A question that I was recently asked is what are deduct from invoice fees with retailers?

For dietary supplement products, what are deduct from invoice fees associated with doing business with Walmart, Target and club stores like Sam’s, Coscto and Bjs; how about for grocery chains like Safeway or drug stores like Walgreens?

To clarify this question: I read that large retailers impose various fees that can be classified as “deduct from invoice fees.” I am not sure what these fees are and how big they are, except that I did read that they can be substantial; whatever that may mean. Maybe they are fees associated with customer returns, marketing allotments, etc. Since offline retail is new to me, I am unsure of how everythign works and I am unsure of the particular jargon. I am basically looking for someone to walk me through a case study relationship with various types of retailers. Maybe I am looking in the wrong places, but it is very hard to find people who detail from A-Z, the specifics of working with national retailers.

My answer:

The average fees to do business with offline retail is 13% of wholesale cost (price you charge the retailer for your product). Those fees vary by retailer and are discussed during vendor negotiations. They can include the following:

  1. 2% for payment within standard 30 day terms;
  2. Opening order discounts (for new product ships), also called introductory allowance;
  3. Slotting fees;
  4. Discounts on orders to new stores that the retailer opens;
  5. Volume pricing discounts;
  6. Automatic fee to account for damaged product;
  7. Fees to ship back damaged or returned product or to dispose of damaged or returned product;
  8. Co-op marketing/marketing allotments (this is a big one), where the retailer deducts on behalf of marketing that it does for you;
  9. Coupons/discount programs that the retailer runs on your product;
  10. Penalties on mistakes on shipping/routing requirements or late fees for not delivering your product in your assigned delivery window.

There might be other ones I am missing, but these are the major ones I’ve dealt with among the retailers you have mentioned in your question.

In general, the fees charged, ordered from least to most, are as follows:

  1. Costco – less than 2%;
  2. Walmart/Sam’s/BJ’s – less than 5%;
  3. Target – 5-15%;
  4. Grocery – 10-15%;
  5. Drug – greater than 15%;

That said, these are fees after year 1 that you should expect. Typically, due to opening order discounts, fees charged in year 1 are higher as a percentage of sales. For example, drug could easily hit 25% in year 1. Because of the above fees, it is critical that you maximize your suggested retail price and thus, your wholesale cost because retailer fees can really reduce or completely eat-up your profit margins. Further, you really need to do a detailed ROI in doing business with each retailer so that you know what you are getting into.