 per unit for freight.

COGs + 40% margin + 26% margin + $0.10 = Whole Sale Price (what they sell it for)
WSP is now $5.17

The natural retailer, from independents to Whole Foods, likes to take between 35%-45% margin.

COGs + 40% margin + 26% margin + $0.10 + 40% margin= Retail Price (the price on the shelf)
$8.50

Yes, $2.25 to $8.50 validates sticker shock! Bottom line is that it takes a lot to get a product on the shelf.

We do everything imaginable in pursuit of a lower retail price except skimp on our values and integrity.  For us, getting Quinn Popcorn to a lower retail price, without sacrificing the quality of our ingredients, will be a HUGE accomplishment. We hope we can get there.

COMMENTS

  1. Jeannie wrote:

    wait, who is COGS? ; )

  2. Hope wrote:

    Thank you for this post. Hugely helpful!

  3. holly gardner wrote:

    COGS = Cost of goods sold

  4. Erica Barrett wrote:

    This is by far the most informative post I have seen on any blog in a long time. it is very true. Understanding margin and COGS is the blood line of successful food sales. You have to work hard everyday to reduce COGS and pass great value to the customer.

  5. Trevor Smith wrote:

    I’m constantly working and reworking our numbers, attempting to keep costs and final price down. Nice write up!

  6. Rick Hirsch wrote:

    I have consulted in the specialty food industry for years after owning my owning manufacturing and distribution companies. I have laid out the above math to so many people so many times. It is a hard message to get across. You did a great job of explaining this. Good luck with your company.

  7. Emerald wrote:

    Thank you for writing this! I also spent hours trying to explain this to both small, hopeful businesses approaching me to sell their products as a Local Forager at WFM and to customers who want the convenience of buying products at a large store with a good shopping experience and pays its employees a living wage, want to buy food made with integrity on a small scale, and don’t like to pay for it.
    I firmly believe it is worth paying more for quality food and would rather go without the latest gadget or flashy clothes and in order to nourish myself with great tasting, safe and ethically-sound food. But, that was only a choice I made after being immersed in different aspects of the food industry because it can be hard to understand as an outsider.
    Thanks for making a great product & caring to educate your customers!

  8. TC wrote:

    I used to work for a Food Brokerage company. We basically acted as the sales agent for the food manufacturer, selling into distribution. We collected commissions on our sales of 3-10%. I was simply amazed how many levels their were in the food industry. And everybody gets a cut. If you really look at how much food has to travel and be processed and handled to feed the number of people in the US, our food is pretty inexpensive. The premium price a nitch item must charge to get on the shelves is simply a factor of manufacturing scale combined with consumer demand.
    I think if every household found 6-10 key items they consumed on a regular basis and moved those choices to smaller sized manufactures of the same type item, I feel the would find higher quality items and spark economic growth.
    My two cents

  9. ellen wrote:

    This was super educational and helpful. I’m curious at what point you would consider self-distributing? When does that make sense??

    Keep up the great products…

  10. Coulter wrote:

    Ellen, I’m really not sure. Very few companies distribute their own products. I’d say it really depends on two things; how geographically concentrated your business is, and how important freshness is. For a local break company it’s a no-brained to buy a truck and distribute. For us it’s not an option!

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