Retailer - Vendor relationship: A short thread.

Big retail chains usually onboard a vendor in the following manner:

1. Fixed amount as upfront deposit for signup.
2. 30-40 (sometimes even 45%) margin on MRP.
3. Shelf cost per SKU per branch
4. Return to vendor on expiry.

The credit cycle is usually 6 bills or more. This means they will fulfil your first bill only when you issue your 7th bill. They will credit your 6th bill amount only on issuing your 13th bill, and so on.

If your brand is fast moving, and highly in demand, you can negotiate.

But if you're a small vendor, a new brand in the market, you will get squeezed for every last inch of life in the form of money you have.

SKU means Stock Keeping Unit. A peanut butter jar of 200g, salted crunchy variant - is one SKU. Salted creamy 200g would be another SKU.

Natures basket asked us 45% margin on MRP, 12 lakhs upfront deposit, 100% discounts on expired products, 7 bill credit cycle, 2.5 lakhs shelf cost per SKU for 20 branches.

This means, I'll roughly have to sell at least 10k jars of 1 sku (say 200g jar peanut butter salted crunchy variant) to even look at breaking even. That's roughly 500 jars per branch per month. This means for looking at making profits, I must invest in advertising.

A TV ad spot in non-prime time itself costs upto 4-5L in decent TV channels with good enough viewership.

If I charge 250 per jar of 200g peanut butter, I should sell it to NB at 172 rupees (250/1.45).

If it takes 10k jars for me to breakeven, that's 10000*172 = 17 lakhs, 20,000 rupees.

If 1st bill gets paid after 7th bill, at any point in time, 1720000*7 = roughly 1.2 crores will be stuck with Nature's basket for our company.

That's not including our advertising costs, which would run in many lakhs (if social media) to crores (if TV/Print). So, one can't enter retail without having at least 10crores in their bank account.

A better strategy for small brands like us is to rent small shops in locations near housing areas in cities, pay like 10-20k in rent per month, and diversify across products, and open different branches of our own branded products, instead of giving retail chains all this leeway.

And, now coming to the Future Retail case. If a vendor like me has an outstanding of 1.2 crores, we'll have to take a 40% haircut, that's roughly 3 bills, approx 50 lakhs of the 1.2 crores. Just think about what kind of impact this has on a small business.

Also, when they say they will pay after 7th bill, it doesn't mean they will definitely clear. There are so many outstanding cases against many popular retail chains, franchise owners, etc., on default payments, payments pending for over 1 year, 5 years, etc.

Unless you have strong industry connections, a strong product that's insanely in demand and with brilliant branding, strong deep pockets, monetary backing (preferably a VC who has ties to the industry and has backed similar firms before), don't even think of offline retail.

If you must think of offline retail, approach the local retail shops which have only one or two branches. They run similar terms, but credit period is usually around the 3 month mark from the invoice date, they don't have crazy deposits or shelf space costs, etc.