How to get your distributors to lower their margin rates

As a brand integrated into a distribution network, you may legitimately wonder how your retailers define their margin rate. In addition, the power dynamic, often favorable to distribution, may leave you feeling helpless in the face of your partners.

Well, it doesn't have to be that way: you also have levers to influence discussions with your distributors in your favor! Sidely therefore suggests looking at the techniques that will allow you to get supermarkets to lower their margin rate on your products.

But before we look at the tools you have, we will review the definition of the margin rate, and then look at its impact on your pricing strategy in mass retail.

Gross margin rate: definition

A few basics to start with. 

The gross margin is the difference between the purchase or production cost of a product and its selling price.

The margin rate is therefore an indicator that evaluates the profitability of a product. It is obtained by dividing the commercial margin by the purchase or production cost.

Here is the formula to determine the gross margin rate applied by your distributor on your product: 

• Gross margin = (selling price - purchase cost) / purchase cost.

Supermarket margin rates

Be careful not to confuse the gross margin rate with: 

• Its namesake "margin rate" used in corporate finance, which assesses a gain or loss in relation to the revenue of the company concerned;

• The net margin rate: this indicator relates to profit, because it takes into account your distributors' expenses, such as operational costs, which they pass on to the resale of your products. Thus, their pre-tax selling price incorporates direct costs, general overheads, and profits, which are often referred to as the "net margin."

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Gross margin and net margin: understanding your distributors' costs

It is therefore fundamental to differentiate between gross margin and net margin. Because, although mass retail can achieve gross margin rates sometimes exceeding 50%, only an in-depth analysis of the associated costs would make it possible to precisely measure the profitability achieved on a specific product. For example, supermarkets generally have higher costs on fresh products, as handling perishable goods involves additional staff costs.

Ultimately, the net margin of supermarkets is generally between 1% and 3% depending on the products concerned.

But, in the end, what impact does this have on the sale of your products?

Pricing of your products in supermarkets: the impact of the margin rate

In the complex dynamic of mass retail, your brand's pricing strategy plays a decisive role in maintaining your sales volumes. Many brands opt for price stability to preserve their market share, a move that can, however, clash with distributors' pricing policies. Indeed, distributors may be tempted to increase retail selling prices, directly impacting consumer perception and, potentially, sales volumes. So, how do you avoid this pitfall?

A lower margin rate from your distributor could translate into an increase in sales volumes, provided that this reduction is properly calibrated and does not affect the brand's overall profitability. Furthermore, it is essential to work on the marketing visibility of your products. A differentiated and well-targeted marketing strategy can help strengthen your brand's attractiveness and maintain demand, even during price fluctuations.

Brand image and consumer perception

It is crucial to note that, in the consumer's mind, it is often the brand, and not the retailer, that is perceived as responsible for price variations. This perception can have significant consequences on brand image and customer loyalty.

It is therefore up to brands to work in close collaboration with distributors to align pricing strategies and ensure transparent communication with consumers, thereby dispelling misunderstandings and strengthening trust in the brand.

But let's get to the heart of the matter and examine how distributors determine their margin rate.

An opaque system that brands struggle to read

In 2019, an article in Le Parisien revealed the high margin rates applied by mass retail on certain products, but also the surprising gap from one aisle to another, or from one product to another. The newspaper had also already pointed out a phenomenon of over-margining on organic fruits and vegetables, 75% higher than those of other products, and even noted completely different variations from one product to another within organic, showing the ability of supermarkets to interpret purchase reasoning and adapt their margin rates to maximize sales. A level of information that you, as distributed brands, are deprived of most of the time, due to lack of access to store checkout data, the holy grail of data sharing.

The same year, also on the theme of organic, Que Choisir considered that retail gross margins had a considerable impact on the final price of foodstuffs, pointing out that these gaps were not justified by any figures related to "distribution costs between organic and conventional."

Margin rate: regulatory framework in mass retail

In France, selling at a loss has been prohibited since 1963, which means that your distributors are not allowed to resell your products for less than they bought them from you.

Since 2019, the EGalim Law also requires distributors to operate a minimum margin rate of 10% on the resale of foodstuffs. EGalim also sets a tighter framework on promotions by banning operations of the "two products for the price of one" type.

On the other hand, there is no legal maximum margin rate, due to a lack of legal provisions in this area. Distributors are therefore free to set margins as they see fit.

Thus - as we will see below - determining the margin rate on your products depends instead on factors external to the regulations, such as demand and competition.

The main factors used to determine the margin rate

On highly in-demand products distributed by competitors, such as Nutella and Coca Cola, retailers tend to lower their margins, for fear that customers will prefer another banner. However, even a low margin rate can yield profitability for the distributor if the sales volume is there! Furthermore, distributors make up for it by operating much higher rates on products that are currently trending, as in the case of organic in 2019.

Thus, from one product to another, the variations that exist in the margin rate can be gigantic, ranging from 1% on some products to over 50% on others! It is therefore obvious that the margin rate depends largely on "the law of the market," a subtle blend of competition and demand.

Ultimately, there is no single way to determine a margin rate, and companies tend to keep these secrets hidden from prying eyes, due to competition. However, we can cite the main criteria that allow distributors to establish a margin rate:

• Operating costs: transport, storage, communication, etc. these figures are allocated to the product concerned;

• The intensity of competition: if competitors offer the same product, a distributor will tend to avoid over-margining to avoid being disqualified by a price deemed too high by consumers;

• The overall strategy: distributors and retailers take their overall commercial approach into account to determine ratios by product family and by product. A loss-leader strategy can, for example, lead to sacrificing margin on a product that generates store traffic or increases the average basket size;

• The forecast or observed sales volume: it is sometimes preferable to lower the margin rate to sell more. Conversely, low revenue can trigger an increase in the margin to compensate;

• The psychological price: often confused with the magic price, the psychological price defines the final amount (including tax) that the buyer is willing to spend. Margin is the first lever to pull to adapt its price to consumer expectations, unless the supplier is required to waive their own margin;

• Chronic vs. impulse purchases: for a product that is rarely bought, or bought unexpectedly, the consumer is likely not to have the competitors' prices in mind. The distributor then benefits from greater leeway.

How brands can use these elements to influence discussions with their distributors

The variation in margin rates from one product to another is not trivial for brands. Indeed, consumers are not equipped to interpret price levels in mass retail. Thus, the high price of organic products leads people to believe that production costs are at the root of the high price, when it is clear that the distributor's margin is also significant. And when the consumer feels that a product is being sold to them at an unjustified price, it is first of all the brand's image that suffers the consequences.

But, considering the elements mentioned above, we can see the factors on which you can act as a brand.

Distribution strategy

Not everyone is Coca-Cola, of course, and in most cases, your distributors will try to impose their conditions on you. Faced with this reality, one option is to rethink your distribution strategy.

Indeed, choosing a more intensive distribution model could have the effect of increasing the pressure on retailers and decreasing the impact of the retail margin on the price to the consumer.

In the case of an exclusive distribution strategy, you will attempt to control the margin rate through the clauses of your distribution contract.

There is therefore a strong correlation between your strategic choices in terms of distribution channels and the margin rate applied by your distributors.

Mastery of psychological pricing

Measuring what your typical customers are willing to spend can allow you to rethink your costs through reverse engineering. If your analysis is robust and based on a substantial database, share it with your distributors, showing them the gap between your internal costs and the known psychological price.

In a win-win collaborative approach, encourage your distributors to apply a margin rate that favors maximizing sales. Thus, rather than just delivering a recommended retail price after surveying competitor shelf prices, you demonstrate to your partner a real ability to listen to the market and a virtuous logic of collaboration from which they too will benefit.

Chronicity of purchase

As pointed out earlier, when a consumer buys a product sporadically, they are less likely to have a price in mind. Your distributors know this concept... If your products belong to this category, prepare to address the topic during your visits, and prepare your arguments!

Competitive intelligence

Finally, as we saw above, the margin rate is heavily correlated with the laws of supply and demand. Thus, a pricing strategy only makes sense in relation to the prices charged by your competitors. Whether it is monitoring the retail prices charged by your distributors or strategic price changes made by your competitors, optimizing the collection and reporting of pricing data in stores requires the use of a CRM application designed for retail.

The margin rate applied by supermarkets is a well-kept trade secret. That is why we have deciphered how your distributors might determine it. It is vital for you to measure the impact of margin rate variations on your products, and you now have a number of tools to rebalance the supplier/distributor relationship and push your partners to avoid over-margining. You can now work on your arguments and try to develop cooperation to achieve your commercial goals together!