Welcome to The Dish, the only newsletter that simplifies finance for CPG people.

This time, we’ve got our sights set on the behemoth that is Costco.

The Main Course

Important Attributes

1. They only mark up products by 12-14%.

2. Brands sell direct to Costco.

3. Freight is optimized as you are sending full truck loads. Depending on product, this can equal as low as 3% of revenue.

4. There are no bs chargebacks that you will receive from distributors.

5. Trade spend isn’t 20%. I’ve seen an average around 7.5% scaling up to 15% for aggressive promo.

6. Goal is to sell $800-1,000 a week per sku at the register. Category dependent. This is some serious volume and revenue!

Crunching the Numbers: Economic Insights

Shipping direct to Costco on top of the low markup allows brands to provide low pricing to drive significant sales volume. Even with steep discounts to the consumers, brands are still selling their products at around the same or better then their other customers who are primarily distributors.

The following are the economics that I think resemble Costco under the margin profile of an early stage brand. Of course product margins can be 35-40% and greater as you gain economies of scale which will put contribution margin in the double digits.

30-35% product margin
– 8.0% trade spend
– 4.0% freight out
– 2.0% Early Pay
– 2.0% Spoil Allowance
——————————_
 14-19% Margin
__________________________
– 5% Demo
– 5% Broker
(can negotiate lower. Don’t tell them I told you that!)
———————————
4-9% profit

Challenges

So the above looks great. BUT, how do you afford to launch in Costco from an inventory build and what does the cash conversion cycle look like. PO and AR financing or getting a credit line can allow you to help fund inventory free up cash. Early payment can occur within 14 days with regular terms at 30, with payments usually very timely.

AND, make sure you can manufacture the amount of product they need. Having your supply chain ready to go is crucial. If you miss shipping on POs, you will get thrown out just as fast as you got in so only launch when you are ready!

Now enough of my nerdy analysis.

Now imagine Costco when your much later stage making 50-60 points of product margins with the same deductions as the 30 point brand. Costco should be your most profitable channel at this point!

Desserts

Try activating a small test region to ensure sell through occurs

Make sure to Demo as much as you can.

Slowly expand. Do not go too fast.

Thanks for reading through today’s Dish.

Have a great week.

— Adam Siskin