Why distribution costs are consistently underestimated
When FMCG founders calculate their product economics, they typically account for raw material cost, packaging, manufacturing overhead, and a target profit margin. Distribution is often treated as a single line item, estimated from experience or from the quoted rate of a logistics company. The actual cost of distribution, when all components are included, is almost always higher than the initial estimate.
The underestimation happens because distribution is not a single cost. It is a collection of costs that accumulate across the full path from your factory gate to the consumer's basket. Each cost layer is individually manageable, but their sum can consume 30 to 50 percent of your retail price depending on the channel, the category, and the geography. A brand that has not modelled these costs accurately before setting its RRP will either price itself out of the market or eliminate the margin that makes the business viable.
Trade margin: the largest single cost
In modern trade channels, the trade margin paid to the retailer is typically the largest component of your distribution cost. Nigerian supermarkets generally operate on margins of 20 to 40 percent of the retail selling price, varying by category. Premium or specialty products may face lower margin demands than commoditised categories where competition is high.
Some chains also charge additional fees that are separate from the trade margin: listing fees for new products, promotional contribution fees for participation in seasonal campaigns, and category management fees in some larger format retailers. These are not always disclosed upfront during buyer negotiations and can catch brands off guard in the first year of a listing.
The practical implication is straightforward: if your product retails at ₦1,000 and the trade margin is 30 percent, the retailer nets ₦300. Your brand receives ₦700 before any distribution or operational costs. Everything that happens between your factory and the retailer must be covered from that ₦700.
Logistics and delivery costs
Delivery costs cover the physical movement of your product from production or warehouse to individual retail locations. In Lagos, where traffic conditions are unpredictable and fuel costs are significant, last-mile delivery can be more expensive per unit than the long-haul leg of the journey.
For brands supplying modern trade in Lagos and Ogun State, delivery frequency matters as much as delivery cost. Supermarkets expect regular replenishment, and a brand that can only afford to deliver once per month will experience stockouts in the weeks before the next delivery. More frequent delivery means higher total logistics cost per unit, but better on-shelf availability and a stronger retail relationship.
Brands using a third-party distributor or logistics partner will pay for this service either as a percentage of revenue or as a per-delivery or per-unit fee. A realistic logistics cost for urban Lagos delivery ranges from 5 to 12 percent of the ex-factory price depending on distance, frequency, and volume.
Field management and in-store costs
Once product is delivered, someone needs to manage it in store. Field costs include the salaries or fees of merchandisers, sales representatives, and field supervisors who conduct store visits, check shelf availability, rotate stock, and manage buyer relationships.
For brands that manage field operations in-house, this is a fixed cost that does not scale proportionally with sales volume at first. A field team capable of covering 30 stores adequately costs roughly the same whether those stores are generating ₦500,000 or ₦5,000,000 in monthly revenue. The per-unit field cost drops as volume grows, which is why brands need to plan for the upfront investment in field capacity before the revenue justifies it.
For brands that use a distribution partner with field infrastructure, the field cost is embedded in the distribution margin. This shifts the cost from fixed to variable, which reduces financial risk in the early stages but means the cost does not reduce as volume grows.
Working capital: the cost that does not appear in unit economics
Working capital cost is the most invisible distribution cost and often the most damaging to brand growth. When you supply modern retail on 30 to 60-day payment terms, you are effectively financing the retailer's inventory for that period. The cash you need to manufacture the next production run is tied up in receivables.
At small volumes, this is manageable. As volumes grow and the number of retail locations increases, the receivables position grows proportionally. A brand supplying 50 stores on 45-day terms at an average monthly revenue of ₦200,000 per store is carrying approximately ₦450 million in outstanding receivables at any point in time. If the business relies on that cash for production, a receivables delay of two weeks can cause a production shortfall that cascades into stockouts.
Brands that plan for working capital requirements before entering modern retail at scale are far less vulnerable to these cascades. The cost of financing the working capital gap, whether through a credit facility, a factoring arrangement, or retained earnings, should be included in the full distribution cost model.
Building a distribution cost model before you set your price
The practical takeaway is simple: model your full distribution cost before you confirm your retail price, not after. The model should include trade margin, logistics cost, field management cost, promotional contribution estimates, and working capital financing cost. Only after all of these are included can you determine whether your target RRP supports a sustainable business.
If the model shows that the economics do not work at your current manufacturing cost structure, you have two options: increase the RRP to a level that the target market will support, or reduce manufacturing costs before entering the channel. Agreeing to pricing that looks commercially viable on the surface but does not survive full cost modelling is the root cause of most brand exits from modern retail.
DALA's brand review process includes a commercial readiness assessment that covers pricing structure and distribution economics before a partnership begins, so brands enter the relationship with a clear understanding of what the numbers actually look like.
