It's impossible to avoid the squeeze on your margins
In my previous post I talked about the collateral costs of setting up our business. These weren’t related to the actual costs of our product, but all the “secondary costs” that included the manufacturing, shipping, office rental and maybe even a salary. Such costs were internal though and ultimately within our control. For instance, when deciding whether to pay ourselves a salary, we mostly didn’t bother.
Yet, what we didn’t fully appreciate was the external pressures on our margins – the ones imposed by third parties; the distributors and the retailers. If we wanted to become something of name within the drinks market (which we desperately did) we needed to climb into bed with these people. However, they weren’t so keen on building a mutually prosperous relationship in the way we had hoped. Instead, distributors and retailers wanted to squeeze us for as much money as possible.
To put it into numbers, a large retailer is going to be looking for about 50% gross margin. Therefore, if you consider your retail price to be £2.80 per drink (as we did), then a large retailer is going to be looking to buy your drinks for about £1.40. I remember when we met with one retailer and asked for £1.80 (a margin of only 35%), I could tell the buyer was torn between just laughing at us and giving us our marching orders there and then.
The other option is to sell to distributors, who will approach smaller shops on your behalf and delivering to them as well. However, between them and the smaller shops, it’s going to work out about the same 50% margin as if you were selling to the larger retailers. The only benefit would be, that the smaller shops aren’t going to push you for discounts and price reductions in the same way as the bigger retailers will do.
A combination of these external and internal financial pressures means there is very little room for error, and as a start-up, making errors is the name of the game. Often the only means to alleviate some of this financial pressure, is with lots of your own cash.