ALMOST seven out of 10 consumers are consciously purchasing local food to support the local economy, according to a Good Food Ireland Business Insight Survey.
While this is great news for artisan producers it comes with it's challenges, namely Distribution. As the producer grows he/she will be tasked with finding a distributor to take on their product to distribute.
With this comes added margins for the distributor and the retailer.
Whether you are talking to a distributor or a buyer from a retailer or foodservice operator you will need to calculate prices which include margins.
For every product there is a cost price and a selling price with a profit in between. This profit can be expressed as a percentage of the cost price, which is referred to as the mark-up, and can also be expressed as a percentage of the selling price which is referred to as a margin. Distributors and buyers most commonly refer to margins, however in order to calculate the margin the producer must mark up the cost price to arrive at the selling price.
There is a simple Matrix below that will assist in calculating margins. To calculate the margin required, locate this margin in the centre column and multiply your selling price to the distributor by the appropriate figure in the right-hand column.
A Practical Example:
You have completed your cost model and you know you need to charge the distributor €1.78 for product “A” if you are to make a profit. This is your cost price.
You have spoken to a number of other producers who have told you that the distributor will look for 30% margin to carry the product.
Calculating Distributor’s Margin:
When you check the margin column (middle column) in the matrix and locate 30% margin (30.07%) it tells you that you must mark the product up by 43% or simply multiply by 1.43.
€1.78 x 1.43 = €2.55. This is the price the distributor will charge the retailer giving the distributor a 30% margin.
Calculating Retailer’s Margin:
If you know that the retailer will look for 35% margin you again go to the matrix which tells you to mark the distributor’s price to the retailer up by 54% (multiply by 1.54).
€2.55 x 1.54 = €3.93. This is the price the retailer charges the consumer giving the retailer a 35% margin.
€1.78 = Producer selling price to the distributor including profit
€2.55 = Distributor selling price to the retailer giving them 30% margin
€3.93 = Retailer selling price to the consumer giving them a 35% margin This margin matrix allows you to work out all the cost inputs throughout the supply chain so that you can see what the retail price should be.