E114: How to Lose Money Chasing Champagne Dreams of Retail DistributionJanuary in Ecom-Crew-Podcast
“The most finite resource you have is your time and your team’s time. So if we were to spin our wheels chasing this huge big box business, that would prevent us from spending our time to stuff that is hugely profitable and is continuing to work. So why take your eye off the ball?” – Bill D’Alessandro on abandoning the big box retail route
“My products are in 5,000 Target stores.”
Admit it, at some point in your ecommerce entrepreneur life, you wished you could say those words. Or let’s say you didn’t, but imagine for a minute that you’re at a party back home for Christmas and high school friends are asking what you’re up to, and then you say those words. Yeah, we’ve all been there.
But with all the allure of big box retail distribution comes headaches that you probably are not aware of. As an example, one big chain approached us about selling our coloring books on their shelves and we were psyched. But after running the numbers we realized that it’s not even worth it.
Today’s guest, Bill D’Alessandro, has gone through the big box retail route when he acquired a business that already had a retail presence. He tells us in this interview the woes he encountered and why he ultimately decided to no longer pursue that route.
Bill is the founder of Elements Brands, a company that acquires and scales consumer products brands. He has been buying businesses for 7 years now and currently owns 9 brands with over 130 products. He is not a stranger to this podcast and you can listen to a previous episode he has done with us about buying businesses vs. starting one from scratch.
Some conversation points:
- The details of how Bill got into retail distribution
- The advantages of mom and pop shops over big box retail
- Treating mom and pop shops as big B2C customers
- The actual costs of going into retail
- What chains expect from a brand owner
- The ridiculous fees chains charge to get your product in their shelves
- What he plans to do moving forward
Thanks for listening to our 114th episode. Until the next one, happy selling!
Full Audio Transcript
Mike: This is Mike, and welcome to episode number 114 of the EcomCrew Podcast. Of course you can go to EcomCrew.com/114 to get to the show notes for this episode. And today I have my good friend Bill D’Alessandro back on the podcast. The time is kind of crazy because he just came down and spent a couple of days with us in Southern California just after ECF. So that’s perfect timing to get him back on the show.
We actually recorded this before New Year, because we try to get these done ahead of time. But today’s topic is going to be retail. And there seems to be a roar from all these e-commerce owners to want to get their products into retail, into these big box stores like a Wal-Mart, or a Best Buy if you’re in electronics, or whatever it might be.
And for me I had an experience trying to get our products into Bed Bath & Beyond. They actually approached us trying to get our coloring books in there, and I’m learning the ins and outs of what that really means. And Bill has figured this out on a much bigger scale. It’s a very interesting conversation.
Spoiler alert, he’s getting out of big box retailers or heading towards getting out of big box retail in 2018, and instead in mom and pop type stores. But some of these big box stores have some pretty egregious requirements. You’ll hear about them here. I think it’s a really interesting episode. Again EcomCrew.com/114 to get to the show notes. We hope you enjoy this interview. See you on the other side of this break.
Guest Intro: The most finite resource you have is your time and your team’s time. So if we were to spin our wheels chasing this huge big box business, that would prevent us from spending our time to stuff that is hugely profitable and is continuing to work. So why take off your eye off the ball?
Mike: Hey Bill, welcome back to the EcomCrew Podcast man.
Bill: Yeah, glad to be here. I love doing this with you.
Mike: So we are titling this, we were just talking about this, what was it, like don’t let your champagne retail dreams — how did you just say that?
Bill: Don’t be led astray by champagne dreams of retail distribution because I want to kind of talk through what it’s looked like for us going into retail. I mean we’ve done roll outs at thousands of big box retail stores. I have talked with other entrepreneurs who’ve done the same and seen some of the numbers behind it, and it can be very, very tempting.
It can sound very romantic; I’m going to be in 5,000 Target stores, or 5,000 Kroger’s or whatever. Surely that will count to my golden ticket. And I’ve seen a lot of entrepreneurs, and I actually include myself in this who have lost their ass trying to chase that dream.
Mike: Yeah, no doubt about it.
Bill: So I want to just generally talk something about the future of retail, what it actually looks like. We can speculate about what we think is going to happen in 2018 and beyond to the big retailers, all they are about.
Mike: Cool, so let’s just – and for people that don’t know who you are, let’s kind of talk about just real quick, you sell personal care products, which are best suited for retail right?
Bill: Yeah, so sunscreen, shampoo, body lotion, lip balm, face cream, all sorts of things like that about, oh geez probably over 150 different SKUs now across nine brands. We sell mostly online, we sell them on our dot com, we sell on Amazon, but then we also do about 30% of our business through retail. And when I say retail, that breaks down into both mom and pop stores, but also big chains like Bed Bath & Beyond, Kroger, Target, Kmart, and a number of others.
Mike: Got you. So as you were building your empire of brands, at some point I guess probably when you had your first brand you were like, you know what that business isn’t going well enough, I’m not growing quickly enough, I want to start exploring retail. Let’s just talk about that initial thought process of what you were selling at the time. And I guess probably your first retail client probably was a mom and pop or some local retailer, not a big national chain. What was your thought process there of why you wanted to make that jump?
Bill: Well because it’s so romantic, right? Everybody — you walk in, you want to see your product on shelf in the store. And you figure that as you walk in a store, you see all these brands, you know these are big companies and I want to be a big company. I guess the way to do it must be to get on a shelf in a store. If I could get into a Whole Foods or Kroger, or whatever just think about all the people who would be buying my products.
So it’s very alluring when you’re an entrepreneur especially as you start to have some success. You might even get some inbound calls about this which we did or have in the past. But yeah we started with mom and pop, and there’s a whole set of considerations going to that also. And that actually has in my experience worked out better than doing the big box route, but we’ve done both.
Mike: Yeah I mean the mom and pop stores can’t demand as much, right? They ask for the margin or shelf space spend or end caps or all these other things we’ll get into, national advertising share and all that. But I mean I guess the downside is that they’re smaller orders, you got to go run after them for collections, and they might want you to do buybacks and stuff like that. So I guess let’s just talk about that first, because it is the first logical step is to get into these mom and pop stores.
So what has been better about it for you, and do you think that’s something you’re going to continue to do at that level in the 2018 or have you kind of made a decision even to stop that?
Bill: So we’ve actually made a decision to lean into that, which is pretty interesting. Because the mom and pop stores — the interesting thing about mom and pop stores is they can look, if you manage it right, they can look a lot like B2C. They can look a lot like just big B2C orders except they sell by the unit, they order a case, they order six or ten at a time, which doesn’t make it a big order, maybe a few hundred bucks.
But if you can train them to place their own order on a shop, a dedicated wholesome shop by store or through a wholesale app like order Supple or one of the others where they can discuss sales and look like a B2C customer, that’s a great business to have. They don’t really call you, they place their own orders.
You sometimes have to chase it down for collections, and we’ve actually determined that it’s not even worth making them send checks; we just accept their credit card, because it’s worth the processing fee in order to not have to chase down the one in ten or one in 20. [Overlapping 00:07:33] eat the percentage on all the mom and pops.
Mike: So on a wholesale Shopify store, how are you placing orders with like net terms, how does that work?
Bill: So we use software for a whole circle [ph] to do that, which is actually a software we built in-house, and then sold a year or two ago. It’s basically a Shopify thing that is like a Shopify for wholesale, but it allows you to do terms. I do know there are some Shopify apps out there, but I don’t think any of them support decoupling a payment from the placing of the order.
Mike: Right yeah that makes sense. So I mean what kind of basic terms are you offering those mom and pop stores? Is it like net 30 or net 60, what do you guys do there?
Bill: So net 30, I find they’re kind of all more than happy with. So they get 50% off retail price. It’s standard, you’ll hear that called keystone sometimes. So we give them keystone pricing 50 off for retail. And then we’ll give them net 30 or we’ll process their credit card kind of right way. That’s about as common case as it gets. There’s really no buybacks from the mom and pops. And obviously they don’t cost that much.
Sometimes we are building out actually recently a [inaudible 00:08:40] where we are trying to market to them like we would market to a B2C customer. So we’ll be doing product launches, we’ll be doing replenishment based on when their last order is, hey you’ve probably sold through all the order retention that you bought, time to pick up another case. Or hey, we’ve added another SKU through.
Sort of try to treat them more and more like B2C customers because they are B2C customers in their personal ass. They’re Amazon customers, and dot com customers just like everybody else, so why won’t they work for their stores in that way. So it’s pretty easy, half off and then run a credit card or net 30.
Mike: And what do you do for shipping there, who pays the shipping?
Bill: We typically set a minimum much like you would on a B2C or at least 100 bucks or 250 bucks or whatever. And then certainly we run promo, like we’ll email free shipping for wholesale just to our wholesalers sometimes around the holidays, or if we want to want to try to make a quarterly number or something. We can run specials on them just like we would to B2C.
Mike: Got you, so the typical mom and pop stores getting keystone pricing, 50% off retail, 50% off the retail price you would sell it for yourself on your website, and for the most part giving them free shipping which eats into the margin just a little bit more. So I mean the bottom line here is that you have to obviously have products that have enough margin in there to do this. But what you do obviously personal care products are higher margin to be able to provide keystone pricing and the free shipping.
And I guess the benefits of all that is that especially with these mom and pops type stores you’re talking about, they’re relatively low maintenance, you’re getting your product all over the country a little bit certain time, and hopefully some percentage of these customers are going to see that product in a store, buy it and like and then order directly from you or Amazon in the future where you actually have a higher margin.
Bill: Yeah and essentially you mentioned Amazon because that’s another thing we put in our wholesale agreement. And if there are folks out there that want a copy of our wholesale agreement, I’d like to share it. But one of the clause in there is that you can’t sell on Amazon, because we don’t want a competition for the buy box on our own products. So before you get to open a ‘wholesale account,’ or basically in order to receive that keystone pricing, you have to sign a wholesale agreement. One of the most important clauses of which is you cannot sell this product on Amazon, or we’ll start seeing more and more mom and pops are doing that out of the background.
Mike: Yeah they’re not stupid. So I mean I think we’ve covered the mom and pop thing and I guess the only other I guess disadvantage real quick before we move on is even though they are relatively low maintenance, you got to have a lot of them to really like move the needle because they’re not buying the same amount that Wal-Mart would from you.
So it’s like a lot of like having one contact that you talk to that buys seven figures of product from you a year, it’s like the exact opposite of what happens at the mom and pop parts. So you probably need, there’s more manpower internally to manage that I think would probably be the other like on the downside part.
Bill: Yeah even a very low touch customer, when there are thousands of them becomes a meaningful amount of effort to manage.
Mike: Yeah. Okay cool, so switching gears now to the part that is probably the thing that people I think like you say they kind of dream of. Like everyone — I don’t because like I’ve never. But I think the average person that makes a product like dreams of being in Wal-Mart. I think is kind of like that you think about like the number of stores they have in the United States and worldwide. But we’ll talk about all the math that goes into this, and why at the end of the day it’s not as appealing as you might think.
And for us like my first experience with this was with Bed Bath and Beyond, because they came to us looking to stock our coloring books of all things. And yeah I was like, oh my god like there’s 3,000 or 4,000, whatever the number was, I forgot now, it’s been a couple of years retail locations. They wanted to buy for all these different spots. And that was the only time that I had a positive thought.
As I started digging down the rabbit hole of what they wanted from us, I was just like, oh my God, like who in their right mind would ever possibly do this. And we ultimately said no. But you’ve said yes, and I think you’re even rethinking that. So let’s kind of go through it because I think it’s a really intriguing conversation. So I mean what was the first big box retail store that you got into?
Bill: So the interesting thing is we actually got several of them through acquisition. Those listening, part of our business model is to buy small brands who kind of feel like they’re tapped out, they don’t know where to go next and help them to scale. So we’ve bought one or two brands that had some retail distribution. So I can’t necessarily speak how they got there, but I can speak to what it’s like to be there.
And we for the most part have been looking at we’re having to make some strategic decisions lately about do we pursue more of this business. We’ve been working with some brokers; we’ve talked to a number of large grocers that are carrying some of our products. I’ve kind of run the math on a large discount retailer and looked round Excel spreadsheet and kind of come to the realization that we’re not going to make any money.
And the reason it’s different so as to try to structure this a little bit, the reason it’s different than a mom and pop retailer is because they’re probably going to take that same Keystone margin. Some will take a little bit less, maybe 40%, on the very low end 35%. But there’s a big but, they’re going to want you to commit to a number of things, the biggest of which is what’s called promotional calendar.
So basically they want your product to go on sale four times a year essentially. So if it normally retails for ten months, they want it to be on sale for 20% off a box. So that’s a two dollar discount that the customer is going to receive. But the retailer doesn’t take that two dollars out of their margin, you take it out of your margin.
Mike: Interesting stuff.
Bill: What happens is four times a year they’re going to put your product on sale for two weeks, and then they’re going to multiply the number of units that they sell on sale by the discount amount and then net it down out of the next check for you.
Mike: So just to go over the math for people that are in the job and they’re currently trying to think about this in their head. If it’s a product that you sell for ten bucks, you normally would get paid let’s say five from the retailer, and they’re now going to take that two dollars off of that and basically pay you three.
Bill: Exactly and so you realize that the customer only got 20% off, but you had to give – you had to sell a product for three dollars instead of five. So you had to give 40% off to the retailer because of the way the math flows down. So very quickly you can see how even with a very low cost of goods sold, at least for these promotional periods you don’t have very much left. And they’ll tell you a story about how during the promotional periods, you’re trying to get into more people’s hands and hope that those people come back outside of promotional period.
Mike: And people that are spending your money always have a really good story to tell.
Bill: They always do, they always do yes.
Mike: And the other important part is, I mean yes it’s 40% off discount there, but like it’s more than 40% of your margin. I mean it really, really digs into that.
Bill: Oh yeah. And then in addition, other things that you are responsible for as the brand, damage. So if somebody walks down the aisle at a grocery store and opens up a box of one of our products and rips it or something, they will bill us back for that. They basically can return that to us or dispose of it and get a credit. We ripped it off; we have to refund them entirely even though it was damaged on their watch.
And oftentimes they’ll charge you sometimes fees, so like four times a year in order to run that what’s called a scan down. It’ll be 500 bucks a time. So that would be an incremental to run the year just as a fee for a walk in the door, for going on sale essentially. And often times I’ve noticed that that fee can be higher than the discount that is ultimately delivered to a customer. Like if you’re a small business or smaller brand, the number of units times the discount might only be a few hundred bucks, but they’ll charge you say 500 bucks as a fee.
So as a category of things, these are what are called bill backs. The fees, the TPRs which stand for Temporary Price Reduction, your product going on sale, all that as a category will be bill backs, things the retailer bills back to you the brand. And I learned a horrifying stat lately, and I have to anonymize this. But a very good friend of mine used to work at one of the large grocers, one of the largest. So their gross margin is 28%. That includes revenue from bill backs, all of these price reductions, fees etcetera that they bill back to brands.
So that includes revenue from bill backs. If you took out the revenue from bill backs, what do you think the gross margin of this retailer would be, take a guess?
Mike: You and I have already talked about this; I can cheat and tell you that it was actually a negative number.
Bill: Yes it was negative eleven, which means that on average this retailer is selling the products for less than they bought them for, how is this possible? And the reason it’s possible is because the stuff around the outside of a grocery store bread, milk, produce, cheese, all that stuff, fresh meat has a negative gross margin. It’s about minus 30 because they’re discounting milk because that’s what gets you to come into the store because you know grocer A has cheaper milk than grocer B.
And then you buy all the stuff at a higher margin in the middle of the store, all the wheat things, all the detergent, everything that comes packaged, they make about 40ish percent gross margin there, they make 40 to 50 on the alcohol in a space where they can sell alcohol, and then make 40 to 50 in the pharmacy. So on a blended basis they’re at minus eleven before they start charging all these brands fees.
So ask yourself as a brand whose team are they on. They’re actually making more money from dinging you with stuff than actually selling your product. So it turns into actually a very adversarial relationship a lot of times where they’re — you might be expecting a check for three or four grand. And we’ve gotten checks for three or four hundred amount as miscellaneous bill, and they’ll critically code it these bill backs and you got to call and no one answers the phone.
And the goal of course is to get you to go ask through it, right, and just eat it. Whereas with the mom and pops, they’re much more generally on your team. They’ll want to know about the product, you can call them up, if they have a problem they’ll tell you. It’s a very different relationship that I found with the big box guys.
Mike: Yeah, I think the mom and pop guy can relate to you more. They own a business much like yours, it’s a small business versus the guy at the large national retailers who got a suit and tie on, and they’re making these decisions in a much different frame of mind.
Bill: Yeah, and I’ll give you a few more data points. And I think really what it is, is that these retailers are getting squeezed from every angle. I mean you don’t need to listen to this podcast to know that retail is in trouble, just pull up the news. And the only place they had to push back on is the brands that they carry. And I have a number of other anecdotal data points, and we’ve looked at buying brands that have like full national distribution in some big drug stores.
I have interviewed job candidates that have formally worked for like food and beverage brands that have national distribution. And I mean small brands, single digit millions in sales, the types of people who might be listening this podcast. And without exception, I mean I have almost ten separate data points here from small brands that are nationally rolled out in large big box retail chains. Those brands gross margin after all those bill backs, and all the fees you have to pay the brokers, all that stuff are less than 10% gross margins, before you pay rent, before you pay salaries, before you do any marketing etc.
Mike: And before you pay the guy to manage that whole process.
Bill: Right and I’ve seen it. I don’t think these brands were poorly run. I think that is sort of the math. And I mean…
Mike: Where do they actually make money then, because I mean obviously if that was their only source of revenue then they would be losing money? So they…
Bill: They’re losing money, that’s why they’re for sale.
Mike: I see, okay interesting.
Bill: Yeah and that’s why their people are leaving. I mean I and was interviewing them, it’s bad, it’s really tough. I just don’t think you can build a business that way. I mean we ran our spreadsheets for a full chain rollout at one of these retailers, and we said we’re passing three to four million in product through their registers every year. The net or the gross margin rather to Elements Brands was that $200,000.
Mike: The match is silly.
Billy: It’s silly. I mean on the flip side of the coin though, you’re moving hundreds of thousands of units.
Mike: I just don’t buy into that; clearly they’re trying to sell you in that. Hopefully people like it, and come back and buy more. You can’t make up a loss on volume. So if they’re buying more from that retail they bought to begin with, all you do is lose more money. So the only opportunity you actually have to get out of that hole is if they come to one of your websites directly or buy it off Amazon. And you’re only going to get a small percentage of people to change their shopping habits from where they bought it to begin with over to some other channel.
Bill: Yes and that sounds conceptually like it would work, that yeah over time people become Amazon shoppers. A, you might be bankrupt before that happens in mass, but B, honestly we saw a company that was doing several million through the registers at a large retailer, and they had less than a thousand dollars a month of direct dot com net amount.
Bill: Crazy, so it was not a large fraction of people that were coming back. And I think the lesson though is that so many people are just not using Excel.
Mike: You’re right.
Bill: A retailer goes, great we want it for a thousand stores, and stars in their eyes, hell yeah, we want to do that. [Inaudible 00:23:14] just get an explicit tag again.
Mike: I think you’re fine with that line.
Bill: They say, hell yeah I want to do that. And they roll out in a thousand whatevers stores, and they don’t realize all the costs that come with that. And by the way, if you don’t sell, if you roll out one of these stores and the product doesn’t sell, they’re going to return it to you, and you’re going to give them a full refund, which means now you probably tooled up and bought all this inventory and probably spent the money that they paid you for it, and now you owe them a six figure check.
Mike: Yeah and that’s called a buy back. We mentioned that term earlier, but that’s basically if you’re rolling out a product in a store, and like I said, they take on a risk. If it doesn’t sell, they’ll make you buy it back from them, which is just crazy.
Bill: It’s crazy, and I think this is an important point for everyone to understand. If you’re going into big box retail, you might think you are done when you sell it to the retailer, you’re not. You’re done when they sell it. Until then, it still could come back to you. And so out of that single digit percentage margin I described earlier, the retailers are also going to lean on you by the way to do above the store level marketing. And I mean they literally mean TV ads, or online ads or radio, or whatever in the local markets where you’re rolled out to drive people into store XYZ to buy brand A, your brand. And that’s coming out of your margin.
Mike: Yeah, that was one of the things that Bed Bath & Beyond wanted us to do. They wanted actually 55% margin so we were left with the 45. And then they kept on — I almost was like, okay we would do that even with our margins are lower than yours, but then all the other stuff that like they kept on digging on to it, which one of those was those national ad campaigns.
So they wanted 3% for that so they can run flyers in the newspaper for other products that might not guarantee that we’re going to be the ones getting in the national flyer. They wanted us to pay for end caps, so they wanted us to register displays. They wanted us to pay for all the shipping to each store; they wanted us to ship everything like on an individual basis to store by store. So it wasn’t like we could ship in like a truckload of stuff into one national warehouse. They wanted us to get at each individual store. They wanted like a fee for like damage, there was like you mentioned damage.
I mean the fees like added up, and it was just like literally we were going to lose money. I was just like why would we do this? And there was still people internally here, they were arguing with me, it’s like, oh well you know it’ still good exposure for ColorIt, we’re still a small brand. This is a good way to – I said no, it doesn’t make sense. It’s like my policy of buying stocks, I have a negative PE. I don’t want to do that because it’s just like if the company is losing money, why do I want to invest in them. And it was like a similar situation, and it’s crazy to me that this relationship exist.
Bill: Yeah, well I think it’s because the world is changing. I mean it used to be if you want to take a consumer product to market, you had to go through a retailer. And that used to be your ticket. And those times were different because A, you didn’t have the choice of going online, but B, because you didn’t have a choice of going online, retailers were less distressed. I mean their margins were better. They were bleeding like crazy; they were being squeezed from every side. So it was a little bit when there’s more money being made by everybody, everything is a little bit friendlier.
Mike: Yeah, that makes sense.
Bill: But now I think you’ve got to be absolutely dialed in. So you mentioned everybody told you that you were insane. I watched the movie The Big Short again last night through this lens, because everyone will tell you you’re insane, because the world has changed and they’ve all grown up in this world where L is equal to success. And you’re going to pencil out in Excel and you’re going to go, wait a minute, this doesn’t make any sense. And you’re feel like a crazy person.
And all the brokers are going to tell you; oh you’re so lucky like you get to get it, like this is fantastic, you’re going to make so much money. And then when you go back to them, and I promise we’ve had these always conversations, you come back in this spreadsheet, and they actually just don’t like can’t compute. It’s like common business, you got massive scale. They’re like it doesn’t — like you should do this clearly. And you’re like, no, look at the math.
And everyone will tell you’re crazy. So you have to have a lot of strength just like the guys in the movie who are shorting the housing market when everyone said it was totally fine, and they felt like they are lunatics. That’s what I feel sometimes.
Mike: Yeah and I think that the other thing for me, the thing that like I ultimately put my foot down on this for more than anything was that when you’re a smaller company, I mean we’re hoping to cross the eight figure mark next year, but relatively still a small company. I mean you’re giving up one thing to do another thing, right? So it’s like why the heck would I give up this higher margin business to do this lower margin business? It doesn’t make sense.
I mean I think when you get to a point where you’ve gone through and done everything you can at the higher margin stuff, and you’ve just kind of like hit a wall, that’s one thing, you’re looking for another way to grow. But I mean we’re still a two to three hundred percent growth rate every year selling a full retail direct to consumers. Why would I give up those sales because I can only afford to buy so much inventory at this moment to then have to go through a cash flow hit of epic proportions because instead of getting paid on net zero when the customer gives me the money when they buy from me on Shopify or your net fifteen when they buy on Amazon, now I got to do net 90 or 120 even I think Bed Bath and Beyond was looking for.
And they were like they negotiated down to like 90 days. We were like basically, we were starting to tell them no and they capitulate a little bit on some stuff but not much. And that was one of things that they think they were “willing to give us 90.” And I just like no, like we can’t, this doesn’t make any sense, it just doesn’t make sense, it’s just nuts.
Bill: Yeah and I think you make a good point there that’s broader than this conversation, which is as a small business, as a growing business, everything has an opportunity cost. It’s very easy – and I fall a bit into this so many times to chase shiny objects. But the most finite resource you have is your time and your team’s time are often even more finite than any capital.
So if we were to spin our wheels chasing this huge big box business, that would prevent us from spending our time on a lot of the Facebook marketing that you and I talk about, or a lot of the funnel type stuff, a lot of the retention marketing, stuff that is hugely profitable on a relative margin basis and is continuing to work. So why take your eye off the ball?
Mike: Yeah I couldn’t agree more. So in the last couple of minutes we have hear of this episode, I’m curious, I mean it’s obvious, now if I’m reading between the lines at this point, it’s obvious like what your stance is on retail and how it fits into your business. What I’m really curious is are you at a point where you’re going to go back and just dismantle the relationships that exist, or are you just going to in 2018 just not chase any new business in this regard and let what already exist kind of stay there because it’s there, and why not? Where are you at for 2018?
Bill: So this is the answer, this is interesting. So we have decided, you’re right, we’ve decided that strategically this is not a great place to spend our time chasing down these big box retailers, going to all their meetings, pitching. They’ll say, oh we love to do it except change this about repackaging, and that’s not a trivial thing. And so we’ve decided we’re not going to do anymore that. The business that we have, we’re not going to tell them we don’t want their money anymore.
But what we’re going to stop doing is agreeing to all the BS. So for example one of our large retailers came back to us a few weeks ago and they said, so our stuff comes in packs of six. And they said, you know packs of six that’s fine, but that means that we have to send six units to every store. That is causing us to carry too much inventory. We really rather only send three units to every store, so we were wondering, could you guys pack it in cases of three instead of cases of six?
Well you can imagine how much A, extra hardware that is, and B, extra work that is especially if you are selling most of your units online. So you’re having to unpack…
Mike: So much stuff.
Bill: Right and waste on all that cardboard, paying for all that cardboard. And so we said, no we’re not going to do that. And they go okay great, you’re out. Somewhere probably we’re going to come out of that retailer. So our strategy is we’re just not doing anything special anymore. We’re going to spend our time — we have a team here that’s great that focuses on wholesaling. They’re going to spend their time on the mom and pop accounts, and the regional chain accounts that are not high maintenance and don’t crush us with bill backs.
Mike: Yeah, it makes a lot of sense.
Bill: And other guys, we’re going to keep taking their money, but when they ask us for stuff like three packs, we’re just going to say no and see if they blink. And they kick us out, that’s fine.
Mike: It is what it is I guess, right?
Mike: It’s amazing to me that that conversation even happens, because if you’re a national account, and they’re saying that sending six units into one store is too much, I mean your stuff is not really selling that much in each store anyway.
Bill: So let me tell you, this shocked me also. So in our category which is beauty, this particular retailer is a grocer. That kind of pharmacy, beauty area, at a grocer, if you move one unit per SKU per store per month, you’re doing okay, right? So think about that, you get a thousand stores; wow we’ve got a thousand stores, right?
Mike: You’re selling 1,000 units a month.
Bill: That’s a thousand units a month.
Mike: Which you can do like in one day of work on Facebook ads.
Bill: Right, and oh boy the headache that comes with that thousand units a month.
Mike: Wow that’s insane. I mean you put that into perspective and it really is completely mind boggling to me. And the retailer is happy with this I guess, right? I mean at the end of the day that shelf space if they’re moving one unit per month, is that — it’s worth it for them I guess. That alone seems mind boggling to me.
Bill: You could argue that at this point kind of their whole business model is not really [overlapping 00:33:36].
Bill: But yes it will not necessarily rip you right out at once. And then again at one unit per store per SKU per month, but again that’s my category. If you were like bread or like the little bars [ph] that would be way too slow.
Mike: I mean you would just think that if they made their footprint 25% smaller and chopped out the stuff that doesn’t move, that that would be more economical for them than having stuff that just sits there and collects dust.
Bill: I can’t explain it, I really don’t know. You would think, it must be it is just that little bit is for footage and they get a 50% gross margin on it, it costs them less than $50 whatever the margin is per month. I don’t know, it seems crazy to me too. But that gives me an idea too, you go, oh thousands of stores. I mean you might go in with two or three SKUs, but you’re probably — if you get the national rollout with a chain, several thousand stores, you’re looking at a few single digit millions in sales tops, and a lot a lot of costs that goes with that.
You really need to if you want to make it work, you’ve got to be with a lot of chains, and you got to have a lot of SKUs. And you’ve got to watch the bill backs like a hawk.
Mike: Yeah, I mean when it comes down to would you rather sell a million dollars in product at 50% margin, or would you rather sell five million dollars in product at like 3% margin.
Bill: Right, you’d rather do less at better margins, it’s less headache.
Mike: Yeah. I mean the whole problem is that I think part of our society in entrepreneurship we’ve talked about this in the podcast before, it’s like everyone’s always like what’s your revenue, what’s revenue. So it strokes your ego and you’re like, oh I sold five million dollars of stuff last year. But as Dave always says is that revenues are vanity and profits are sanity.
Bill: Yeah and when you talk about vanity you tell your grandma that you’re in Target.
Mike: Right exactly.
Bill: Or Wal-Mart or whatever. That’s serious vanity, but you probably…
Mike: I’m in Target grandma, but can you lend me some money to pay the rent?
Bill: Right. Please go to Target and buy it.
Mike: Yeah, crazy. All right man, we’re running a little bit late, so we’ll leave it there. I could talk about this for another half an hour because it is a crazy subject. But we made the decision just like you that was we can do it in a different way, but it isn’t for us. Maybe someday when we have a higher margin product and we have a personal care brand and we’re trying to conquer the world or something I don’t know, but for now it is definitely not our focus.
We’ve been focusing on direct to consumer and at the high margins, and for us even the mom and pop shops aren’t really worth it because there’s not a lot of mom and pop shops that deal in coloring stuff. And we don’t want to go out and hire a full time mid five figure a year employee just to like manage that whole process because even that it isn’t worth it for us. And maybe if you have a higher margin product like you do, then it is worth it, and that’s the place to be. But I think clearly that the big box retailers is you got to have your head examined before you really give that a consideration.
Bill: I think you just need to make decisions with data. And it’s shocking to me always how few people do that. You need to make decisions with data and trust your spreadsheets.
Mike: Yeah, take emotion out of it and use the data.
Mike: Cool man. Well I appreciate you doing this with us. We’ll get you back on as soon as we can.
Bill: All right, it sounds good. Great talking with you Mike.
Mike: Thanks Bill.
And that’s a wrap. I hope you guys enjoy this episode of the EcomCrew Podcast. Again you can go to the show notes episode number 114, EcomCrew.com/114. Bill I want to thank you again for coming on the show today my friend.
Bill: Yeah glad to be here, glad to be here. And if anybody — I mentioned the wholesale agreement earlier in the episode. If anybody wants a copy, please drop me an email. It’s [email protected], or you can find me on Twitter @BillDA. Yeah that’s where you find me, I’ll be happy to share.
Mike: Cool, and don’t forget everyone, Bill is on the prowl for consumer product type businesses. So if you have a consumer product business you’re thinking of potentially selling someday, or you just want to kind of shoot the crap to Bill about that, definitely shoot him an email or find him on Twitter. He’s the real deal man. He’s trying to consume like the Borg [ph], consume a business a quarter in 2018. Obviously I’m being facetious there; he’s trying to acquire a business a quarter in 2018. So he’s definitely interested if you have a business that’s interesting, definitely reach out to him.
Bill: Yeah and even if not personally interesting for me, I can point you in the right direction or help you to get geared up to sell your business, or I just love to help generally.
Mike: Cool. Again Bill I really appreciate it. Guys again EcomCrew.com/114 for the show notes. Bill will be keeping an eye out for any questions that come on the episode as well just like he did the last time we talked. And thanks so much again for coming on, and we’ll talk to you soon.
Michael started his first business when he was 18 and is a serial entrepreneur. He got his start in the online world way back in 2004 as an affiliate marketer. From there he grew as an SEO expert and has transitioned into ecommerce, running several sites that bring in a total of 7-figures of revenue each year.