As a food entrepreneur, navigating the world of retail can be challenging. One of the most important aspects to understand is the relationship between your brand, distributors, and retailers.
Deductions and manufacturer chargebacks play a significant role in this relationship, and understanding them is crucial for your business’s success; because they are often badly understood and managed, they are frequently a source of anger, frustration and strain on relationships.
We have heard horror stories of manufacturers losing up to 75% of the invoice amount to deductions.
In this ultimate guide, we’ll break down everything you need to know about deductions and manufacturer chargebacks in the food industry.
Deductions: What are they?
Deductions are costs incurred by a brand that are “deducted” from their invoice by the distributor. These deductions can be a profit center for distributors or act as a clearinghouse for their retailers. They are often commitments a brand made to the distributor or retailer and are being collected upon.
Deductions can be disputed if a brand feels they have been taken in error or without prior approval. However, regaining funds through the dispute process requires organization, persistence, and patience.
Distributor Agreements: Know what you’re signing up for
I cannot stress this enough: If you don’t understand what you’re signing, don’t sign it. Far too many new food entrepreneurs sign first and worry later, when it is often too late.
Distributor agreements outline the financial terms and performance expectations for both parties. Deductions should be clearly spelled out in these agreements, so make sure to read the fine print and consult with an expert before signing.
Understanding the costs associated with a specific distributor is essential for making informed decisions about your pricing and retail strategy.
Common Promotions Resulting in Distributor Deductions
Some promotions you may agree to with a distributor or retailer can result in deductions from your invoice. These include:
- Off-invoice promotions
- Published ads
- Distributor trade shows
It’s crucial to plan your programs appropriately to avoid owing extra money to distributors.
Deduction Lingo: Terms you should know
To better understand deductions, familiarize yourself with some common industry terms:
- OI (Off-invoice): A discount deducted straight from a brand’s invoice. Typically, off-invoice discounts are around 15% of the regular case sales price in 2-3 separate months a year.
- MCB (Manufacturer Chargeback): A retailer buys a product at a discount from a distributor, and the distributor deducts the amount from the brand’s invoice. These deductions often come with an added fee or upcharge from the distributor.
- Scans: A discount taken at the final point of sale. Scans offer more transparency to brands since they’re linked to the end transaction and often accompanied by supporting documentation.
- PLC (Product Loss Claim): A retailer charges back the distributor for spoiled/unsellable products, and those charges get passed on to the brand.
- EDLP (Everyday Low Price): An ongoing discount agreed upon by the brand.
- TPR (Temporary Price Reduction): A brand agrees to reduce the price of an item to a distributor for a certain period, and the distributor passes that along to the retailer.
- 3rd Party Billing: A distributor acts as a clearinghouse for the retailer to collect money owed by a brand.
- Overpulls: A retailer buys more product at a discounted price than the distributor had in stock, resulting in a deduction for the extra product.
- Pricing Credit: Issued when brands don’t invoice price correctly, and the distributor issues a deduction for the difference between the invoiced price and the correct price.
- Free Fill: A brand gives away a free case of product to promote a launch or new placements. These cases usually get charged back to the brand at a “wholesale” price, higher than the price the distributor paid for it. Read this article to earn more about free fills.
- Shortages: When a brand doesn’t ship enough product to meet the distributor’s request on their PO. Shortages can incur several different types of deductions.
How to Manage Distributor Deductions and Chargebacks
Managing deductions and chargebacks effectively can be the difference between success and failure for your business. Here are some essential steps to help you stay on top of your deductions:
1. Maintain clear and organized records
Keep detailed records of all deductions and chargebacks, including the date, amount, reason, and any supporting documentation. This will make it easier to dispute any erroneous charges and track trends over time.
2. Communicate with your distributor
Establish open lines of communication with your distributor to ensure you’re both on the same page regarding deductions, chargebacks, and promotions. This can help prevent misunderstandings and disputes down the line.
3. Monitor your inventory closely
Tracking your inventory levels and sales data can help you avoid overpulls, shortages, and other issues that can lead to deductions. Use inventory management software or other tools to stay on top of your stock levels.
4. Be proactive about disputing distributor chargeback errors
If you spot an error in your deductions or chargebacks, don’t hesitate to dispute it with your distributor. Being proactive can help you recoup funds and maintain a healthy cash flow for your business.
5. Continuously evaluate your pricing and promotions strategy
Regularly assess your pricing strategy and promotions to ensure they’re working in your favour. If you find that certain promotions are consistently leading to significant deductions, consider adjusting your strategy to minimize these costs.
Real-World Example: The Impact of Deductions
Consider a brand that agrees to an off-invoice discount of 15% for three months. During this period, they sell 1,000 cases of their product at a regular price of $100 per case. Without the promotion, the brand would have earned $100,000 in revenue.
However, with the off-invoice discount, their revenue is reduced to $85,000 ($100 x 85% x 1,000 cases). The $15,000 in deductions directly impacts the brand’s bottom line, making it crucial for the brand to carefully assess whether the promotion will generate enough additional sales to offset the cost of the deductions.
Deductions and manufacturer chargebacks are an unavoidable part of the food industry, but understanding how they work and managing them effectively can help you minimize their impact on your business.
By keeping detailed records, communicating with your distributor, monitoring your inventory, being proactive about disputes, and evaluating your pricing strategy, you can better navigate the complex world of retail and set your food or beverage business up for success.