If you’re an entrepreneur creating handmade items or artisanal food products, being approached by a large retailer can seem like the perfect opportunity to grow. Big retailers are increasingly looking to small makers to meet consumer demand for niche products, from the West Elm Local program that offers regional goods at select stores to the launch of Etsy Wholesale, which connects retailers with craft entrepreneurs.
However, there are specific concerns for artisanal producers when they’re approached by large retailers, including ability to fulfill large orders and the cost of using quality materials or ingredients. “It's always exciting when a big retailer approaches your small business, but you need to take several things into consideration,” says Jennifer Lewis, founder of smallfoodbiz.com and author of “Getting Your Specialty Food Product Onto Store Shelves: The Ultimate Wholesale How-To Guide for Artisan Food Companies.”
Here are six questions to ask yourself when big retailer comes knocking:
Question #1: “Where will this land us in the next one or two years?”
Evaluate your business plan. Looking at — and possibly amending — your business plan can help you determine the plausibility of fulfilling an order. While you most likely have a business plan if you’ve been pitching to retailers or investors, a small cottage food or craft business might not have one in place. Before moving forward, create this simple business road map, using resources such as the U.S. Small Business Association guide and templates from companies like Bplans. “A business plan helps you determine what direction you'll take the business in during the next 12 to 24 months,” Lewis says.
Question #2: “Can I deliver?”
Find out whether the timeline to deliver is flexible. “If your product is handmade or made in small batches, it may not be possible to meet a large retailer's order,” Lewis says. “You may want to talk to the retailer about pushing an order out so that you have more time to prepare.”
Turn down the offer if it’s simply not possible to fulfill the order. “[The retailer] will most often appreciate the honesty as that means they won't be holding shelf space for a product they won't get and can instead put something else in that space,” says Lewis. “Better to say no now and save the opportunity to say yes in the future when you're ready to work with them.”
Question #3: “What are the total costs?”
Calculate costs. Quality materials and ingredients may set your product apart, but you’ll have to cover those costs before the retailer pays, typically 30 to 120 days from the delivery of the product. “That's all materials, labor, et cetera that you have to carry as an expense until you get paid,” Lewis says. “Will your business be able to survive that?”
Take into account fees from CPAs or attorneys you may need to consult, as well as possible long-term growth costs to fulfill larger orders, from additional staff to a bigger production space.
Question #4: “Is this how much my product should still cost?”
Know how to price your product. When calculating the price, take into account not only the current cost of production, but also projected long-term costs as the business grows. “The price you lock in now is likely not going to increase the next time you work with that retailer, so you need to make sure you're comfortable with the profit you'll be making and that it will help cover all the costs associated with running your business,” Lewis says.
“Without a doubt, the biggest problem I see is that entrepreneurs don't really understand what their product costs them to make in terms of materials and labor, and then they don't price their products correctly,” she says. “Time and time again I see entrepreneurs get their products onto the shelves of larger retailers at a price that simply doesn't allow them to grow because they don't know what their costs actually are.”
Large orders also mean you’re selling to the retailer at a bigger discount. “A big retailer doesn't want to pay the same price for 1,000 units that a small retailer pays for 12 units,” Lewis says. The bottom line: “Make sure the price you're negotiating is still profitable for you. There's no point in being excited that your product made it onto the shelf of a certain retailer if you're losing money in the process.”
Question #5: “What’s the fine print?”
In addition to price and delivery of payment, there are also some other key questions to ask the retailer. “You’d want to know how the product will be merchandised, what price point the retailer is planning to sell it for, and whether the retailer expects you to support the product with any company-specific marketing that may be an additional cost to you,” Lewis says. “From a logistics standpoint, how is the product being transported to the retailer and who is responsible for covering that cost? Lastly: What is the drop-dead date for the order to be delivered?”
Question #6: “How will this relationship affect my relationship with my current customers and retailers?”
Consider how your revenue stream will be affected if a small retail shop stops carrying your product once it’s available at a large retailer, says Lewis. “Small stores typically pride themselves on offering customers items that the larger stores don't, so you need to be cognizant of this and evaluate how a switch to a larger retailer may impact your business,” she says.
Growth also may affect your market niche. While By Brooklyn, a New York retail shop that specializes in Brooklyn-made products, continues to carry products after they’re picked up by larger retailers, the store has stopped carrying several food products when growth caused production to move outside of the borough, says owner Gaia DiLoreto. “Since the product is no longer made in Brooklyn, we no longer carry it,” she says.
Also be aware of how the retailer might reflect on your own business and how customers might react. After Urban Outfitters’ bloody Kent State University sweatshirt sparked outrage in September, Tina De Broux decided to pull out of a deal with the retailer to sell her Under Aurora natural body care and fragrance online. The controversy hit close to home — her mother and aunt attended Kent State and her business is based in Ohio — but not being associated with Urban Outfitters was also the right business choice, she says. “I may have the lost immediate sales to Urban Outfitters, but I've also had opportunities arise because of this decision,” says DeBroux.