Invoice deductions are a material cost of business for suppliers selling to retail chains. The deductions represent the difference between your invoice amount and the payment remitted by the distributor used to service these chains. These deductions can cover many expenses associated with selling and promoting products in certain retail segments through the distributor network: fees for new retail accounts; monies for retailer promotions; shelf resets; and short shipments are just a few.
Unexpected deductions, often called chargebacks, can be time- and revenue-draining when they occur. Most deductions should ideally be pre-authorized, or agreed upon upfront when buyer and seller set the terms of the sale. Clarity about the sale terms is paramount and may be the single best piece of advice for minimizing deductions. Unexpected chargebacks are usually the result of miscommunication and/or misunderstanding about the structure of the initial agreement among the main players involved in the sale—supplier and distributor or supplier and retailer.
Most deduction disputes revolve around supermarkets, but many are applicable to other channels as well. Here are some of the most common deductions you can encounter.
Slotting/Free Fills: Introduction charges come in the form of Slotting Fees—a set charge/per store/per SKU. This charge can be expected upfront: If the retailer wants $6,000 per SKU and you want authorization for 3 SKUs, that’s $18,000. The charge can also be taken as Free Fills or free case(s) of product per store. As a standard policy, suppliers often allow one free case per store.
Unsaleables/Outdated Merchandise/Spoils/Damages: Products that are damaged or past their shelf-life. Off-invoice allowances are a general industry standard in minimizing Unsaleable deductions.
Advertising: It is a generally accepted practice to state that advertising, whether in distributor catalogs, fliers, retailer circulars, etc., must be pre-approved by the manufacturer or representative in writing and for the manufacturer to require a sample of the advertisement with the date of publication.
Promotions: Support programs designed to turn your product’s inventory. Typical promotions include:
Temporary Price Reductions (TPR): This is the familiar 15 percent off-in-the-month-of-April promotion. You would give a distributor an off-invoice deduction for that month, and the savings should be passed along to the retailer and, ultimately, the consumer. In addition to the off-invoice discount, there are distributors who charge to run these promotions, either through a flat fee or as an advertising cost to run an ad in a related circular.
Scan Downs: Every time a product on a scan down promotion is run through the register, the consumer gets a discount. You only pay for items that are sold to the consumer versus a temporary price reduction, where distributors receive a discount on anything they order during the promotion. For example, if you are offering $0.25 off an item and 80 of those items were scanned, you’ll get a chargeback for 80 x $0.25. Scan downs are often arranged through a broker with the individual retailer, who then bills the manufacturer back for items sold. If shelf space allows, you can try to negotiate upfront supplements such as Shelf Talkers that will help move your product. Also require a movement report. Scan downs can come with administrative fees.
Demos: In-store demos allow consumers to taste your product either in a passive “take-one” display or an active one where a member of the company, an independent contractor, or the retailer’s own demo team is staffing the area. The biggest expense will be for extra product samples. In addition, there is often a fee simply for scheduling a demo. Documentation to prove the demo took place can range from a report signed by the store manager to a more detailed pre- and post-inventory count and narrative comments from the demonstrator. Any sample requests for in-store demos should be made in writing to the manufacturer.
Cut Case Charges: This is a cost for the distributor cutting a master case into smaller units to fill a retailer’s specific order. You should determine the retailer’s preference for case size upfront during the terms of the sale. It is often cost-effective to begin shipping in six-packs versus the standard 12-packs rather than incur continual cut case charges.
Damaged Case Charges: Some manufacturers will contest deductions for damaged cases, stating they are not responsible for any product that is damaged or has its label cut when opened at retail by distributor or store personnel.
Short Shipments: The main difficulty surrounding short shipment charges stems from distributors’ often-standard policy of counting shipments at their warehouse. This is generally in conflict with suppliers’ policies that orders picked up by the distributor must be signed for by a representative and that any shortages after the truck leaves will be the distributor’s responsibility. Whether or not the method is negotiable should be determined upfront as costs and delays of having an entire shipment returned because it was short, can run high.
New Store Placements: This is typically the free-fill charge. But you can run into problems with what constitutes a new store. Is it a grand opening, a remodel, an existing store that’s been bought? In some cases, any store that has not been stocking your product in the past six months and then does, is considered a new store. You can see deductions for each of these scenarios, so be clear at the outset and track the charges carefully.
New Item Placement: Suppliers recommend specifying that this should be charged only when an account is requesting a new SKU that has not been previously stocked. This charge should not apply to SKUs that are re-listed.
Resets or Remodels: A reset is a reorganizing of the retailers’ shelves in a particular category while a remodel is a larger overhaul of a department or store. The majority of suppliers surveyed do not accept charges for resets for items already stocked. Many are more open to supporting a remodel with a promotion or demo or allow a free fill or will provide an allowance for a remodel, though not a reset.
This information is excerpted from SFA’s “A Supplier’s Guide to Managing Invoice Deductions,” available in the specialtyfood.com Learning Center.
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