10 Terms Every Food Business Should Know

Embarking on your own food business is an exhilarating venture. However, as you delve deeper into the food industry, it's likely that you'll encounter unfamiliar business terminology. To ensure smooth communication and comprehension, here's a concise guide to some common and significant terms in the food business.

Financial Terms:

1. COGS (Cost of Goods Sold): The total expense incurred in producing the final product, including ingredients (including shipping costs), packaging materials, and labor (in-house production or co-packing). Accurately determining the COGS is crucial for pricing your product effectively.

2. GPM (Gross Profit Margin): The percentage or dollar amount obtained by deducting the COGS from the final revenue. GPM measures a company's efficiency by comparing production costs to revenue. Higher GPM indicates greater efficiency. The formula is (Revenue - COGS) / Revenue.

3. NPM (Net Profit Margin): The final profit obtained after subtracting business expenses from the GPM. It represents the actual profit made from selling products.

4. ROI (Return on Investment): The profitability of an investment based on the initial amount of money invested. ROI serves as an indicator of business performance and attractiveness to potential investors. The formula is (Total gain on investment - Cost of investment) / Cost of investment.

5. MSRP (Manufacturer Suggested Retail Price): The recommended price set by the manufacturer for retail sale. The actual cost of the product may vary from the MSRP depending on the store.

Discounts and Promotion Terms:

1. MCB (Manufacturer Chargebacks): Allowances charged to a manufacturer by a distributor as part of a promotion. The distributor offers a discount to the retailer and charges the manufacturer for the promotional amount.

2. OI Promotion (Off-Invoice Promotion): Discounts given by manufacturers to distributors, which are then passed on to retailers. These discounts are determined by the manufacturer and available to all retailers carrying the product.

3. Scan Down Promotion: A store-specific promotion negotiated between a manufacturer and a retailer. The manufacturer pays the retailer a predetermined discount amount directly after the promotional period based on the number of items sold.

4. EDLP (Everyday Low Pricing): A long-term pricing strategy where products are sold at discounted prices for an extended period. EDLP requires less promotional advertising and is commonly used by large retail chains and wholesale clubs.

Manufacturing and Distribution Terms:

1. Co-packer (Contract Packer): Companies that manufacture and package products for clients who may not have their own commercial kitchens. Co-packers help businesses scale up production and meet increasing demand.

2. Private Label: Manufacturing a product that is then packaged and sold under a retailer's brand name. Also known as "store brands."

3. Food Broker: Independent marketing sales agents who negotiate sales between buyers (stores, restaurants) and manufacturers. They can assist with in-store marketing activities and help reach agreements.

4. Food Distributor: Companies that streamline the distribution process by buying products from manufacturers, storing them in warehouses, and selling them to retailers. Online distributors offer an alternative approach, eliminating the need for warehouse storage and connecting manufacturers directly with retailers.

In-Store Terms:

1. Facings: The number of shelf positions occupied by a company's products. More facings increase visibility and can be advantageous in competitive markets.

2. Eye Level: The most prominent shelf space at the customer's eye level, offering greater visibility and a higher chance of selling. However, securing these prime shelves can be costly and competitive.

Remember, this guide provides a foundation for understanding food business terminology. For further insights, explore Part 2 to expand your knowledge of essential food business terms.