When dream partnerships come with nightmare costs

For Black-owned businesses, working with big retail means $$$ up-front

Oct 12, 2020 | Editorial | Business | Budgeting | Jobs
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It should be a wish granted...

Small business owner Lauren Napier gets called up to the big leagues as major retailers jostle to carry her beauty products. In the wake of George Floyd’s murder and a social movement to address systemic racism, retailers are responding with initiatives to support Black businesses. In the beauty industry, 15 Percent Pledge signers like Sephora and independent plans from companies such as Estée Lauder have created new opportunities for Black entrepreneurs to bring their small-scale brands to aisles around the world. But any benefit to their bank accounts is far from guaranteed. A heavy financial burden awaits these small businesses in a process packed with hidden costs.

What it takes to go big retail:

  • More product needs to be supplied, fast. To fill shelves in hundreds of stores across the country, small business owners need to ramp up manufacturing, packaging, and shipping. This can easily add up to tens of thousands of dollars in out-of-pocket costs.
  • Plus product showcases to tout a new brand. These simple displays can wind up running thousands of dollars per store. For showcases across a number of locations, that number can quickly multiply. And once again, these costs aren’t covered by the retailer.
  • Half a million for marketing?! Big retailers in the beauty sector favor brands that can sell and promote their products both in-store and online. That means ponying up for physical costs like signage and displays in addition to online advertising. For beauty brands, it’s not unusual for an annual marketing budget to reach $500,000.
  • And when the product is finally sold... The retailer gets a cut. Getting into the store can mean handing the retailer 50-60% of their sales. This leaves small businesses with a smaller profit margin and even less room for error.
  • Check, please? Small businesses can rack up a sky-high tab jumping through all the hoops a big retailer requires. Long-term, it can add up to millions of dollars.

But there’s still money to be made

Getting one’s products into thousands of stores across the country can exponentially increase the reach of a brand. Even with smaller profit margins and heavy up-front costs, the results can be more than worthwhile for brands that consistently sell well. It can mean the difference between an independent hustle and the power to create jobs. And now might be the perfect time to partner with big-box retailers, who’ve thrived during the pandemic relative to small businesses.

And barriers to be broken

Black founders are the least likely group to receive venture capital (VC) support, getting less than 1% of all VC funding. And this trend makes itself apparent on retail shelves — prior to signing the 15 Percent Pledge, less than 2.5% of Sephora’s brands came from Black-owned businesses. This chance to be represented in retail isn’t just financial; it’s an opportunity to address a systemic gap in representation. Seeing their products appear on a wider platform for millions of Americans to support via purchases could create a net social benefit for Black entrepreneurs despite the high costs of a retail partnership.

Does “big retail” have to mean physical stores?

Some brands, like Black-owned Mischo Beauty, have worked with retailers like Macy’s to sell their products solely through the web. This effectively eliminates costs associated with getting to brick-and-mortar stores while still allowing a Black-owned business to enjoy the amplification of a major retailer’s online channels. And with online retail seeing record sales driven by the pandemic, sticking to web distribution may be an ideal way for retailer initiatives to help Black-owned businesses go “big retail” without paying for literal shelf space.