Cost-Plus & Inside Income: The Hidden Economics of Distribution

Most people assume distributors mark up a product’s cost, pass it on to the retailer, and pocket the difference. In reality, “cost-plus” is just the beginning. Large distributors like UNFI and KeHE frequently rely on additional revenue streams, often bundled under “inside income” or “vendor support.” These include freight markups, data fees, promotional allowances, spoilage allocations, and more. While it’s not inherently nefarious, it can be confusing—and when you’re a small brand or local grocer, confusion can quickly erode your margins and feel like the distributor is out to get you.

This guide walks you through the many ways distributors earn income behind the scenes, how it affects both suppliers and retailers, and why understanding these hidden economics is crucial for anyone in the CPG ecosystem.

The Basics of Cost-Plus

At its simplest, cost-plus means the distributor takes the brand’s cost (COGS) and adds a fixed markup before selling to the retailer. For example, if a brand sells a case of goods at $100 and the distributor’s markup is set at 10%, the retailer sees a $110 invoice for that product. This model was originally introduced to create a sense of transparency for retailers: they know the baseline cost plus the distributor’s margin, theoretically keeping shelf prices predictable.

However, the grocery landscape is far more complicated than it was decades ago, when cost-plus became a go-to system. Modern distributors handle enormous catalogs of products—from local craft sauces to national cereal brands—each with unique shipping requirements, shelf-life considerations, and promotional demands. They must juggle everything from sophisticated warehouse management to specialized trucking routes. On top of that, large retailers demand competitive pricing that eats into the distributor’s margin.

Because of these pressures, a pure “plus” on top of the brand’s cost often isn’t enough to fully cover operating expenses, let alone generate profit. As a result, distributors layer additional fees and programs on top of the straightforward markup. This is where inside income enters the picture. For brands and retailers who believe cost-plus alone defines the distributor’s business model, it’s a wake-up call: the real profitability engine lies in more complex, sometimes opaque, revenue streams that go well beyond a simple markup.

Inside Income: How Distributors Actually Make Money

Inside income (sometimes called “vendor income” or “supplier support”) refers to the additional fees and rebates distributors collect from brands. Distribution is a high-touch ecosystem, and margins are thin for even the largest players. When you add a “touch”, they often ad a fee associated with that touch. These can include:

  • Data & Reporting Fees: Selling SKU-level sales data or requiring a “BI” (business intelligence) fee.

  • Promotional Allowances: Charging brands for ad programs, special buyer decks, or show participation.

  • Spoils & Shrink Fees: A set percentage to cover damaged or expired goods. If spoilage is lower than expected, the distributor keeps the excess.

  • Freight Markups (Freight Pad): Arranging inbound freight but billing at a higher rate than their actual cost.

  • Slotting / Activation: One-time or annual fees for listing new SKUs or reactivating old ones.

  • Compliance Fines: Penalties for late deliveries, incorrect labeling, or inadequate fill rates.

For retailers, many of these charges happen at the brand-distributor level, but the effects ripple down in the form of higher wholesale prices or fewer product choices. The complexity of inside income is often misunderstood, leading to tension when brands see unexpected deductions or when retailers notice unplanned cost increases on certain SKUs.

Why Inside Income Keeps Rising

Inside income has steadily grown in importance for major distributors due to three primary forces:

(A) Competitive Retail Bids
 Big retail chains wield substantial purchasing power and demand rock-bottom distributor markups. In some cases, distributors agree to extremely slim (or even negative) margins on paper just to lock in large accounts. While this secures high-volume sales, it also means the distributor must recoup revenue elsewhere—usually through fees and surcharges levied on brands and retailers. As retailers push for even lower markups each contract cycle, the distributor compensates by expanding or increasing these inside income streams.

(B) Public Company Pressures
 Distributors like UNFI are publicly traded, which comes with quarterly earnings calls and shareholder expectations. If cost-plus margins are squeezed by retailers, management faces pressure to hit financial targets through alternative means. Inside income thus becomes a critical pillar of profitability. The more “value-added services” or “reporting capabilities” they can sell to brands, the healthier their financial statements look—and the less reliant they are on that thin cost-plus markup.

(C) Expanding Services & Complexity
 Modern distributors offer far more than simple warehousing. They provide data portals, marketing platforms, professional category resets, and more. Each service introduces another potential fee or ongoing charge. Over time, what began as a few add-ons transforms into a sprawling menu of programs. This complexity makes it challenging for brands to know exactly where their money is going and can create confusion about the true cost of doing business with a given distributor.

Taken together, these factors ensure that inside income is no short-lived trend. As retailers continue demanding lower markups and distributors invest in new “solutions” to differentiate themselves, the array of surcharges and fees will likely keep evolving—and increasing.

Impact on Brands: Margin Erosion & Hidden Costs

For suppliers, especially smaller or emerging brands, inside income can be the difference between profitability and bleeding cash. Many brands budget for a 15–25% distributor markup, assuming cost-plus is all they’ll pay. Then come the extra line items:

  • Promotional Buy-Ins: Distributors might expect deep discounts on certain SKUs to run promotions, with the brand absorbing the cost gap.

  • Data Fees: Access to velocity reports or inventory dashboards can be incredibly useful, but the monthly or quarterly charges add up—sometimes without clear ROI if the brand doesn’t use the data effectively.

  • Spoils & Shrink Allowances: While this protects the distributor from losses, brands might be charged a few percentage points on every invoice—regardless of whether actual spoilage occurs at that rate.

One critical challenge is timing. These charges can appear as deductions on statements months after the sale, making it hard for brands to match them against specific promotions or shipments. Smaller brands may lack the back-office systems or staff to track every fee, leading to disputes that drag on—or, more commonly, fees that slip by unnoticed.

Over time, this margin erosion can break a brand’s expansion plans. Instead of fueling marketing or R&D, the brand’s budget goes to covering fees they never fully anticipated. For startups counting on distribution to scale, failing to account for inside income can quickly turn what looked like a profitable opportunity into a net loss.

Impact on Grocers: Higher Prices & Limited Variety

Although inside income primarily affects the brand-distributor relationship, grocers face downstream consequences that can shape their assortment and pricing:

  • Higher Landed Costs: When brands see their margins squeezed, they might raise their wholesale prices to maintain profitability. Because many grocers operate on a cost-plus formula with the distributor, these increases get passed directly to retail, potentially driving up shelf prices.

  • Reduced SKU Diversity: Smaller brands already on thin margins could decide distribution isn’t worth the added fees or might focus on regions with better terms. Grocers who rely heavily on a single national distributor could lose access to niche or local products if those brands exit the system.

  • Inconsistent Promotions: Some inside income fees relate to brand-funded promotions or marketing campaigns. If a brand feels burned by high distributor deductions, they may reduce promotional activity, resulting in fewer deals or special events for your shoppers.

The flip side is that grocers can, in theory, benefit if distributors reinvest some of this inside income into better data, improved fill rates, or supply chain efficiency. However, that outcome isn’t guaranteed. It depends on how the distributor allocates the revenue they collect. As a result, grocers must keep a close eye on cost trends and build strong relationships with both distributors and key suppliers to ensure their assortment remains competitive and diverse.


What Brands & Retailers Can Do to Navigate Inside Income

For Brands

A proactive approach is crucial. Start by requesting a detailed fee schedule from your distributor—itemizing data fees, spoils charges, promotional program costs, and any other surcharges. If your SKUs aren’t in a certain marketing program, clarify that you shouldn’t be billed for it. You can also:

  • Audit Your Statements Frequently: Disputing a charge six months later is more difficult than catching it in the same billing cycle.

  • Incorporate Fees into Your Pricing Model: Don’t wait to realize your 15% margin has shrunk to 5%. Account for potential inside income from day one.

  • Build Strong Direct Ties with Retailers: Even if you rely on a distributor, maintaining some direct relationship with key retail accounts can help you negotiate better promotional strategies or avoid unnecessary middleman expenses.

For Grocers

Just because these fees happen “upstream” doesn’t mean you’re off the hook. If brand costs balloon, your store will eventually feel the pinch. Here’s what you can do:

  • Encourage Brand-Distributor Dialogue: If a beloved local brand is about to drop out, consider stepping in. Sometimes a small volume guarantee or a direct arrangement for certain SKUs can keep them in distribution. Distributors are more than a vendor, they’re a partner.

  • Diversify Your Supply: Relying exclusively on one large distributor can limit leverage and hamper your ability to find niche or regional favorites. Exploring regional DSDs or aggregator platforms might secure unique products—and keep your main distributor honest.

  • Monitor Shelf Price Trends: Sudden cost hikes in a category may be traced back to new or increased inside income fees. Understanding these shifts helps you decide whether to pass them on to customers, negotiate for better terms, or explore alternatives.

In both cases, communication is key—brands need clarity from distributors, and grocers need clarity from the brands they count on. A little transparency can go a long way in preventing margin shocks and missed opportunities.

A Hypothetical Fee Breakdown

Imagine an emerging brand sells a product for $100 a case, and it costs them $70 per case to produce and get it to the distributor. Say it has 40 cases to a pallet. This pallet sells for $4,000 and they make $1,200 on that pallet. Thats a 30% margin.

  • Data Fee: 2% = $2 x 40 cases = +$80

  • Spoils (or damaged labels) Chargebacks: $8 x 2 cases + $200 value 2or 2 cases = +$216

  • Promotional Program: $1.50 per case for 20 cases = +$30

Suddenly, this pallet did not earn $1,200 in profit, it earned $874.

This is a common example of 1 pallet, and only 1 thing went wrong; two cases eventually expired and had to be billed back and disposed of for a fee. Trucks are late, labels are missing, things happen that can add small fees. You can see how easily a 30% margin became 21%. This is why understanding the business model, and understanding your entire costs is critical to success. It also highlights how if you actively manage your costs when working with a distributor, you can make an impact on where your margins land.

Communication is Key

Inside income and cost-plus distribution aren’t inherently unethical—distributors have real costs to cover. But communication is often lacking, and the complexities of multiple fee streams can easily trip up both suppliers and retailers. If you’re a brand, it’s essential to get a full picture of all potential fees and ensure your margin planning includes them. If you’re a grocer, staying informed about these hidden economics can help you maintain diverse product offerings and fair pricing for your customers.

Next Steps

With a solid grasp of the economics behind distribution, you can negotiate better terms, set realistic margins, and keep surprises out of your invoices.