CPG Manufacturers selling direct-to-consumer and undercutting distributors, retailers and other resellers

This is a Quora question I was asked to answer.

The full question is as follows:

What do distributor contracts look like, and do they ever allow companies to sell products themselves? If so, how is the margin controlled so that the company doesn’t undercut the distributor? We are looking to begin selling a consumer good through a website and to stores, but the manufacturer will also sell the product in their own stores.

My answer is as follows:

My experience is largely in food and distributor/retailer contracts do not normally restrict the manufacturer from selling products to other distributors, retailers, channels or direct-to-consumer. Unless, however, it is written in agreements with distributors and retailers that the manufacturer will not do that, which I have never seen or heard of and if I were a manufacturer, would not recommend.

It is wise for CPG manufacturers selling direct-to-consumer because while direct sales can be more profitable, the primary rational is that direct-to-consumer gives the manufacturer a direct relationship with the end-consumer for surveys and other data-gathering purposes. In most cases, I only see manufacturers sell direct via their website. Most do not own their own stores and if they do, there are very few locations.

If a manufacturer has its own stores in the same geographic area as other retailers and is offering better pricing, that still may not be a problem for other retailers carrying the same product. It comes down to how well the buying public knows about the manufacturer stores and whether or not they will choose to shop there for the best pricing.

In many cases, convenience trumps price (that is, the consumer has to travel out of their way to get the product at a lower price) and consumer experience can also trump price (that is, the consumer likes shopping at a certain retailer even though the price is higher).

I would recommend a testing period with the manufacturer’s products to determine if you can generate sufficient sales to satisfy your ROI benchmarks, even with manufacturer stores that are competing with you.