264. Retail Said Yes. Your P&L Might Say No. How to Pressure Test Growth Before It Breaks Your Brand

0:01Abby Richards:Welcome to Startup to Scale, a podcast by FoodBevy. I'm your host Jordan Buckner. Join me as I talk to aspiring entrepreneurs, seasoned industry experts, and everyone in between as we unlock the keys to growing from startup to scale.

0:20Abby Richards:Getting approval from retail feels like you're moving the business forward. You land the PO, you start seeing your product on the shelf, and it starts to feel like you're really going somewhere. It feels like nice validation. But getting a yes from a retailer doesn't actually mean your underlying business fundamentals work. You can scale into hundreds of stores, move a large amount of volume, and still lose money on every case that you sell. That actually happened to me. Like I lost money when I was selling T-squares into hundreds of Albertson stores because I didn't understand all the fees and deductions that came with it.

0:56Abby Richards:So today I invited on Abbie June Richards, who is the CPG CFO, to break down kind of how to actually evaluate retail opportunities, thinking about things like contribution margin, cash timing, and kind of the real cost of doing business. Whether you are just kind of starting out in retail or you have been in retail for a little while, but you're trying to really just get the footing under you. Really kind of want to break down some of those key concepts so that you can have the right mindset and moving forward. So, Abby, I'm excited to have you join me today and welcome to the show. Yeah, thanks, Jordan.

1:29So excited to be here.

1:30Abby Richards:Someone once told me that CPG is harder than it looks. I love the stickers that you made around Expo as well. I think those are like really cool, but it's so true because I love it. The getting to like starting a product and like starting in the food business feels like one of the easiest businesses to do, quote unquote, because like everyone can that most people can like cook and make something. and so you're like oh i have a product i just need to start selling into a couple stores but then you realize like it's not just about having one retailer like velocity and volume have a real role to play and the kind of barriers are really high and so i think a lot of people are really confused by that when they start getting into retail and so yeah i kind of want to start out talking to you like founders are getting a lot of retail yeses right now i see a lot of them like launching in new stores and expanding.

2:22Abby Richards:I'm kind of curious, like, what's your first reaction when someone's like, hey, I just landed this big account. Like, shouldn't I be excited? What kind of goes through your head? Yeah, I mean, getting that yes from a retailer. I mean, you mentioned that it feels, you know, validating. It's definitely an exciting moment. But I like to say it's like a hurdle in the race, right? It's not the entire race. And there's so much more that comes after that. It just means that you now have the opportunity to truly win, right? You have an opportunity to win in that retailer if the economics and the cash position can support it.

2:58But I'll give a quick plug for our cash fight framework. That is one of the things that we use because there are so many different angles to look at, right? Like so many different things to be thinking about and optimizing and improving over time. And that's, it's a lot to handle for sure.

3:14Abby Richards:So as you're kind of evaluating a retail opportunity, maybe like with a brand, what kind of numbers do you look at first to understand like what the opportunity could look like for any given company? What questions do you ask? Yeah, of course. So, I mean, we're starting with the case price, right? Because that's your revenue, your gross revenue to your customer, whether that's the retailer or distributor. Then you have to layer on trade spend, which reduces is your revenue, your COGS, which is everything that it takes to get the inventory ready to sell your fulfillment, right? And ideally you're landing around a 30 to 40 % margin on net revenue.

3:56And that's important because you still need money to market, right? Do demos and ideally maybe cover a little bit of your overhead, overtime, maybe a little. It'd be nice to pay yourself at some point. I know it definitely will and I think that that whole like margin calculation

4:14Abby Richards:piece I found to be really tricky because in starting off especially like for the first time like okay we let's estimate trade spend is 15 maybe 20 just as a benchmark and here's our product cost so we know there's going to be some distributor fees but let's kind of model that in what it could be. How much of a discrepancy do you see between people like modern really like figuring out like modeling what their margin is going to look like versus the reality of like once they start selling and seeing the real numbers that come in. Yeah, I mean, yes, founders, they get that contract from the distributor.

4:50And I think it seems to be that they think these are normal terms, right? This is the normal thing. They're excited, right? Maybe they finally got the anchor account or the distributor said no before, but now they're saying yes because they have a retailer that will sell through. And so it just feels like forward motion. It just feels positive. And they're like, well, this is the contract. It's like signing with your cell phone, right? You don't redline cell phone contract, right? But with the distributor, it's very different because you need to understand all those fees, right? Reading line by line, understanding what have you agreed to, whether it's, you know, OIs, having an understanding of how bridge buying can occur.

5:32Did I agree to an early pay discount, which is, you know, 2 % on, on a 20, 20 days faster payment is like 37 % APR. And if you have leverage, it's possible you could ask for that to be taken off. Right. But, um, I think that's, that's the difference is looking at, you know, all those different little mechanics, reading the contract really, really carefully, understanding the DC opening fees, right? Just making sure you understand all of it because most trade spend is valid, right? Like, yes, there are deductions that are goofy that come through there for a different customer or different vendor.

6:12There are definitely mistakes and there are ones that you can reverse, but a lot of it is valid. A lot of it was in the contract to begin with.

6:20Abby Richards:Yeah. And it's interesting because I think I hear from two founders, like there's some that just don't understand the contract and what they're signing up for and all the fees. And I think that's really hard. As a founder, it's your responsibility to read through the contract, get a counsel if you need to understand what that means, or someone who understands how distributors work. If it's not an attorney, they don't know. They just can read the contract. Someone like your son who actually knows what that means. But I also hear from other founders, and I feel like I was in this camp where I theoretically understood the fees from a contract perspective of like, there's a new fee to open up a DC and then there's a new fee to do like marketing support and all these other allowances.

7:03Abby Richards:What I didn't understand was the timing of it all. And that sometimes that hits all at once, right? So maybe you send out your first$15 ,000 invoice for a second, and then they're actually deducting 80 % of that because of all these fees happening at one time. I'm like, oh, wait, I actually thought that might happen across the entire year, not on one invoice. And then it happens the other way where I'm like, OK, I can estimate this amount of deductions on the first invoice. But then there's additional fees from that original invoice that happen three, six, nine months later. Then I'm like, oh, I sent out an invoice.

7:37Abby Richards:I got paid. But now they're deducting from this other thing in the future for the same invoice. And then like the timing really throws you off mentally because it's hard to reconcile how all of those layer to be happening. Yes, yes. I won't go too deep into accounting, right? But there is the concept of accruing, right, for trade spend. Yes, understanding if you're saying yes to opening to DC opening fees or you know that that's in the contract, you know, you definitely need to understand how many DCs are there? Which ones am I am I pulling into? I've also seen where brands have in their contract that the distributor can sell to anyone, right?

8:17Open retailers anywhere. And, you know, it's possible that a retailer could say yes to you just to get a free fill. I mean, possible, not never has happened, right? So I would never say yes to you can open any retailer you want to. You can sell to anyone you want to. I would want to have control over that because of the free fills. And then also just wanting to pace yourself on which DCs you're opening and making sure you have critical mass with each one before you move on to another one.

8:45Abby Richards:Yeah, and I think I like that one in particular. I remember getting counseled on that when filling out paperwork. I forget if it was you on the fire or Katie at the time. because on the paper it says, would you like us to pitch retailers on your behalf essentially and provide, you know, a free fill for their first order, right? And you're like, oh, I would love their help selling my product into more stores until you realize that they only might order the free product. And because you don't know or you're not set up to support them, like it doesn't sell and then you're out of free product without having that control, as you mentioned.

9:21Abby Richards:And so I think there's a lot of pieces like that where founders without the experience cannot envision the ramifications. Like if there's no limit, right? And they're like, oh, a thousand stores will order and we're going to give free fill. That could be all the product that you sent to the distributor for your first order and you get paid for none of it because of this one checkbox. Yeah, absolutely. I mean, the margin's one thing, right? Calculating the margin is really important. Definitely would never say that that margin isn't important. But that's really only the first layer, right? as you alluded to, is like now we have to ask how much inventory do we need up front to fill these orders, right?

9:56And then thinking through when are you actually going to get paid on everything? Because, you know, we talked about this distributor payments. They may make you wait for the first payment while they're looking for sell through, right? That's in the contract. If you look, it's not going to be necessarily normal terms. And to your point about it being difficult to map out, I mean, I have come into teams situations. They're already doing millions in revenue, right? And they have a big launch on the horizon and everyone underestimates how much cash they're going to need for that until we actually actually map it out.

10:33Abby Richards:So let's talk through that because I know cash and timing is where a lot of brands get into trouble because that cash conversion cycle can be so long. And so let's kind of break down how you think about that cash cycle for brands and all the things they need to think about along the way. Sure. Yeah. So in terms of the cash conversion cycle, I'll just define it really quick. So is the time it takes from the time that you buy your inventory until the time that you get paid back from it, from your customer. And so that will include not only the time that you pay it, but you don't actually get the inventory, right?

11:11Sometimes there's an aspect of that. And then it's also the time that the inventory on average, right? Because a lot of this is averages. How long is it going to sit in your warehouse, right? Typically, you're not necessarily going to be able to do it just in time for everything, right? It's going to sit in a fulfillment center somewhere for at least a little bit of time, hopefully not too long. And then you have your terms with your customer and that adds even more time, right? And when we're thinking about the big picture, the time that you can take to pay your vendors comes off of that, right?

11:42So if you're not repaying for your inventory, if you get terms with your supplier, with your co-packer, let's just say you're co-packing, that can help you out with your cash conversion cycle. So just want to make sure and kind of define that first. And then second of all, I like to look at your margin and then the balance sheet and cash flow impact of each customer, right? Channel, typically, we kind of think about on a channel level, similar margin profile, similar cash timing and whatnot. Because knowing those different pieces, right? When you're modeling out D2C, you don't want to think about accounts receivable, right?

12:17So that's totally separate. You don't want to model your cash conversion cycle for your company as a whole. So I like to keep them if we're if we're getting nerdy in terms of a spreadsheet, it's on different tabs. I mean, that's the bottom line.

12:28Abby Richards:So then you have or have you figured out ways of modeling what that cash looks like in every situation? Like, do you advise like do your team or have clients advice where you're looking at for like every retail order, every purchase order to lay out like how those cash conversion cycles overlay? I think in theory, like if you have one order, like you're purchasing, doing one production run, you have one retailer and they're buying it all. It's fairly simple. But when you start having overlaps of two, three, four, five, and they're all happening at different times, is there a way of keeping track of that or kind of what's the best approach?

13:03Yeah. So it will say that that rolls into cash fight. So it's the A in cash fight. A is an alert level and it ties into cash flow forecasting. Right. So we have the financial. Typically, we want to have two different models. Right. So we have the financial model margins, high level cash flow monthly. Separately, we have a cash flow forecast and that is going to include specific POs, specific customer invoices. Right. We're getting down to the nitty gritty because we want to know over the next three ish months what is going to happen with our bank balance. And you can always extend that. I actually had a client one time who was like, can you just extend this out to 26 weeks?

13:41Because we want to be really specific and we have all this data and we just want to put it together. And I did that and I was like, yeah, it looks like we need about three million dollars. Right. And that again, everyone's like, no, that can't be right. I'm like, no, it is. It is. You're launching it like Kroger and Target and and and.

14:00Abby Richards:Yeah, I think that's what's so important, right? Because it's not like they're all ordering in one bulk order and then you deliver and get paid at the same time. Right. Like you sell the first product and while you're waiting, someone else is ordering. You have to fulfill that order and maybe a third client you need production for to fulfill that order. And so you're still waiting to get paid from the first before you have to fulfill these other additional orders. And I think that's the mindset shift that gets a lot of founders in trouble because it's hard to visualize that. And with so many moving pieces and they're just like, I can't even see.

14:33Abby Richards:So I think that's why it's so helpful to talk with someone who can help you visualize and lay out exactly like what you need for cash, because I think it's so, so important. Yeah. And I mean, we again, it's the Cash Fight framework. And we also have a free cash flow forecast Excel tool, just something it's pretty basic. It's not anything like most founders should be able to use it. Right. But it it's asking for the nitty gritty. right? It's what's currently, so on the customer payment sheet, what's currently in AR? Let's map out getting paid on that. What's in the pipeline, right? Like what do you have POs for?

15:08And then, okay, because that's only going to maybe take us out to eight to 10 weeks. Let's do some demand planning, right? What do we think that people are actually going to order? Because if we want to go to 13 weeks, we can't just rely on what's in, for instance, QuickBooks today.

15:21Abby Richards:My goodness. So I think it might be helpful too, because I know you referenced it, to walk through what the cash fight model is and kind of what are those key components within there? Yeah, you're going to get me. Okay, I'm going to try and do it. I don't have it handy. So it's the conversion cycle is C. A is alert level. S is shelf pricing. Which is shipping and fulfillment. F is financing. I is inventory. G is goods sold. Which is overhead. And T is trade, spin, and marketing. Love it. You got it. Yeah, there's just a lot to think about. Which has been a while because there's so many components, Justin, what you mentioned there that like someone needs to keep straight and like understand the effect of everything.

15:57Yeah. And that's what finance is, right? We're looking at everything like big picture. We can go deep, right? Like we can go nitty gritty, but it's knowing when to stay high level and when to dive in. And if, you know, that's nine pieces. If five of those are looking great, then you know you need to work on the other four, right? So it helps you kind of zero in. I will say that when I'm thinking about sort of triaging, you know, what's important and what to start with. One big mistake I see is just underpricing. So one thing I say, it's a little tough, but it's like, if you're special, charge a premium, right?

16:33Don't feel like you have to price with the incumbents or even beat them in some cases. Like I've had founders, well, I'm new. I need to like come in under, kind of earn my spot. I'm like, no, if you're special, charge more. And if you're not special, what's the point?

16:47Abby Richards:I think, you know, I will say I've been in this industry a long time. I've created a product that I transparently say, honestly, say like with running T-squares, right, I made T-infused energy bars and we never achieved product market fit. our product had very little inert demand. There was no existing demand. All the sales that we built, we essentially had to educate every customer on to become a customer and a supporter. And that was extremely expensive. And I think the reality is, whether I say it or just look at the numbers, is that most of the businesses in CPG or not will not survive. And that's not to discourage you from doing it is to say, how can you be intentional with the product that you are creating and the business model behind it to set yourself up for success at the beginning?

17:38Abby Richards:Because I think a lot of people have an idea of like, oh, this would be a really cool product. I did. I was like, what if I could eat my tea because my tea always gets cold because I make it and I never actually get around to drinking it. And so I put that in a energy bar essentially so I can eat it at any time. But you know what? That wasn't actually a big problem for people. Like people were not willing to pay for it. I think that's where a lot of founders get into trouble because they're like, I'm not actually solving a big problem for people. And if I charge a lot for it, they're not going to buy.

18:08Abby Richards:So I feel like I have to charge too little for it just to try to make it a easy decision to get them to try it. But that creates a big disincentive and like you can't build a business that way. Yeah, absolutely. I mean, that's another mistake is, you know, not really having the sell through. You sell to a big distributor and it doesn't sell through. I've seen brands get delisted and end up owing the distributor more money than they even had in revenue for the year. So if you sold a certain number of cases, you get to$30 ,000 in revenue, but you have$40 ,000 in chargebacks, your revenue is negative.

18:44And that's before you even pay for your cost of goods sold, fulfillment, anything. I've literally had brands reach out and say, how do I record this? My revenue looks negative. And I'm like, it is negative. That is the correct reporting.

18:58Abby Richards:I guess as well. And I know that like, I mean, what thoughts or advice do you have for founders who don't quite have the velocity yet to make these large jumps in distribution, but at the same time they're running out of cash? And so they feel like they have to say yes because they have the vision of getting this big check for their initial purchase order or their initial invoice. And they're like, I know we're not quite ready, but I kind of need the money. And I think that's a lot of tension that a lot of founders end up having. Yeah, I mean, the short answer is that retail isn't a big cash play early on.

19:32Right. That's just not a reason to get into retails because you need some cash right now. Right. That's the short answer. I mean volume doesn't fix economics if you start out with really weak margins you're going to gain a few points through economies of scale over time but it's not going to be this huge windfall and more volume usually creates more cash problems you're going to need inventory you're going to need support and eventually even more overhead right you're going to need to hire someone to help you and it can just get into this snowball effect with cash that's really unfortunate I think

20:08Abby Richards:that is the thing that happens to a lot of founders and a cautionary tale not to do that because it does not get easier. It's very difficult to pull out of retail once you realize the mistake it is before you hit those velocity numbers. So as hard as it is, achieve that high velocity numbers for your category where you can feel confident in that growth before expanding your distribution, even if you feel like you need the cash, because that's only going to put more pressure on you, not less at the end of the day. Yeah, you definitely have to think before you say yes, right? Let's let's say they give you a yes, but that doesn't mean you have to respond with the yes, right?