Don't Blame UNFI for Food Inflation and Your Failure

A high-profile podcast in the Wall Street Journal yesterday interviewed an owner of a small food brand.¹

The article discussed how distributor chargebacks work and gave the impression that an increase in distributor chargebacks has been responsible for both overall food inflation and the 87% failure rate among food brands. These conclusions were seemingly bolstered by UNFI’s decision not to be interviewed for the article.

Unfortunately, both conclusions are incorrect, nearly the opposite of the truth.

The overall grocery business in the U.S. is $810 billion. UNFI and KeHE together sell $38 billion per year. Even accounting for retailer markups, items sold by UNFI and KeHE together account for less than 10% of grocery sales. It is clearly not the case that distributors could have possibly caused a large rise in food prices. They simply are not big enough.^{2 3}

UNFI and KeHE distribute small brands to grocery stores and large brands to small chains. The grocery business is dominated by large food producers and large chains. Most of the grocery business is directly delivered to chains’, rather than through distributors.

UNFI is a publicly traded company. Rather than the price-gouging behavior that the media would have you believe, the truth is that UNFI’s profits over this decade have declined to nearly zero. This is due to retailers demanding lower markups. UNFI’s stock declined by about 80% from 2022 to mid 2024 because of this, a fact The Wall Street Journal conveniently omitted. To compensate for the decline of their major source of revenue, UNFI has raised fees to their suppliers. But the overall dollar volume of this fee increase is hardly responsible for food inflation in the United States.

Fees charged to brands are part of overall trade spend. About 75% of trade spend is usually fees billed back from retailers through distributors. Distributors provide this service as a convenience to both brands and retailers. Distributors take a service fee for this. The other 25% of trade spend may be promotions offered to distributors’ customers. Only a small portion of trade spend goes directly to the distributor. It usually ends up at the retailer, or as a discount to the consumer.

In order to succeed, brands must manage their overall trade spend. They must devise an effective promotional campaign schedule. Marketing must catch the eye of the consumer and thereby build the consumer base for their product. At the same time, it cannot bankrupt the company. Overall trade spend should be around 20-25% of sales for a small brand. Larger brands usually have a lower trade spend as a percentage of revenues.

Many CPG brands do not have the ability to monitor and plan their trade spend. I have seen brands spend 150% of their revenues on promotions. This obviously is a quick road to bankruptcy. There is software to help you monitor and measure your trade spend and its effectiveness, and even challenge the rare incorrect chargeback. For instance, Glimpse is an innovative company using AI in this space.

The reason that 87% of brands fail is not due to distributor chargebacks. The #1 reason that CPG brands fail is because the market does not want their product. That’s responsible for half of all failures. This hasn’t changed since the beginning of time. Growing a successful CPG business takes patience and experience. If you would like to increase your chances of survival to more than 13%, please contact us.