Podcast: How to Expand from DTC to Retail Profitably
Episode Summary
This episode of the 'Free to Grow CFO' podcast, hosted by Jon Blair, features an in-depth conversation with Adam Siskin, co-founder and partner of The Platform CPG, on the intricacies of expanding a direct-to-consumer (DTC) brand into the retail space. The discussion covers important considerations for DTC brands looking to venture into retail, highlighting the differences in finance, operations, sales, and marketing challenges between DTC and retail. Adam Siskin shares his extensive background in the CPG world, emphasizing the importance of understanding margin profiles, the impact of trade spend and chargebacks, and strategies for contract negotiations with distributors like Kehe and UNFI. Moreover, the episode touches on the crucial elements of debt financing for covering the cash conversion cycle gap in wholesale and offers personal insights into balancing an entrepreneurial career with family life.
Episode Transcript
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00:00 Welcome and Introductions
00:39 Adam's Entrepreneurial Journey and Transition into CPG
08:27 Expanding DTC into Retail: Strategies and Considerations
21:28 Understanding Trade Spend in Retail Expansion
24:55 Diving Deeper into Chargebacks and Cash Planning
25:50 Challenges and Strategies for DTC Brands Entering Wholesale
34:27 Navigating Contract Negotiations and Distribution Challenges
40:53 Financing Strategies for Wholesale vs. DTC Channels
48:50 Balancing Entrepreneurship with Family Life
52:51 Final Thoughts
[00:00:00] Jon Blair: Hey, what's happening, everyone. Welcome back to the Free to Grow CFO podcast, where we talk all things scale on a DTC brand with a profit focused mindset.
I'm your host, Jon Blair, founder of Free to Grow CFO. We're the premier outsourced accounting and finance firm built exclusively for growing DTC brands. I'm really stoked to have everyone joining today. I got my buddy Adam Siskin on here, co founder and partner of platform CPG. He's got a background in the CPG world that extends.
Far and beyond the platform CPG that we'll get into in a little bit here. But Adam, I feel like we're always texting and. Chatting on the phone on the side and it's nice to finally have you here for an actual hour to chat all things scale on a brand what's happening, man.
[00:00:46] Adam Siskin: I appreciate you having me on here.
I know we ping each other a lot on LinkedIn, which is fun. Definitely collaborate on brands. So it's, it's great to get a discussion going. Talking about the industry and different facets of it.
[00:01:01] Jon Blair: Awesome, man. So what we're going to be talking about today, the last few weeks, we've talked a lot about DTC advertising, scaling through scaling ad spend.
We're going to actually talk about something that's really front and center in the DTC world right now, and that's, that's expanding into retail. And I'm kind of calling today's topic like tips and tricks, do's and don'ts, advantages and drawbacks of expanding into retail. And the reason why I've got Adam on is because Adam is, Adam, in the CPG world and especially in food and beverage, Adam's got a really robust background in scaling brands within the retail and even more specifically grocery retail.
And there are expanding into retail is something that depending on the size of your DTC brand, you neeDTConsider expanding into retail at some point. My buddy Ryan Rouse always talks about like, Hey, listen, if you're, if you're never going to expand into retail, you have to understand. That there is a ceiling to how big you can grow your DTC only brand.
And there's nothing wrong with that. If you want to stay DTC, there's absolutely nothing wrong with that, but know that you are limiting. And if you want to expand beyond a certain revenue, depending on what your category is, you need to meet you need to meet your customer in brick and mortar retailers.
And so depending on how big you want to grow, depending on your product category, retail absolutely should be considered, but fair warning. It's a different game than DTC Now, don't be scared and, and don't be scared to the point where you don't want to ever consider expanding into. Retail, but understand it comes with different finance challenges, different operations challenges, definitely different sales and marketing challenges.
So I've got Adam on today. So we can chat about the nuances, the tips, the tricks, the do's and don'ts of expanding into retail. Really focusing in on, on food and beverage and kind of like grocery retail. But before we do that, Adam, I want to have you give everyone a little bit of your background and your entrepreneurial journey.
So people can understand why. I mean, and these are my words. I consider you to be a guru in the grocery retail kind of finance side of the world.
[00:03:22] Adam Siskin: Definitely. I've been in the CPG space for about eight years. Prior I was playing finance roles within the healthcare system. I did some private equity, a little bit of tech and.
My transition into CPG was, was actually by accident. I was marketing on Craigslist about 10 years ago from Microsoft Excel and financial modeling and things like that. And I found a programmer that started working for me about 12 years ago and built up this Craigslist business on the side where when I was turning it into six figures, I told my boss I'm out of here and he was like, He laughed at me when I told him why.
And, you know, along the way, I actually met my mentor to this day. His name is Eric Skay. So Eric was the the CEO of Rayo's when they sold off to private equity, Sovos about eight, nine years ago. And Eric actually was at a Mets game on Craigslist and texts and messaged me for help. And I I built him a financial model.
He was actually at the time working with a client of mine today. called Riot Energy. It was called T Riot back then. They changed the name to Riot Energy so I helped them with some modeling there and then I went on my own and The rest was history. I hopped into Rayo's, you know, I worked across him and the CFO built infrastructure.
They sold off to Sovos. I went into Sovos portfolio more as like a technical analyst. So I didn't have the CPG knowledge and experience and the network. So it was really more like technical finance of what you would think of like with a financial analyst. And so my program and programmer and I would automate.
All the different operational functions, whether it was demand planning, production planning, trade planning, report automation. And so I, I started off in that arena and then, you know, I would say over the last eight years, I've touched maybe about a hundred brands as a fractional CFO. So I have a firm called Silvercrest Solutions which does fractional CFO work.
There's data visualization, deduction management. And so. I've touched a lot of brands from a finance lens. I've placed a little bit of capital as well in Chicago. And then in the last four years, you know, I launched what's called the Platform CPG with my business partner, Paul, and another colleague of ours, Jonathan, that are based in New York.
And so with the Platform CPG, I really started to learn about the ins and outs of the business, not just from like a financial view, but Of FP& A and all that great stuff, but really started to learn about sales, operations, marketing. And we launched this company three, four years ago. We we've target kind of wealth funded early stage brands that we can accelerate through a roadmap into the market and get commercialized.
And it's been quite a journey, but I've definitely learned. A lot of aspects of how to enter the space and how to be successful.
[00:06:29] Jon Blair: Dude, Craigslist stories are the best. One of my, one of my best friends I met through Craigslist in a former life, I was in a thrash metal band that got signed to a record label, put out one record, went on tour and our, I found our audio engineer and producer on Craigslist.
And we're now like best friends. And I, I always make a joke. I go, Hey, Matt. You're the coolest person I've ever met on Craigslist, but
[00:06:53] Adam Siskin: I, I actually met, there was one other I met the stepdaughter of Anna Wintour on Craigslist too. So Anna Wintour is you know, the chief editor of Vogue, Vogue magazine.
And so I actually helped launch a company called Masonette with a couple of women at a Vogue and it was a wildly successful company. Next thing you know what I'm flying to California and Beverly Hills. I'm working with, Joyce Azria, who's the daughter of Max Azria from BCBG Max Azria. So, as you can see, I'm not a stylish person but I was working in the fashion industry right around the same time as Rayo, so definitely got a you know, a glimpse and touch of outside of the food and beverage vertical doing that.
[00:07:41] Jon Blair: By the way, for those of you who don't know, R A O S, R A O S, that's the pasta sauce. If you haven't seen that on the shelves, and or there's not someone in your pantry, you neeDTCrawl out of the hole that you're living in because R A O S is absolutely huge. My wife, when she found out that you worked with R A O S, Adam, this is a funny side story.
She was like, she's such a fan of R A O S that she's like, what? This guy, this guy worked with rail. So anyways, side story we can, we can get into chatting about DTC expansion into retail now. Again, to set the stage of this conversation, the reason why I'm bringing this up is because, Free to Grow, we work with profit focused DTC brands, right?
And we, we do their bookkeeping and we serve them as fractional CFOs. As we look. At scaling a DTC brand profitably, again, depending on your strategy, your target customer and your product category, there inevitably becomes this conversation that arises where we need to talk about when is the time to expand into retail and should we consider doing that and, and, and if, and when we do.
What are we getting ourselves into? Right. And so, you know, I, this is kind of a broad question, but I think a great jumping off point. Like it, if a brand comes to you that has a digital, you know, a DTC presence and they're, they're looking to consider the transition into, into retail, what are some of the first things that you start asking them about or advising them on before they decide to like dive into retail expansion as a strategy?
[00:09:20] Adam Siskin: Definitely. The first question I ask anyone, regardless of where you're starting is like, what's the aspiration? So what are your goals of your business and why do you want to enter retail? Because that's going to often drive more specific feedback as to the best way to enter retail, you know, based on your own strategy and goals and what you envision.
What I would say overall is like the number one thing that has to be looked into is margin. And that's just true with. Any product, whether you enter the DTC space, the retail space, is there a business model that's meant to be had? Because in DTC, you're selling direct to the consumer. So you're skipping about like a 35 or 40 point margin take from the retailer.
And then a distributor like a UNFINK, he might charge 15 points for a DSD distributor that goes up and down the street, might charge 25. So now all of a sudden you have, you know, over 50 percent of your customer. Selling price to the consumer being taken out by the retailer and the distributor. And so understanding your current margin profile and then at scale where you can be, I think is definitely one of the first areas that I look into to make sure that there's a sound business model entering the landscape.
[00:10:38] Jon Blair: Yeah. I, you talk about this a lot in your content. So do I like those margin considerations upfront rather than after the fact. Right. Like I've seen a lot of brands make mistakes where they, they expand into a channel, like they take on, you know, Whole Foods or Sprouts, a small number of accounts or H E B or something.
And they're stoked because they get into the stores and they're like, let's, let's land, land in the stores and then let's figure out how to make money afterwards. Right. And What, what I see happen oftentimes is, and I see this in DTC too. It's not just expanding into a grocery retailer, right? Is that like, Hey, let's get some traction.
And then let's figure out how to turn a profit from a unit economic standpoint. And, and the reality is I just see it as. Honestly, next to impossible to reverse the profitability equation. If you have bad unit economics to start with, as opposed to like I would say some of the more savvy brand founders that I work with, they are thinking about unit economic margins from day one, right?
Unit contribution margins from day one. And they're, they're literally baking that into how they're thinking about. Their supply chain costs during the R and D phase and thinking about pricing. Right. And they're thinking about that on the front end, as opposed to the backend. Do you see similar issues with brands at times?
And do you see it? Is it possible to like go back and try to raise prices or cut costs? Try to retreat to become profitable when you made the mistake of not being profitable or profitable enough in the first place.
[00:12:18] Adam Siskin: Sure. I would say most if not all, and all might be a little aggressive, but, but most CPG brands that launch are not going to be profitable.
And there's multiple reasons why that might be a. You don't have economies of scale. So if you're coming out of the DTC space and you've grown a nice size business, call it 20, 30 million. Cut that in half because that's the revenue that you're going to have actually in wholesale. So when you think about like your scale, if you're a 30 million dollar online business, you're You're, you're really a 15 million wholesale business because 50 points of margin.
So when you just think about like the number of units you're selling, that's kind of how I look at it. And so let's say you start to really get economies of scale at like between like 30 and 50 million, where you can really start to drive down those cogs. I always say that in retail, like you got to have 60 points of margin in the foreseeable future, like further out as you've grown, because.
Your trade spend, let's say, could be 20 points, you know, 15 to 20 points at scale. You know, you might have five to seven points of freight out. You might have three to five points of warehousing. You got your 5 percent broker. And so when, when this all stacks against you, the business model of being in wholesale is like, how do I get, you know, a 10 or 15%, even a margin?
That's really the ultimate goal. And the only way to get there. Is with a really, really high product margin that has to be assumed at some point in the beginning, most C. P. G. Brands. Again, I'm gonna make a generic comment have around 30 points of margin. So if I go to, like, call it, you know, 50 brands, I think, like, 40 out of 50, maybe higher.
Will be around 30 points of product margin and I just I define product margin as literally your cost of goods sold. So you're packaging raw material, your co packer and the price you're going to sell to the to the retail or to the distributor. So it's not trade spend. Usually you're going to have around 30 points when you're not at scale.
Ideally, you're at like 10 points. You're in huge trouble because you're just going to be burning a ton of money. If you're, you know, a lot higher, great. You're going to be burning less money, but in the beginning where a lot of brands make a mistake is, is that they get super excited, like you said, about getting into Sprouts.
The number of brands I've seen just get crushed by going into Sprouts early stage. Is, is really, really heavy because of the slotting fee. Sprouts is going to ask you for one or two cases, and if you get a 400 door rollout into all their doors, I've seen brands with like a six figure bill, where after the fact they go, Holy shit, I'm now getting charged back and not seeing any of the revenue collection occur.
From Kehi, who is the main distributor of Sprouts. So, I, I agree with you that, like, really looking at the upfront cost of entering a channel or a specific customer and building out that full contribution margin down the line is essential so that you can really appropriately assess cash burn and capital you need to get through the, Elementary kind of steps of entering retail with the fully loaded cogs and then making your way towards profitability.
[00:15:47] Jon Blair: Dang. There's too many things we could talk about in there. So I'm going to have to lead us down the list one at a time. Let's start first with what I'm just going to call sales and marketing costs because well. Actually, let me summarize something, two points that you made that I think are super helpful that I want to make sure the audience takes away one plan on your gross margin being lower, right?
Because the price point's going to be lower because, because the retailer needs to take a margin. And so you've got, you've got to be able to bear that. And then number two. There are sales and marketing costs that are associated with retail. And I think there can be, I've seen this misconception, right?
That like DTC is really expensive when it comes to marketing sales. More sorry, marketing costs and retail is not, not as expensive. You know, they've already established those retailers already established traffic and they've kind of done the heavy lifting. Of marketing for you, right? And so your, your marketing costs are going to be lower than DTC Not necessarily the case. And that's where I want to go a little bit deeper here is that like me through, you talked about trade spend, you talked about slotting fees. Walk through some of the typical sales and marketing costs of working within a retailer and just some of the just rough average benchmarks you can expect to spend in those areas.
[00:17:09] Adam Siskin: Sure. So. I'm going to start off with the answer for DTC for food and beverage, which I know is your arena and why it's important is that you're actually seeing a lot of brands retreat from DTC that are food and beverage specific with a low AOV, which. That's kind of your your bread and butter, but like it's kind of the same workup is that if I'm selling a product, let's say an energy drink that sells for 2.
99 in retail. Sometimes you can sell it for a little bit more online. Let's say it's 40. It's going to cost you, if you're shipping with FedEx or UPS, call it like 10 or 12. So 25 percent of your, 25 percent of your revenue is going to freight. And then as you know, acquisition costs have gone up increasingly and maybe 50 percent is your ROAS and now all of a sudden you have 75 points of your revenue.
Gone. And, and so a food and beverage brand is very, very quickly underwater because that's shipping or the pick and pack fee that costs you 3 on the 40 order ends up, you know, being significantly. A part of your revenue. And so when you look at kind of the wholesale arena and you look at kind of like at the very top, if you have 30 points of product margin to start with a early stage brand, that's in a very.
Call it aggressive or competitive arena, which I would say a lot of brands are, especially ones that are kind of innovative or trying to disrupt. You're spending like 20 to 30 percent on trade spend out of the gate. So like your margin could be almost wiped away immediately if you only have 30 points of margin to start.
And the reason is the following one is that you got to go discount. And, and on the shelf. And so when you get like the buy one, get one freeze and this and that, you know, depending on the category, it could range from like 50. 10 to 30 percent with the majority being closer to like 20, 25, 30, especially the brands that you see hit the headlines on LinkedIn or social media.
So you're spending out of your 30 points. Let's just say it's 20 points. Your shipping is probably another 10 points because you're not shipping full truckloads. So it's going to cost you around 10 percent just for LTL. So if my 20 points of trade and my 10 points of shipping that wipes out my 30 of margin, now I'm at zero.
Now you got your three PL fees. You got your warehousing, you got your broker. Now you're, you know, further underwater. And so a lot of times a brand's contribution margin, which are all of those expenses lined up, you could be at like negative 10 percent in the beginning. And you really got to scale until your product margin goes to 40 points to 45.
And then everything gets optimized, your shipping goes down to seven. Maybe your, your trade probably won't go down as fast as the other components, because you still have to aggressively discount. And then there's marketing. So like with marketing, it's a lot more complicated in the wholesale space, because you're, you're really going about shopper marketing, for example, in different facets.
So there's demos, there's Instacart. There's digital, you know, online targeting that you can go after certain geographic zip codes. There's, you know, top of funnel where it's brand building with events and bottom of funnel, which is really conversion that you go after. So your marketing dollars are spread really, really thin across your distribution.
Which is why I always tell brands to go really narrow and deep to start than doing like a nationwide, launch that requires every dollar to be spread out thin across the board.
[00:20:55] Jon Blair: Hmm. That makes sense. That's, that's good. That's good advice. I, I, some might already know this. And or have been able to, you know, infer it from like, or, or from what you just ran through.
But what is the definition of trade spend and what does that money really go towards?
[00:21:13] Adam Siskin: Sure. So trade spend, there's a few aspects of trade spend. One is just pure discounting. So again, when a product, when you're lowering the price of a product to the consumer that's a bulk of trade spend. And so usually you're, you're creating what's called a trade spend calendar for a whole year with a retailer where you might promote like one, like, let's say two weeks out of every quarter, you can price promote down.
For two week periods, you know, throughout the year, that's a bulk of trade spend. There's also like early pay discounting. So like if you get paid within 10 days there's, you know, 2 percent discount. I think UNFI recently actually. Increased it like closer to 30 days. They called that, you know, early spend trade early pay discount.
And then oftentimes you're getting charged back by UNFI and KE. If you have something shipped late or you short ship there's also something called an off invoice where during a period of time, you're giving a discount to the distributors. Who are supposed to pass that down to independent stores that don't have, you know, true discounting programs.
Whether that happens or not is a big debate in the industry. So anytime that you're lowering the price that you're physically getting back, whether it's to a distributor or to the consumer that gets charged back to you, that's what hits trade spend.
[00:22:43] Jon Blair: Got it. Got it. So the point is when we go from comparing a DTC brand, it's.
And the contribution margin profile of, of being the retailer, right. Versus going wholesale and selling to either two distributors that sell to retailers or sell direct to retailers. There's all these different deductions and costs. That are, that are unique to wholesale and even some that are unique to grocery, right?
That, that you have to be prepared for and that your existing margin structure has to be able to bear, right? Exactly. And so what's interesting is that like, and this is like, this is a, like you mentioned, you've said a couple of things. You're like, hey, this is a general statement. There are caveats to this.
But like what I tend to see does really well, in terms of like transitioning from DTC to retail. Is a product that already has a very killer gross margin. And what we call, some people call it fully loaded gross margin. We call it contribution margin before marketing, meaning that after you back out, effectively shipping and fulfillment costs, right from gross margin.
What I, I have a couple of brands that Free to Grow works with that they're gross margins, like 80 to 85%. Right. And then after you back out shipping and fulfillment, they're working with like a seven, 70 percent contribution margin before marketing. Now keep in mind. That lowering the price point for wholesale, right.
Is going to bring those percentages down, but there's a good amount. You then compare that to their AOV, that 70 percent times their AOV. The point is they've got a good amount of dollars, right. Of contribution margin dollars to work with that they can use to pay for the wholesale you know, price discount to pay for the trade spend.
But one thing I want to dive into a little bit deeper, you mentioned charge backs. And there's this whole concept. I actually have a, a pretty deep wholesale background early on in my career before getting into DTC. So I've dealt with a lot of this stuff firsthand chargebacks and just overall planning, right?
There's this, there's like demand planning. And, and planning for what you think is going to get ordered versus what actually gets ordered. And then there's cash planning, which includes not just the fact that there's receivables, right. As opposeDTCollecting your cash, right. Upon upon sale, like you do DTC, but there are also these deductions, chargebacks that you can and should expect when you actually finally receive payments in the wholesale world.
So as it relates to cash planning. And specifically deductions. And demand planning, what are some of the challenges that a DTC brand needs to, to be able to weather as they move into, into wholesale?
[00:25:41] Adam Siskin: Yeah, I would say the planning, there's a lot more variables and I could be wrong on this, but.
Because I'm not a D2C expert by any means, the brands I work with oftentimes have a lighter D2C profile. I almost call it like a marketing spend because they're not making money on the channel. And so, I feel that like at the D2C side, it's like a very calculated approach. Because the moment that a product is in a warehouse, You don't necessarily need a massive operations team to sit there and ship it to different DCs and locations of distributors.
You know, it gets picked and packed. And so when I look at kind of the margin profile of DTC and the margin profile of wholesale, you know, from like the chargeback and trade perspective, specifically, I think that one should always expect to be like I said, around 20 percent if you are indeed going to be price promoting throughout the year.
And then I think again, like if you take your price to a distributor, when you double that, that's essentially like what the consumer is paying. And so there is a lot of margin loss that happens there. And so my, my biggest advice. For someone going into the wholesale kind of arena. And this is kind of at the platform.
Like what I do with my partners is, is like, we go really narrow and deep. I want to hit like 10 or 20 stores to start and really crush it in those stores and understand the full contribution margin of everything that's occurring. Cause it's not black and white out of the gate. You do need to spend on marketing.
You do need to activate. Consumer awareness. And so I really think that narrow and deep approach allows you to kind of dip your toe in without going too, too deep, taking on a massive financial burden. And that's usually the strategy that, that I do when entering the retail landscape, as it's not, no one lays out for you, this is exactly what's going to happen.
Every contract and every is a negotiation depending on who your customer is.
[00:27:48] Jon Blair: So on the charge back side. Right for I don't know if this is the right term. I think this is what we useDTCall it back in my wholesale days, but like non compliant shipments, right? Whether that's you screw up the barcode or some sort of required documentation where the shipment doesn't have, you know, the right.
Unique identification on everything. This is something that DTC brands who are expanding into retail. And by the way, this is not unique to grocery. If you're going to sell them to target, you're going to sell on the Walmart. You're going to sell into like non grocery retailers. These kinds of chargebacks are universal to selling wholesale, the, you know, regardless of the product category, you have to ship shipments to the DCs or to the warehouses for these retailers in a very specific way.
Cause they're large, Right. They're churning through a ton of inventory that they're receiving into the warehouses. And so you have to have the right, you have to have barcodes. You have to have very specific information. Some there is even specific information around like how large your pallets can be, how the pallets are loaded.
So walk through, I think a lot of DEC brands aren't aware of this. Walk through like some of the common requirements for. Putting together a compliant shipment that doesn't get charged backs assessed against it. And so that so the D2C brands listening can like understand what they have to like what they're gonna have to adhere to operationally just to ship shipments in a way that the retailer will actually accept and not charge them back for.
[00:29:22] Adam Siskin: Yeah, so I would say out of the gate, you're going to give your like palette configurations and pricing and weights and everything like that up front. So when you're like, you want to find K here, the two largest distributors, when you onboard with them, there's a meticulous process that you have to go through so that you are providing like all the dimensional and physical weights of your products and configurations.
So you're oftentimes not getting charged back specifically for. Those reasons being off, but more so if a shipment is late. So if you ship something that's late, you're going to get a fee hit back at you for a late shipment. If your shipment is not in full, you might get a charge back because you partially shipped.
You know, I would say. Operationally, those are kind of the chargebacks that can occur. They're not necessarily that large as a percentage of like your overall chargeback. Some like hidden ones are, you know, Khe for example, charges you back 2% what they call as like their bi, their BI fee. 'cause they let you have like a portal access.
So they're taking 2% no matter what, like crazy. Then, then. You know, unify it's optional, but I think they're starting to migrate more to it being mandatory. But then also like, they're going to hit you with like 2 percent this early pay discount. Even if they don't pay early, they're just going to hit you with it until you fight back.
And then the moment you fight back and you go through kind of the, that process, they'll stop doing that. So like, if you think about the business model of like a unifier, Kehi, If they're making 15 points of, of margin, from what they're paying for the product to then to the retailer, their business model is like operating on like a couple points of EBITDA.
So anytime that they can charge back like a couple points for data or two points for early pay, that's a massive amount of additional EBITDA that they're actually taking on because their product margin, like the brand that's at 30 points, they're starting at 15. And then when they take out all the costs of their drivers and their trucks and this and that, I mean, they have a couple of points left.
So the hidden fees are really like that BI fee for the data. You know, if you activate new warehouses, they charge you for those. Each SKU gets charged out of the gate. So there's some upfront costs, but there's actually like a lot of third party firms out there that are specifically built. To manage deductions and chargebacks, they actually send you like PDF files that are not in tabular Excel format.
So you got to convert them and, you know, slice and dice. So they make it like really challenging to actually like digest your chargebacks. One company I work with a lot is called PromoMash. There's a guy named Yuval that owns that company and PromoMash has probably one of the leaders in like, Managing and disputing K, he and you and F I and it's, it's an entire business in itself due to like the complexity and how tedious it is to truly manage it down to the invoice level.
[00:32:37] Jon Blair: Yeah deduction negotiation or chargeback disputing and reconciliation is a huge effort. I've been through a lot of it in my early days and it's like it, it can feel like a losing battle if you don't know what you're doing. And, and it's funny cause so in the Amazon world and the DTC world Amazon takes, there, there are costs and fees and deductions that you get from Amazon that actually can be disputed or, and are invalid, but it's really hard to fight back against them and to know which things to fight back against.
So there's whole companies out there that you can pay to go get these charge backs resolved and get those fees back and get what's called damage goods paybacks, and they just charge you a percentage. So anyways that this is like super helpful next level, advice for any of you d2c operators out there thinking about expanding into wholesale These are the things that a lot of d2c brands Go into wholesale thinking like, Hey, we need another channel to capture more TAM and to overall bring our, our, our you know, like weighted average marketing efficiency up, and then they don't realize they're getting into some of these things from an operational and even cashflow planning challenges standpoint, again, I'm not saying don't do it.
I'm saying. These are the tips and tricks, right? These are the things you need to know going into it, right? So you can bake these into your plan. So there's something that we've kind of danced around here. That is incredibly important when we think about setting up an expansion into wholesale, to make it, to, to set it up so that there's the highest likelihood of profitability.
There's the contract that you're negotiating, right? With whoever you're selling to, whether it's direct to a retailer or, or the contract you're negotiating with a distributor you're not negotiating a contract with every customer who buys on your Shopify store, right? But you're definitely, there's definitely a contract in place with your customers on the wholesale side of the world.
And it bakes in these requirements and these deductions and the rights that That the that your wholesale customer has to deduct all of these charges. And furthermore, it, you know, the rights that they don't have so that you know what to fight back against when you have a customer or when you have a client, Adam, that is negotiating a contract with a Kehi or maybe direct with a grocery retailer, what are some of the major terms?
You get asked for advice. Like, Hey, what do we need to look out for in this contract? What's kind of like your mental checklist of what you've got to make sure you go after in that contract.
[00:35:24] Adam Siskin: Sure. So. What I'll say is, is that there are, like I said, two large distributors, Kehi and Unify. They are, they're your best friend and they're your worst enemy because they are the ones that are going to be moving your product nationally across the country.
And they also have all the major contracts with the big retailers. And so it's a necessity to use them. You, you can put together. A network of, of smaller distributors outside of them. It's very tough to do it and it's more expensive. So overall, like they have a pretty cookie cutter blanket contract that they're not going to deviate from that much.
And so there actually is very little that you can negotiate within the contract. Because if you want to do business with them, like this is what. They are going to operate by from moving your product from, you know, point A to point B, essentially. And so, the major things, like I said, is, is this can't be negotiated, but you, like, the 2 percent discount, you can't get that taken out of the contract that easily.
I don't know that I've actually ever seen it taken out. And so, While you're not managing that in the contract negotiation, you should definitely do that on the backend. The one thing that, that I suggest for some brands to look into is FOB pricing. So basically you can do delivered pricing to Kehi and UNFI and in the earliest stages, it can cost you like 10 or 12 points of revenue.
To deliver your product and, you know, pallet size or multi pallet size shipments, or you can have UNFI and KE pick up from you and, you know, they have much, much stronger buying power with carriers where it might only cost you like 6 percent of your revenue or 7%. So there's A world where you can save like four or five points, so I think while that's not necessarily a contract negotiation because you have optionality of what of where you want to go, definitely something in the contract that you should look for is if you want to price it, pick up or delivered and there's benefits and challenges of both, of course, outside of that, you know, there are off invoice promotional periods. They're going to push you to essentially lock in an off invoice period, which basically means you need to give the product to K here, you and if I typically for 15 percent less during those windows and supposedly they pass that on to the customer, which is, which is debatable.
That I would definitely negotiate hard. Cause I don't think that the ROI. You're going to really see there than actually delivering those kinds of savings directly to the customer.
[00:38:09] Jon Blair: Interesting. That's super interesting. Yeah. And I mean, so the FOB versus the delivered pricing, I like that you called that out at guardian bikes for a short period of time, you know, we were primary, primarily a DTC brand, but for a short period of time, we sold direct to Amazon on Amazon vendor central, they're buying containers.
A product from us. And, you know, even though we had to drop our price to allow them to have their margin. One thing that we found is that when we had them pay for freight and just deducted from the invoice, like you said, it was about half of what the cost would have been for us to do it. And it was because they have economies of scale and, and negotiating leverage right with the carriers.
And so that was one thing that actually helped take a bit of the sting out. Of the wholesale versus the retail pricing margin impact and one step further too I don't know if you can you can't really necessarily do this with grocery, but but other product categories We eventually negotiated a direct import program where we were actually having them Purchase FOB factory port, like origin port, right?
So we weren't paying to have it come from China, come into the U S and then having them pay for shipping from our U S warehouse. We had them, we had the retailer, Amazon pick up the goods and take title to them at the China port. And they could get, they could get that those goods moved from the China port to their warehouse.
Like for like a third of the cost of us importing them and then fulfilling them direct to Amazon after that. So like for product categories outside of grocery, if over time, and you usually can't do this right out the gate because they want to test your volume, right? They want to give you small tests that are lower risk for the retailer, as opposed to like buying a whole containers, a lot more inventory risks that they take on.
But if you can, over time you know, if you ship some sort of a consumer product that isn't perishable, if you can, and you're making the product outside of the U S if you can negotiate direct import. And even containers at a time, the economies of scale that you start realizing within a wholesale.
Are actually much larger than you might think if you get the retailer to actually pay for the inbound freight. So, so there's, I want to, I want to shift directions a little bit. I want to talk about financing, right? For for wholesale the wholesale channel versus DTC. So like in the DTC world, when we're talking about debt financing specifically, the two primary needs are for inventory and for ad spend.
And inventory is usually the bigger need because there's no receivables to use as collateral, right? Which lenders like a lot more than inventory. Cause it's more liquid, especially if the receivable is a, a big retailer that's known to pay on time. Right. So you have this less liquid asset in inventory, but it is the primary asset that needs to be financed as you're scaling from a debt financing perspective.
So there's very specific lenders and specific types of types of debt facilities that tend to be best for that. But when you're, when you're expanding into, into wholesale and you've got receivables and inventory, And, you know, the challenge is you're buying inventory and you have payment, maybe little to no payment terms with your co packer, but then you're selling to a distributor or direct to a retailer and they're giving you have like net 90 day terms.
You've got to, you've got to finance that cash gap, right? And debt is a tool that you can use. To help you finance that gap, what are some of the strategies or lenders? Just what, what are some of the things that you think through when, when you need to help a brand with debt financing to, to close that cash conversion cycle gap?
[00:42:04] Adam Siskin: Yeah, yeah. And that's the biggest difference, as you pointed out, with the cash conversion cycle for D2C versus retail is going to be the AR, right? I think terms with your co packers and, you know, suppliers and things like that on the AP side are going to be the same, you know, as online, but the AR is where it's non existent online, really, or maybe it's a 12 or 24 hour ordeal.
That's really where. Retail based businesses start to get financing is on the AR. And so like we discussed with trade spend, if you sell a thousand dollars of goods, you might only get paid back 800 because of the trade spend. So what the providers out there are going to look at, there's, there's kind of two types.
There's factoring, which is a lot easier to do than getting a line of credit. When you factor your accounts receivable, you can actually be like a tiny business doing, you know, 10, 000 a month, 5, 000 a month and there's factors out there that will start that early and scale with you. So essentially, the factors are going to look at your cash collection and see what percent of your invoice you're actually collecting because of all the chargebacks and promos that you're running.
And so let's pretend it's like 75 percent that they're going to advance you. Every single time you get an invoice, you can submit it to the factor and they'll wire you that 75 percent and then they essentially collect the cash from the customers. So that's one form of factoring that I would say there's a lot of players out there that will do it.
There's, you know, a lot of regional banks, there's a lot of private companies but you got to go invoice by invoice. Then there is getting a line of credit. Now, most players out there, debt players, Are not providing you a line of credit until you're at least 5 million in revenue. So like, you know, there's one called blue ocean.
There's one called assemble brands. There's one called Dwight. You know, those are three major players that are out there that do lines of credits. Most of all three of those primarily have that like 5 million entry point in where they want to give you like a million dollar line of credit. And so. What they do is, is they do a similar formula for your line of credit where they'll take, let's say, like 75 percent of your AR, but then they'll also take like 50 percent of your, your COGS, right?
And obviously they're going to look at the type of product you have, and like, can it sell easily from like a liquidation perspective, and they'll put a borrowing base together with those metrics. The best way to get a line of credit is not when you absolutely need it. So waiting until your cash goes down to zero is not when you want your line of credit because they're not going to give you one.
So a lot of the brands that I work with that are heavily capitalized, we're going out getting lines of credit while we have a super strong balance sheet so that we go through all the due diligence and underwriting and get the most favorable terms. Yeah. Most of these line of credits don't have an unused line fee where you're being charged for not using it.
So you can sign up for the line of credit and then essentially you don't have to pull on it until later down the road when it makes more sense. If you're sitting on, you know, two years of capital for operating capital. Why are you going to spend, you know, 15 to 18 percent on your line of credit voluntarily while you have that much capital in hand?
The, the debt players will give you a reason why you should do it, and, oh, you should never use your equity dollars, you know, you should use your debt dollars for inventory. But if I'm sitting on two years of cash, and I can earn five and a quarter percent in the money market, or I can pay you, 18%, you know, I'd rather keep my money in the money market and fund my own inventory because I can't earn 18 percent elsewhere like you'd be paying.
And so that's, I, those are kind of the, the two profiles of how to get debt in the space.
[00:46:07] Jon Blair: Yeah, that was a really, really solid overview. And you know, this is just kind of like an FYI to the people listening. Dwight Funding also loves Ecom. They were, they were our lender for a time at Guardian Bikes, but they're also really big in food and beverage CPG.
So, you know, they, they, they'll look at both receivables, like Adam mentioned, and your inventory as what's called a borrowing base and the percentages that, you know, generally speaking, 80 percent of, of AR, although I've negotiated higher, and generally speaking, the lenders will tell you 50 percent of inventory, although I've negotiated up to 70.
You know, if you have a solid CFO who knows how to work, who knows these lenders and, and understands how to negotiate, you can get much better rates and just favorable terms across the line of credit structure. I will say, I highly recommend, obviously I run a fractional CFO firm. So I'm you know, biased here, but like, don't go at raising a significant line of credit without getting some sort of advice from a CFO.
Even if it's just like. Asking some questions and getting some high level free advice from a potential you know, fractional CFO candidate. It's like these lenders, look, there are plenty of lenders out there who are good people, but they're in the business of protecting themselves. And so like, they're not going to give you the most favorable terms out the gate.
They're going to give you their boiler plate, cookie cutter contract and a term sheet and contract. And you have to know. How to push back and where you can push back and where you need to like, hold off and the lender's not going to move on that. Right. And so that that's a spot where we help a lot of brands because debt financing is, I always say like debt financing is not something that you should rely upon a hundred percent in your capital structure, but it's a tool and it should be part of your capital structure if you're running a consumer brand, like it absolutely should be.
There's a place for it, especially when you have asset bases like AR and inventory. That expand and contract as you are like either seasonally or as you're like you know, fulfilling big orders to certain retailers and whatnot. So, well, look. I feel like I got to have you on again because there's a bunch more that we didn't get to, but we're going to have to land the plane here.
Before we, we kind of shut down this episode, I think I see some Play Doh back there right to the right of your, of your right arm. So like you're, you're not just, a CPG kind of operator and CFO. You're also a dad. I always like to end these episodes talking about something like, you know, personal.
Walk me through and because like, I'm asking you this question because I have three little kids and I think we're about the same age, have very, both have very entrepreneurial backgrounds. The biggest thing that I'm, I'm challenged with every single day is what I always jokingly say in my, in my content is scaling early stage businesses while also scaling an early stage family, right?
Trying to be a good dad and be a good husband. I'd love to just hear a little bit about like, how you have navigated being a, a husband and a father while also being a, Early stage hustler like I am and and just how hard it is to balance those things.
[00:49:35] Adam Siskin: Yeah I think when you're in the entrepreneurial arena and you're very motivated to Grow, you know, it's always on your mind like business and growth and partners and ecosystem.
And so You know, what I've done is, is I've made conscious moments in my day to focus on my kids. So I take my daughter every day to her preschool. So I, you know, 7. 30 drop off, I'm there every single day. And then typically I'm picking her up at like 4, 4. 30. So I'm grabbing her, I drop her off. I have a nanny.
Sometimes I get a couple more emails in. I'm usually logged off at like 5. 30. So. I might text if someone, you know, in like a Pacific time zone is, you know, reaching out to me, but, but generally, like, I'm shutting off my computer and I'm, like, dedicating that time with my family from like 530 to 7 or 730, And so I I'd say I'm pretty good at like setting boundaries for like active, active work so that I can have my dinner and things of that nature.
Same thing on the weekends. I try not to work on the weekends unless it's like a quarter end. So I think really putting up those guardrails, just, just like you would with like your own clients and business setting expectations. I do some, I do it very similarly with my family to make sure I can get that time.
And hence you see some kids stuff in my my back here and here, you know, I have a little play mat sometimes where my daughter can be dropped off. Try to hide it, but didn't, didn't quite get all of it in
[00:51:16] Jon Blair: there. Well, I have a keen eye for having a five year old, a three year old and an 18 month old that, that, that's the first thing I saw, but behind me, you can't see it.
See it. There's all kinds of crazy kids stuff. And usually when I go out my, my office, I it looks like a a target toy aisle, like threw up all over my house. That's usually what's going on behind me, but cool, man. Well, this was an awesome conversation. Listen for everyone listening DTC operators out there, like.
Adam went through a bunch of super helpful next level advice on just what to expect when you're, when you're expanding into wholesale. At the end of the day. As you know, scaling your brand up to this point, you're never going to build a plan perfectly. You're never going to be able to predict everything that's going to happen.
But today Adam took you through some, some real key areas for you to consider as you're thinking through expanding into retail. It's definitely a strategy that makes sense for D2C brands to do at some point, depending on your aspirations and your goals, but know that you are You're opening up a vertical in your business that is different than DTC It doesn't mean it's good, it doesn't mean it's bad, but it's different. Be prepared for the difference. So Adam, before we kind of shut it down here, where can people find more info on you, Silvercrest, and Platform CPG?
[00:52:40] Adam Siskin: Yeah, so I'm active on LinkedIn, so you can always DM me, Adam Siskin. I have, you know, two websites, silvercrestsolutions.
com and the platform cpg. com where people can reach out. So I'm always doing, you know, every week I do three or four calls with founders. A lot of times my relationships are informal in the sense that I'll help with an intro you know, provide advice, not necessarily within an agenda, as we all know, it's a really tight knit industry.
And so definitely networking and providing guidance as much as I can.
[00:53:18] Jon Blair: For sure. Definitely reach out to Adam if you have any questions about scaling and in the grocery retail landscape. He's my go to. I'm texting with him all the time and he's the first person that I introduce people to if they have any sort of challenges with scaling and in a grocery retail.
So that's all for this week's episode. I hope that this was helpful. If you want more helpful tips on scaling a DTC brand, consider following me, Jon Blair on LinkedIn. And don't forget, if you're interested in learning more about how Free To Grow's e-commerce accountants and fractional CFOs can help your brand scale alongside healthy profit and cash flow, check us out at freetogrowcfo.com. And until next time, scale on!
