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Why Landing at a Big Retailer Wasn't Our Golden Goose

December 26, 2013
URL: http://www.entrepreneur.com/article/230538

If your startup is focused on offering customers products, landing at a big-name retailer may not always be the best route.

That said, my audio-equipment company OrigAudio, did experience benefits from partnering up with the likes of Bed Bath & Beyond and Nordstrom. For one, it was great brand exposure and these partnerships meant huge sales volumes that most likely we would not have been able to achieve otherwise. However despite record sales, we were shocked to discover net profit was lacking. The product was a winner, the price point was right but retail was not the golden goose we expected.

For startups looking to enter the retail space, here is some obstacles we encountered -- factors you should consider:

It all adds up. Why didn't a homerun product give us homerun net profits? The largest issue was all the unexpected costs that come from doing business with a retail giant. From warranty exchanges to retail marketing fees, these costs add up faster than you can imagine. 

Related: How This Startup Turned an Inventory Nightmare into a Customer Gold Mine

Also, unique to in-store retail is you are responsible for the cost of the point-of-purchase displays in each store -- a rather high expense. For instance, the display for our top-selling Rock-It speaker set us back $45,000 to outfit one retail chain.

Furthermore, even if you do end up turning a profit, you won't be seeing that money for a long time as most retail giants enforce 90-day payment terms on their manufacturers.

You're the responsible one. Not only are there monetary "hits," there are also several issues that you may not have considered before throwing your product into retail locations. Most stores have incredibly lenient return policies, which you end up carrying the burden. For example, Walmart, has a pretty limitless return policy where someone can buy and use a product and essentially return it whenever they got tired of it. Through no fault of the product, the manufacturer is now responsible for the product, one that is in no way faulty but cannot be resold.

Cash flow is a major headache. Besides the lenient return policies, the payment terms are anything but fair to the manufacturer. To produce products, most companies have to buy raw materials for their products up front, then wait about 40 days for their products to be produced. If the products are produced internationally, add more time to have it delivered to the retailer (for us, we had to wait an additional 40 days to get our products shipped form China). Once the product arrives, the 90 day period stated above kicks in. When it all adds up, that's more than 170 days you'll be responsible for floating the cash to hope your product sells at retail If it doesn't you'll pay the majority of your payment back to the retailer, thus making it impossible to manage cash flow.

Related: 10 Questions Every Entrepreneur Needs to Ask Suppliers

After our experience selling to major retail locations, we decided to change our strategy to focus on selling directly to consumers through our ecommerce site and more importantly, becoming a supplier in the B2B industry.

Why we pivoted to our B2B approach.
They say you must adapt to survive. Once we realized retail was not the product nirvana everyone claimed, we changed our outlook on our business. We determined that our products were uniquely suited to customization -- with options of designing your own speakers and later headphones. So we saw an opportunity to dominate the B2B world as a promotional product supplier.We noticed companies that sold somewhat boring products such as cups, pens, mugs and t-shirts dominated the promotional industry. Since we had completely different customizable products, we decided we could make a major splash in the industry.

As a supplier in the promotional industry, there are no additional costs of doing business outside your operations costs (i.e. producing, printing, and wages).Payments are made upfront, the distributor or clients covers the cost of shipping and there are no returns since everything is privately labeled. Distributors are also interested in selling your whole line of products if it fits their individual clients the best, whereas most stores are usually only interested in just a few of your products. 

Although B2B has been a major boom to our business, sales are far less predictable than in retail. We could have an order for 10,000 headphones in one month and one for 300 the next. Overall, retail has been a great learning experience but B2B has been what's allowed our business to flourish.