Food Distributor Chargebacks: Why That $68K Invoice Only Paid $13K
(Listen on Apple or Spotify. Full transcript below.)
Ever wondered what really happens when your food brand signs with a major distributor?
Well, thanks to food distributor chargebacks, the excitement of landing that distribution deal can quickly turn to confusion when you receive your first payment.
In a recent episode of the Good Food CFO Podcast, I shared a real-world example that surprised many listeners - and might just change how you approach your distribution strategy.
The Payment Reality Check: A Case Study
Let's cut right to the numbers that startled so many food founders who tuned in: a brand invoiced KeHE for $68,267 across six purchase orders. After waiting for the initial orders to sell through, they received a payment of just $13,345 - a mere 19.5% of what they invoiced.
This isn't an anomaly or a mistake. It's the standard reality of distribution economics that many founders don't discover until they're already committed. But why such a dramatic difference between invoice and payment?
The Payment Timeline Surprise
One of the most challenging aspects of working with major distributors like KeHE is the payment timeline for new suppliers. While you might negotiate "net 30" or "net 60" terms, what many founders don't realize is that those terms don't apply to your first orders.
As specified in KeHE's contract, "a new supplier's payment will not be released until the initial POs in all DCs have sold." In practical terms, this means if you open three distribution centers simultaneously, you won't receive payment until all three initial purchase orders have completely sold through to retailers.
This waiting period can extend far beyond the standard payment terms - we've seen brands wait 3-6 months (sometimes longer) for their first check, creating significant cash flow challenges right when production demands are increasing.
Where Does the Money Go? Understanding Chargebacks
The dramatic difference between invoice amount and payment is largely due to chargebacks - various fees and allowances that distributors deduct from your payment. In our case study, the chargebacks totaled $54,921 across eight different categories.
What kinds of chargebacks should you expect? Here's a snapshot of what we covered in the podcast:
Ready date non-compliance chargebacks: Penalties when product isn't ready at the scheduled pickup time
Spoilage allowances: Not necessarily tied to actual spoilage, but a percentage-based allowance distributors can charge
Intro allowances: Discounts provided to retailers when you're first introduced to their stores
Free fills: Completely free product given to retailers when you're first placed on shelf
MCBs (Manufacturer's Chargebacks): Costs for promotional periods throughout the year
Ad fees: Charges for retailer and distributor advertising programs
Missed promo fees: Penalties related to promotional commitments
Invoice adjustments: Deductions for product reportedly not received
Of the total chargebacks, $22,660 (over 40%) were from intro allowances and free fills alone - costs specifically associated with opening new doors.
The "Velocity Over Doors" Strategy
This high cost of opening new doors is exactly why I often advise clients to focus on "velocity over doors" - meaning it's generally more financially sustainable to increase sales volume in existing stores than to continuously open new ones.
When you open new doors, you face:
Free fills and intro allowances
Potential slotting fees
Demo costs and broker fees
Other onboarding expenses
Meanwhile, focusing on velocity in existing stores often provides:
Higher margins
Better cash flow dynamics
More valuable sales data
Stronger relationships with existing retailers
This doesn't mean you shouldn't grow your distribution footprint - but understanding the true cost of each new retailer helps you make strategic decisions about when and where to expand.
Are Regional Distributors a Better Option?
A listener asked if all distributors operate like KeHE. The answer is no, and a great alternative is regional distributors - regional distributors often offer:
More transparent financial practices
Less "nickel and diming" with chargebacks
Stronger, more direct relationships
Fairer margins
While regional distributors will still have some chargebacks and allowances, the overall financial picture often looks quite different. For many brands, starting with strategic regional distribution can provide a more sustainable path to growth.
Questions to Ask Before Committing to Distribution
Before signing with any distributor, consider these essential questions:
Can your cash flow support the payment timeline? Remember that initial payment may be delayed 3-6 months or more.
Do you understand ALL potential chargebacks? Get clarity on each type of chargeback, how they're calculated, and when they apply.
What will your true margin be after all chargebacks? Run the numbers with a realistic assessment of all costs.
Do you have the capacity to support this growth? Consider production capacity, team resources, and operating capital.
Is this the right channel mix for your current stage? Distribution works best when balanced with other, higher-margin channels.
Making Strategic Distribution Decisions
Distribution isn't inherently good or bad for your business - it's simply a channel with specific economics that must be understood and incorporated into your growth strategy.
As I mentioned in the podcast, when I work with clients considering distribution, we always run the numbers to determine if the relationship will be profitable. The reality? Most distribution relationships aren't profitable in the first 90 days, and often not even in the first year.
This doesn't mean distribution is the wrong move, but it does mean you need to:
Have realistic expectations about the timeline to profitability
Maintain adequate cash reserves to weather the onboarding period
Balance distribution with other, higher-margin sales channels
Strategically select which doors to open and when
The Bottom Line
As I shared in the podcast, "It's not about getting big. It's about building financially sustainable and profitable businesses." Understanding the true economics of distribution is essential to making decisions that support long-term sustainability and profitability.
For a deeper dive into the financial mechanics of distribution, including a detailed breakdown of each chargeback type and strategies for managing them, be sure to listen to the full podcast episode. The real-world examples and specific numbers provided will give you a clearer picture of what to expect and how to prepare.
Want more content like this delivered to your inbox? Sign up to receive my insights directly. And if you found this valuable, please rate, review, and subscribe to the Good Food CFO Podcast - it helps us reach more food founders with this critical financial knowledge!
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Episode Timeline
00:00 Introduction to Distribution Challenges
01:46 Understanding Payment Terms with Distributors
10:06 The Impact of Chargebacks on Cash Flow
13:23 Real-World Example: Payouts and Chargebacks
25:12 Navigating Onboarding Costs and Profitability
32:03 Strategies for Sustainable Growth
38:01 Exploring Alternatives to Major Distributors
Full Episode Transcript
You're listening to the Good Food CFO Podcast. I'm your host, Sarah Delevan, joined as always by our producer, Chelsea Stier. Chelsea, I wrote a newsletter recently that created a lot of chatter in our inbox and we have decided to turn it into an episode.
Yeah, you actually shared a real world example of what it looks like to open distribution centers and specifically what it looks like to start selling through KeHE. That newsletter got a lot of questions and comments in our inbox. I actually have some questions myself that I wanted to ask you. I'd love to talk through what you shared in that newsletter.
Yeah.
And I also want to say that if you're listening and you want content like what we're talking about today in your inbox, you can sign up at the goodfoodcfo.com. We're going to share that link in the show notes to make sure that you get on our emailing list. And then also, if you like what you hear today, be sure to rate, review, and subscribe to this podcast wherever you listen. It is...
the number one way that you can help us reach our goal of reaching 1 million food founders. Sarah, I actually want to jump right into this episode and start with my first question right off the bat. Okay. Looking back at the newsletter that you wrote, one of the first things you said is there's hard truths about the payment timeframes when it comes to opening distribution.
specifically in this example like with KeHE. One of the things that you said was that those payment terms or meaning like when they will pay you after they've received the product mean nothing when they're onboarding a new business.
That's correct. It does not matter what your agreed upon payment terms are because the Keighi contract states, and this is a quote, that a new supplier's payment will not be released until the initial POs in all DCs have sold. So POs are purchase orders, DCs are distribution centers. So that means in normal terminology, if you send a pallet of product to
three DCs, like you open them all at the same time. All of your product across those three DCs need to be sold through in order for you to receive your first payment from KeHE. There's confusion around this. Even when you read the contract and you understand that that's the case here, you sometimes think, on the first PO in this
distribution center, I'll get paid on it when that sells through. And it doesn't seem to be the case. sort of, in at least many of the instances that we have seen, you know, and on my desk, it'll be all three distribution centers need to sell through those first POs in order for a payment to be issued by KeHE.
So I'm going to stop you because I have a question here. someone who has never signed a contract with a distributor, and I am not sure exactly how this works or what you mean by selling through, do you mean selling through to the retailer or through the retailer?
Speaker 1 (03:42.926)
to the retailers. That's a great clarifying question. Thank you. If you ship a pallet to a KeHE distribution center, let's say they order one pallet on that first purchase order, every unit from that pallet must ship from KeHE to a retailer, which it doesn't matter which ones, but to a retailer so that that pallet is gone. All of the units are gone. When they're gone, then they'll issue a payment to you. Now, if they order
three pallets on the initial PO, then all three pallets, all of the units from them need to be sold and moved to a retailer in order for you to get paid. That often happens because you'll have more than one SKU. If you do a pallet per SKU going to a single DC, you now have three pallets that all need to move before you'll get your initial payment. There is conversation if we're talking about like, there anything you can do about this?
try not to let KeHE order more than you think they can move in a reasonable timeframe, right? Yeah. But that takes conversation and oftentimes you don't have a ton of control. They'll just like place a PO with you and then you need to deliver on it. So yes, I think if you're working with a broker or if you're communicating with like the buyer at KeHE for your product, you can try to work with them to have a very reasonable amount of product purchased within that first PO and go from there. But we've seen brands wait
in excess, long in excess of 90 days, even up to six months for initial POs across multiple distribution centers to be sold so that brands finally get payment. And so long, long time. And here's the other thing. We've also seen KeHE reorder before the initial POs are sold through. So you might have, and I'm making up numbers here, but you might have
know, 25 cases of something still there from your initial palette and KeHE will order another palette because they don't want to run out, right? They don't want to be out of stock. But what that means in terms of your cash flow and things is that you're now producing a second palette for KeHE or more and you haven't received payment for the first one. So this is like one of the many ways where onboarding with a distributor can cause cash flow
Speaker 2 (06:00.508)
one.
Speaker 1 (06:08.234)
issues and cashflow concerns because of how the money is flowing into your business from the distributor versus how it's flowing out to produce product and get it delivered to their warehouses.
Yeah. And as you've said, you've seen brands wait in excess of six months for that initial payment. But once that happens, don't you go to net 30 or net 90 terms or something like within that distributor where you should be able to expect payment within 90 days of, you know, releasing an order?
So, yes, after you sell through the units that were on the first PO, then your standard payment terms will go into effect. So you're talking about like net 30, net 60, net 90, whatever you agree to with KeHE. However, what they also state in their contracts is that the date printed on your invoice does not factor into when a payment will be due.
It's actually calculated based on the later of two dates, either when KeHE receives the invoice or when product is received and available for sale. In other words, you might get a PO, purchase order, and from that purchase order, you create an invoice. KeHE might receive that invoice before they receive that product. They're not going to base their
payment date on when they receive that invoice or the date on that invoice, they're going to wait until that product is received and available for sale and then their payment terms will start from there. it's not like… That's why when we're managing cash flow, as you know, Chelsea, for some of our clients, you might have a KeHE invoice or any distributor invoice coming due, let's say, June 1st. But we typically do not expect that invoice to actually be paid on
Speaker 1 (08:14.668)
June 1st because there's like some wiggle room as to when the terms actually start. In particular, here we're talking about 4K heat. So it might be the 5th, it might be the 10th, right?
Yeah, and I can see where you need to be really clear about, yeah, what is it that determines that due date, right? So that you are planning your cash flow, I mean, all of it in a way that isn't going to have you end up short.
Yeah, and I think there's another really important thing to talk about here is if KeHE is coming to you to pick up the product, let's say we'll use that palette again, you may have created the palette on a Monday, it's ready to go, the invoice has been sent to KeHE and they're coming to pick it up on a Wednesday. Right there, there's a two-day lag in the date on your invoice versus when it's going to be available in their DC.
And so it's kind of like, ugh, so annoying. the thing you have to know about working with IKEA, UNFI, is that even when they've got specific things in writing that you think you understand, there's these little nuanced things that just sort of add complexity to it. And the reason I write newsletters like this, the reason we're doing episodes like this is because I want people to be aware of these nuances.
Another nuance here is this idea of chargebacks, which we're going to get into in more detail in a couple of minutes. if you have invoices you've sent to KeHE, let's just say you've got $10,000 in invoices that are payable by KeHE to you, there is absolutely a possibility that you actually owe KeHE $12,000 for
Speaker 1 (10:06.638)
the various types of chargebacks that may be on your account. And in that case, KeHE is not going to issue you a payment because technically you owe KeHE $2,000. And so another thing their contract says around payment is that when the debit succeeds the credits, meaning there's a negative balance on your account, in this case a negative $2,000, no check will be issued.
You'll get a report that shows you that you have a negative balance with KE. And when your balance becomes positive, that's when they'll issue a payment to you. think the other sort of tricky thing is like, when will it become positive? You have to wait until the next invoice, right? So if in 30 days, the next invoice will come payable, right? Then that invoice's information is going to be added to your account. And we're going to see if now you have a positive balance.
with KeHE in which case they will cut you a check. If you don't, then they won't cut you a check. If you're sitting there listening and you think that that won't happen, how is it possible that you would owe KeHE money? Know that there have been instances where brands have had to write checks to brokers and to distributors rather than the other way around. It's very real. It has happened.
Very real, but also very bonkers. And Sarah, we're talking about hard truths here. And I think an even harder pill to swallow is chargebacks. You were just talking about how they can impact your payment from distributors like KeHE. And your invoices can have chargebacks all up and down them. And after waiting for months, likely to get paid,
When you do get paid, that payment can be a fraction of what you invoice for, if that. And again, in the newsletter, you shared that a brand recently sold through their first six POs with KeHE that totaled almost $68,000. And when we come back from the break, we're going to share what they actually were paid out.
Speaker 1 (12:23.04)
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new tools and more, visit thegoodfoodcfo.com slash BABOYOT. That's B-A-B-O-Y-O-T. Now back to the show.
So Sarah, I teased before the break that we're going to talk about this brand that you were sharing in the newsletter. They sold their first six POs to KeHE, totaling around $68,000. What was their actual payout on those first six POs?
Yeah, I'm going to get very specific with the numbers. It was $68,267 that was invoiced to KeHE. The check that they received from KeHE was for $13,345. If you're a numbers person like me, that's 19.5 % of what was invoiced that actually got paid. And as you said, Chelsea, this was due to
chargebacks. Here's some more nerdy insight into how this works. Brands get a spreadsheet from KeHE that says, okay, here are the invoices that you sent us. Each one has a line. Then here are all of the chargebacks that we are applying to these invoices, the amounts of the chargebacks, the codes, not the explanations, but the codes for those chargebacks. Then at the bottom is the total of the check that they will issue to the brand.
So what I would love to do is just talk through, because I think specifics are important. People always ask for specifics when we talk about, you know, numbers and things here on the podcast. Let's talk about the specifics of what those chargebacks were for. How does that sound? Yeah, that's okay. The very first one on the list was ready date, non-compliance chargeback. And that's a fancy way of saying that the product wasn't ready when KeHE requested it to be picked up.
Sounds great.
which resulted in a penalty fee. For transparency here, the codes that are in the spreadsheet that KeHE provides, you have to look them up. I actually have a spreadsheet. I'm sure it's out of date to some degree right now, but where you can look up the code and it tells you what does this mean, what store is it specifically for, what is the KeHE code, et cetera. In this case, the broker went through the process of looking at all of the codes and provided the brand with an explanation. And for this one, she was like,
Can you verify that they actually like requested a pick-up date and that it wasn't ready? Because if that's not the case or you have no information in that regard, we might be able to dispute this charge. this is one of many types of charges that CAHI can tack onto a charge back report.
Yeah, what was the next one?
The next one is something called a spoilage allowance. This is another one that is a bit nuanced. A lot of times when people hear about the word spoilage, they're like, yeah, well, if my product goes bad, obviously, he can't sell it, and so I'm going to get charged back for that product that went bad or got damaged or etc. But when we talk about a spoilage allowance, this is actually not necessarily a product that went bad.
It's an allowance, which means the distributor can charge this without providing evidence of actual spoilage. So if you have a, I'm making up a number, but if you have a 3 % spoilage allowance, that means that 3 % of the product that you send can be charged back as a spoilage allowance. It doesn't actually mean that up to 3 % of spoilages can be charged back. It has nothing to do with actual numbers. We know for a fact,
that the product that was shipped for this brand didn't go bad in the timeframe that this allowance was charged back.
And that's just something that's in the contract. Like they have that. And so they're obviously going to use utilize it is what you're saying.
Correct. Exactly.
Okay, so the next chargeback that you talked about in the newsletter was an intro allowance.
Yeah. So an intro allowance is something that is incurred when you're opening a new retailer or sometimes when you're opening a new distribution center. So think about it as like, hey, this is a new customer. And so we're going to give you a discount on the first products that you receive from the brand. So at KeHE, there are sometimes intro allowances for opening a distribution center. There are also intro allowances for particular retailers.
So, let's say Chelsea's grocer is onboarding my nut butter and the price of being onboarded is that we provide you with an intro allowance of 50%, which means that when our product went to KeHE and then KeHE was delivering product to you, you're going to get 50 % off the price that you would normally pay KeHE for the product. My brand is going to be charged back.
for the discount that you were provided by KeHE. Okay? So that's what's going to hit. Exactly. Okay. Exactly. The brand covers all the chargebacks in that case. Similarly, and I'm going to jump down in the list a little bit out of order from how I did it in the newsletter, but another sort of like new account charge or chargeback is a free-fill charge. So I think maybe a lot of listeners are familiar with this.
Okay. Losing any money.
An interim allowance is like the retailer is not going to pay the full amount for those initial products, but they're going to pay something. A free fill is when KeHE delivers the product to Chelsea's Grocer completely free. And so we're, as the brand, going to be charged back that full amount of the product, right? And it's usually one case per skew per store. So if Chelsea's Grocer has five locations and I'm selling three skews, I am giving 15
cases away for free. So it's one of each of my three SKUs across five stores. And so that chargeback for the free fills is going to show up on my chargeback report.
So these last two that you talked about, right, the intro allowance and the free fill, this is just to get yourself out there, just to get your brand, your product into and onto shelves. It seems like a major investment on the brand's part to even be able to do that.
Yeah.
Yeah. And I think we'll talk about that and some specifics in just a moment, but you're absolutely right. The way that it is conceived or the way that it's understood in the industry is that for Chelsea's grocer to take on my brand, your customers don't know about me yet. They see it as taking a risk, number one, to give self-space to a new product. And number two,
your store is going to incur costs for making signage, receiving the product, putting it on the shelf. One could say there are reasonable reasons why a brand would give an intro allowance or even a free fill for space on shelf at a new grocer to help cover those onboarding costs and to sort of cover the risk of bringing this new product on.
Obviously, intro allowances are much more favorable for a brand than free fill is. But what we didn't talk about here because this particular brand did not incur them is slotting fees. So slotting fees are when you might have to give a free fill, you might even have to give an intro allowance and pay a fee to be on shelf. And it might be $1,500 per SKU. I don't think we clarified this, Chelsea.
The things we're talking about are the very specific things that this brand was charged back for. So there's a larger list outside of this. This is just us being very specific about this real world situation for a brand to illustrate to our listeners what it can actually look like.
Yeah. Yeah. And it looks like the next charge back that they were hit with was you have it written here as MCB.
Yeah, which stands for a manufacturer's chargeback. So we talked about intro allowances and free fills. That's to get on shelf. Once you're on shelf, there is absolutely an expectation to be on promotion when you're on shelf. So we talked about this with Felice many episodes ago. There's this idea of driving trial. So you are a new product on shelf and you want people to try your product. So you discount it a bit.
Maybe 20%, maybe 15%, maybe it's a BOGO offer, which means buy one, get one free. Whatever you think is appropriate to move your product off shelf and have people try it. Retailers will require a certain number of weeks throughout the year that a brand is on promotion. Generally, there's a recommended amount in terms of might be like 20 % off, it might be $2 off. It varies depending on the brand, the product, the price point, et cetera.
But MCBs will happen throughout the year across most of the retailers that you're in, particularly if you're selling through KeHE. And so that's what that chargeback is for.
Yeah, and then I can also see here on this list that they were charged back for ad fees. It also looks like what you were just talking about, right? Promos missed promo fees.
Yeah. So missed promo fees is one that again, the broker wasn't totally sure about. Yeah. And so that's why reviewing these spreadsheets is so important. And so this one was actually flagged for getting clarification and for possible dispute, but it was listed on the chargeback report, which is why we're talking about it here. And then ad fees. Ad fees can be anything from KeHE's own advertising fees that they charge.
Or it can be individual store ad fees that are passed through KeHE. So let's just say, again, using Chelsea's grocer, you want to put me or you require me to be in your flyer when I launch my new product there. There could be a $1,500 or a $3,000 charge to have that ad printed, et cetera, et cetera, and to go out to your shoppers. So that's what the ad fees are. And then the final one on the list for this particular brand is
called an invoice adjustment for product not received. This essentially means that you invoiced for a product that wasn't in the shipment that you sent to KeHE. Let's say that you I'll make it really dramatic. Let's say that you sent three pallets of product and half a pallet was missing from the shipment. They will charge you back for the product that they did not receive.
This is another one – I mean, you need to be careful about all of these and really review all of them in detail. This is one where you have to say, did they tell you they didn't receive the product? Did they provide documentation to you, etc., etc.? Because you want to make sure that if they indeed did not receive that product or they're reporting it, that it's true, right? Yeah. these were, again let me just count these up. So one, two, three, four, five, six, seven, eight different
types of chargebacks from the total, again, invoiced amount of $68,267, the chargebacks totaled $54,921. So the brand will receive, as I said earlier, 19.5 % of the invoiced amount. And the other thing that's important to know here is that that's before factoring in the cost of producing their product. So their cost of goods sold are not factored in here.
Yeah.
So we talk about margin a lot, a lot, a lot, a lot on this podcast. We talk about, you know, a baseline kind of guideline that we've provided where I like to see, you know, if you're selling through three channels, that being direct to consumer, direct to retailers, and then distribution, you start somewhere around 70, 75 % margin so that when you get to distribution, you're still
I mean, at this point, I'm saying 40 % or higher margins in distribution because you just lost all but 19 % of your income from this channel, right? And then you're going to factor in the cost to produce that product. This brand for these six invoices has lost money. Now, that is not unusual. It is not unexpected.
It is absolutely expected when you're onboarding, especially with more than one regional distribution center with KeHE and when you're opening new stores.
Yeah, I kind of want to go back here because earlier I know that you mentioned that the intro allowance and the free-fill charges, right, that those were specifically for opening new stores or opening new distribution centers. How much of those alone were in that charge back?
Yeah, so of the $54,921 of chargeback fees, $22,660 were related to intro allowances and free fills specifically only. I'm not going to go into the details of how many stores they opened or anything like that because I don't think that context is necessary and it's going to be very, very different depending on the brand, et cetera.
This is why people talk about A, understanding what your true costs are going to be when you're onboarding with a new distributor and understanding what the needs of the retailers that you're going to start to work with are prior to agreeing to work with them. Do they have slotting fees? Do they require free fills?
What is the intro allowance? Beyond that, what are the long-term promos going to be, et cetera, et All of these numbers factor into how much are we going to lose in year one with this retail store. When I work with a client who is working with a large distributor like this in particular, and they're considering which stores to onboard with, we run through the numbers.
in this spreadsheet that I have built to determine will this relationship be profitable in year one. 10 out of 10 times I'm going to say what the retailer is asking for in the first 90 days to onboard, you're absolutely not going to be profitable in the first 90 days. They're 9 out of 10 times not going to be profitable within the first year. And you have a chance at profitability in year two depending on what those long-term promos and things look like.
But this is why people talk about velocity over doors, right? So to clarify for people, velocity is the number of products that you sell in a particular store that you're already in. You can look at it like velocity per month, Velocity per week, etc. Doors is the number of stores that you are in. So when you have a growth strategy that is increasing the number of doors that you have, that's an expensive growth strategy because you're going to have
the intro allowances, the free fills, et cetera. When you're talking about velocity, you've already paid the new door fees, as we'll say, and now you're in the store and now you are focused on driving volume, driving sales, moving units within the stores that you are in. There are still costs associated with selling and increasing velocity. You're not always on promo, but you're certainly going to likely be on promo anywhere from
Yeah
6 to 12 weeks out of the year, sometimes even more than that. But there's a lot of long-term benefits to saying, okay, I'm in enough stores now, I have enough doors, and now I'm going to drive volume. So there's that immediate financial benefit in terms of the cost savings and being able to drive profitability in the stores that you're in. But there's also that really good data that you can show that says, hey, look, we got into these doors on this date and look at the
the velocities that we're getting here. Not only that for when you're ready to go pitch to new stores, it also helps you stay on the shelf in those stores. If you're opening doors, and I am sure we've talked about this here, but I think it needs to be said again, if you're opening doors and you're not moving enough product, that store is going to drop you. Now you just paid a ton of money to be in a store through KeHE, and if that store drops you, you need to open another location to replace it potentially.
Right. And so it becomes a student. Exactly. A very expensive.
more.
can also see where, whatever that looks like, right? If you're like, I'm going to start with these doors, these stores, right? And I'm going to just focus on my velocity and I'm going to focus on ramping up the sales within those stores along with that really good data that you're talking about, right? And the information that you can then take to sell yourself further. I think it's also good for you to
know what is your capacity. And to know within a certain market how much can you tap out of that market. Yeah, so I think that's a great strategy.
I think you bring up a good point too in terms of your capacity. I think it's not only how much can you tap in an area, but have you tapped into everything that's possible in that area? lot of folks open multiple distribution centers in different regions at one time. You have to ask yourself, what is my capacity to
manage all of this? Is that going to incur demo fees and who's going to do the demos for me? Do I need to have a broker team or a team that's going in there and making sure that my product is on shelf and that we're managing that relationship? So there's exponential costs that come with opening more than one distribution center, right? So the POs look really great in the beginning, but you got to sell through those.
initial orders as we talked about in the beginning to be able to get paid and then in order for KeHE to kind of keep reordering and for the stores to keep buying. So there's so many takeaways that I hope that people are like gleaning from our conversation. But one of them is like be strategic about A, moving into KeHE. What is it really going to cost you? Who are the stores that you're going to sell through?
in KeHE, what are those onboarding costs going to look like? I really want people to know that information beforehand. Also, do you have enough stores, enough doors, whatever the equation is for you to make opening this KeHE distribution center worth it for you? Can you support it?
And so that's really my next question is like, how do I walk away from this conversation, not feeling completely discouraged or like I, you know, working with a KeHE, with a UNFI is sounds like a terrible idea.
Sure. Well, I think one of the questions we got in our inbox was, how does a business who's only getting 25 % back of their wholesale price survive? And that's being generous, right? Because in this example, they got 19.5%. But the question still is a good one. How do they survive? And I think that sort of relates to your question, Chelsea. It's like,
I always say you need to know what you're getting into before you agree to it, right? So this is meant to be informational. This is meant to be actual data that you can rely on. This is not just me making up an example. This is real. So therefore, you've got some information that you can then use to help you in your decision-making.
a distributor is going to say, hey, we're going to take a 25 % margin, but that's just on the price of the product and has nothing to do with chargebacks, means, you can actually start to do some math and try to figure out what will my real return be, my ultimate margin be in a distribution relationship with KeHE. And then from there, you can say, what else do I have to have in place in my business to survive? Do I have enough
cash? Do I have sales in other channels with higher margins? And is that going to have a positive impact on my cash to help support this growth? How many units do I have to sell through KeHE, right, with the promos and everything taken into consideration in order to reach my breakeven point? These numbers feel overwhelming and hard for people to do, but the reality is if you don't
take a stab at it. If you don't take a hard look at it, the odds of you running out of money are very, very high. So one side of this answer is do your homework, run the numbers, be honest with yourself about what it will take to be in a relationship with a distributor like KeHE. And the other part of this answer is a lot of businesses don't survive. The number of businesses that run into cashflow problems due to growth is
like is many, many, many, many, many, many. And that's another bit of reality that we need to talk about because our goal here, one of them, right, is to make food industry finances easy, easy to understand. We try to make tools that you can make informed decisions. We also, like we do all of that to help you stay in business.
And so if distribution doesn't make sense to you right now, given what you know, what you've learned, maybe here on this episode today or previously, then don't go into distribution. What is the strategy that can actually work for you and your business today?
Mm-hmm.
I mean, that's sort of the harsh reality of it. You know, I was on Dr. James Richardson's podcast and he typically talks about growth, right, and what it takes to build a really big brand. And I live in a space that's different than him where we talk about, it's not about getting big. It's not about being in big distribution. It's about building financially sustainable and profitable businesses. And it was lovely to talk with him and sort of
find our middle ground and our understanding and the fact that there is more than one way to build a business. What he says very frankly is that in order to be a big national brand, you have to have a lot of money. Typically, that's reserved for actors, actresses, people who come into the industry with a lot of cash to burn, or someone who's gotten a lot of investment, which comes with a lot of strings attached. It's not to say don't
Yeah.
do it. We're not about saying what to do and what not to do here. But again, it's a harsh reality of what it takes to be that kind of brand. And I'll add that we don't need only that kind of brand. We need local businesses. We need and quite frankly want regional businesses. Yeah. Right. you're getting me hyped up,
I would even add too that I don't know that I would call it a harsh reality. I would just call it like the reality. Right. Right. Yeah. And exactly what you're saying, right, is like looking in the mirror, looking at the numbers and really understanding who you are as a business, where you fit in all of this, and then following that through with real strategy behind it.
Yeah, yeah. There was one more question that was in our inbox that I want to address here too, and that is, all distributors like KeHE? And the answer to that is no. We have talked a bit, and I'm very interested in interviewing somebody on the show who has built a national brand or nearly national brand using
regional distributors. So not UNFI, not KeHE, but smaller regional distributors to build a national presence or even like a large multi-regional presence. regional distributors tend to not have as... They're still going to be free fills and intro allowances. They're still going to be MCBs because the stores are still going to want to have you on promo. But the nickel and diming is a lot less there.
and the relationships are better, stronger, more direct with regional brands. I'm not going to shout out any – Sorry, with regional distributors. I'm not going to shout out any particular distributors because my view of them is a bit smaller than what I would like to represent because I know this is a national podcast. But they're everywhere. They're in New York. They're in Los Angeles. They're in the middle of the country. There are really great regional distributors who have fair margins.
fair practices, a lot more transparency than KeHE does, and they're really wonderful to work with. So consider them, seek them out, ask your community of other food founders who those regional distributors might be, and consider working with them if they're a good fit for your business.
Yeah, I love that advice. Okay, well, thank you so much for going through this newsletter with me and, you know, us having the opportunity to talk through all of the chatter, as you said, that came with it in our inboxes. Yeah, I appreciated it.
Yeah, my pleasure. Thank you, Chelsea.
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