Rants, Raves, Reviews

Retail Margin Gouging

By Gary R, in , posted: 29-May-2007 09:36

I know a number of people who work in distribution and all of them talk about how much retailers suck the margin and the unrealistic expectations that are set. Now, don't get me wrong here, retail is generally a necessity because people like to touch and see products before buying. Also, a retailer has the reach, the foot traffic, etc and it does cost a retailer a great deal to run a business, but....

Here is an example of the terms imposed by a major electronics retailer who I will not name but it gives you an idea where the margin loading occurs:

1. Shipping - no matter where the distributor is based all products must be shipped to the retailers central distribution point in Auckland. The retailer then splits up the shipment and sends the goods across the country. This is doubling up on freight that is passed to the consumer. For this privilege the distributor pays the retailer a 2% stocking fee.

2. Training - the distributor pays a fee to train the shop staff which is around $2000 every quarter plus the cost of flights, etc for the trainers. Now we all know that retail has a high staff turn over.

3. MDF - or market development fund. Generally to be in the retailers catalog the distributor pays around $2000 for a little picture and blurb and lot more for TV. Plus there is also an MDF kick back which can equal 3% of purchases.

4. Display area - to be on the end of an isle where the product will (in theory) be highlighted to the shopper the distributor 'rents' the 'end cap' which can cost around $1000 p/month per store.

5. Price protection - the distributor must rebate the retailer if the manufacturer drops the price but there is no guarantee that the retailer will pass on the lower price to the consumer.

6. Sales targets - the retailer sets there own target for the product and if they meet/exceed the target they expect a rebate which does not necessarily get passed onto the consumer.

7. Incentive schemes - the distributor is expected to directly offer financial inducements to the shop workers for selling a product. This means the retailer can pay minimum wage as the staff receive bonuses from the distributor.

8. Right of Return - the retailer can return any product to the distributor. This means that 3 months down the track the retailer can decide that they don't want to stock the product any longer so they can return it for a full refund - no questions asked.

9. Margin expectation - the retailer expects to make at least 25% margin (or 33.333% on return) on the base cost of the goods.

10. 60 day payment - the retailer can demand 60 day credit terms with the distributor meaning no payment for 2 months.

Essentially the retailer is saying that the distributor adds 'no value' and needs the retailer to reach the consumer. I disagree and where possible these days I purchase online from companies who do not pay for 'bricks and mortar'. A distributor actually does all this and more:

1. Buy the goods off the manufacturer usually for cash. No credit here.
2. Take the risk of putting a volume of product in the warehouse
3. Accept ultimate responsibility for any defects or malfunctions
4. Accept warranty returns which are accumulated for return to the manufacturer (remember this is money sitting at the back of the distributors warehouse)
5. Abides by the retailers terms and conditions - generally no negotiation here
6. Arranges any in country customisation or changes that are required to meet any NZ regulations (such as power supplies, etc).
7. Carries all risk associated with stock rotation, damaged/incomplete stock or a retailer that changes their mind

Now, back in the olden days manufacturers were quite good as in they would generally offer MDF, kick backs for meeting targets and other inducements that assisted the distributor with the overall margin. These days manufacturers (especially out of Asia) offer nothing except 1% of additional stock for warranty replacement. Product pricing is based on volume and generally these volumes are way bigger than we would ever sell in NZ. For example price breaks may be like this: 1000+, 5000+, 10000+. There are no sales targets, MDF, incentives or any additional funds to cover the cost of 'doing the business' for the product. All the distributor gets is 'the lowest price' from the manufacturer. This means that the distributor (who carries all the risk) must build all these incidentals into the cost before passing it onto the retailer but here is the catch:

The retailer expects 'open book pricing' where the distributor must declare to the retailer what was paid to the manufacturer for the product. The retailer then expects the distributor to only make 2% margin. Yes, thats right 2% to carry all the risk.

A distributor would be better off putting the money in the bank at 8% interest. Now you know why products can cost more in NZ than in other countries.

Other related posts:
I Thought I would Come Back
Unemployment does get boring
Over the 'i'

Permalink to Retail Margin Gouging | Add a comment (4 comments) | Main Index

Comment by Bung, on 29-May-2007 10:18

You prefer to buy online but you're probably still dealing with a retailer who has established some visibility. How many importers or distributors are prepared or want to have a direct relationship with joe public?

Comment by Grant17, on 29-May-2007 10:23

Thanks Jama for that very enlightening expose. I knew that the retailer/distributor relationship was loaded heavily in the retailer's favour, but what you have outlined is hopelessly one-sided.

It reminds me of the Tender/RFQ games that large corporates like to play with their suppliers. At the end of the day, there is so little margin left for the distributor, and the risk is so great, that you really wonder why anyone bothers.

I guess this is where The Warehouse wins with their policy of sourcing directly from overseas suppliers, but I've also heard that they are very aggressive in screwing low prices out of their local suppliers.

Retailers like to play God, that much is obvious!

Comment by paradoxsm, on 29-May-2007 18:44

Cheers for some very useful info, I knew parts of but very interesting to see it fully broken up!.

I have completed a post I meant to place up months ago. (november last year)

Does you company deal direct to public?

I was meaning to build up a list of them before posting but real-life got too busy!

Comment by Jeffthechef, on 7-Jun-2007 11:32


I know what company you're talking about..

Its a feck1ng joke at times!!

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Gary R
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