Why Your Margins Are Shrinking and How to Fix It
Profit margins in consumer packaged goods (CPG) rarely collapse all at once; they deteriorate gradually, often imperceptibly. A few cents per unit. An unnoticed freight adjustment. An unexpected chargeback. Over time, these seemingly minor hits accumulate, leaving brands confused when profitability vanishes from the financial statements.
This is the reality of operating a CPG business. These issues aren't discussed in onboarding calls or investor pitches, but they have a substantial impact on your bottom line. If your objective is to strengthen margins, manage increasing costs of goods sold (COGS), or build resilience into your supply chain, this is where to begin.
COGS creep: the silent margin killer
Your P&L might still show a profit—but what about the costs hiding underneath? Co-man labor increases that slip through unnoticed, gradual shifts in packaging specs, creeping freight surcharges, and vendor-driven ingredient price adjustments are all signs of COGS creep. This isn’t a single spike; it’s death by a hundred small increases. If you’re not auditing your true cost to produce every quarter, you’re missing the trend lines. That means you’re watching your margin vanish in real time, but only recognizing it after the quarter is closed. RFQ your freight annually and review warehousing every 12–24 months to stay ahead; cost drift is cumulative and preventable. More importantly, establish a habit of breaking out every line item by unit and tracking them over time. Shrinking margins won’t show up in your sales report—but they will quietly destroy your runway.
Outdated Packaging
Every founder has overprinted packaging to meet MOQs, only to end up sitting on obsolete inventory after a compliance or branding update. Maybe you changed a nutrition claim. Maybe you needed to fix a UPC. Whatever the reason, that packaging is now deadweight. Old stock might be used as samples, but those are still sunk costs—and they represent your brand’s first impression. And let’s be honest: buyers can tell when they’re getting second-tier inventory. The golden rule: no PO, no run. Only produce against confirmed orders, and make sure everyone from ops to marketing lives by that discipline. When packaging is treated like a strategic asset—not a guessing game—you protect cash flow and avoid unnecessary write-offs.
“Flat Fee” Distribution: Lipstick on a Pig
Distributors like UNFI and KeHE now offer bundled, flat-fee programs. But these packages still hide promo opt-ins, ad placements, and deductions under generic labels. What sounds like simplification is often just consolidation—with no real reduction in cost. You haven’t eliminated costs—you’ve just made them harder to see. Flat fees are a spreadsheet comfort, but they can mask leakage and limit your ability to optimize spend. Request full breakdowns before signing and track your effective margin by deal. Predictability doesn’t mean value. Transparency keeps you in control. If you can’t model it, you can’t manage it—and that’s what these flat fee bundles often obscure.
Flat-fee programs often include:
Built-in promotional program costs
Required advertising placements
Deductions that are re-labeled but not removed
Distributor promotions: death by a thousand deductions
Every time you agree to a distributor promotion, what looks like a simple discount might come with chargebacks, slotting fees, extended TPR deductions, and surprise “marketing support” line items. Distributors often treat promos as a profit center, not a shared growth strategy. If you can't measure lift or attribute ROI, your margins are quietly dissolving. And once you agree to one program, the door’s wide open for future deductions—some recurring, some invented. It’s not always predatory; it’s just business to them. Only run promos when you can measure the return—or start small and scale only with proof. If a promotion doesn’t pay for itself in velocity or expanded shelf space, then it’s just a self-funded markdown.
Common deductions you will find:
Chargebacks
Slotting fees
Temporary price reduction (TPR) extensions
Unexpected “marketing support” deductions
Broker Incentives That Don’t Align
Many brokers earn their commission when product hits a distributor—not when it sells through retail. That means your inventory might sit unsold while the broker still gets paid. Misaligned incentives lead to spoilage, stale stock, and lost dollars. What looks like a strong broker relationship on paper might actually be masking inventory drag and eroded trust with retail buyers. Tie broker compensation to POS sell-through wherever possible, and be sure they’re looped into promotional timelines and performance goals. If they’re not aligned with outcomes, they’re just another fixed cost. And if they’re not proactively reporting back with data, store feedback, and improvement ideas, you’re probably doing more work than they are. Brokers should amplify your growth, not just coast on commission.
Retailer Chargebacks for Tiny Mistakes
Retail compliance errors are costly. Delivering early, printing a barcode in the wrong spot, or stacking a pallet slightly out of spec can each trigger $100–$500 fines. Repeat issues get you flagged—or worse, delisted. Most buyers won’t warn you; they’ll just penalize. You may not even know there’s a problem until the deductions hit your remittance report weeks later. Build a compliance checklist into every outbound shipment and keep documentation on file, because chargeback reversals depend on it. If your 3PL or freight partner can’t follow retail specs, find one who can. Chargebacks don’t just cost money—they damage your reputation with buyers. And reputation is the real currency in retail.
Ingredient Volatility Blows Up Forecasts
Ingredient prices are one of the biggest wildcards in CPG. Globally sourced inputs like coconut milk, oats, and cocoa are at the mercy of port delays, droughts, and policy shifts. These swings don’t follow your budget cycles or your investor expectations. A lack of locked-in contracts leaves your forecasts exposed, and if you're mid-promo during a price hike, your margins disappear fast. Even worse, these spikes can turn a top-performing SKU into a cash drain without warning. Negotiate contracts when your volume allows and always have a backup supplier option to protect yourself from these swings. Build in supplier diversity from the start—even if your cost per unit increases slightly—because your margin is only as secure as your weakest input.
Storage and Handling Fees
Warehousing costs are rarely clean or transparent. Between pallet fees, in/out handling charges, and SKU complexity penalties, your storage line item can grow silently as you scale. This is especially true as you add formats, bundles, or seasonal inventory. If you’re not allocating these costs by SKU or channel, you won’t know where the real drag is coming from. Flat averages hide the truth. Don’t treat warehousing as a flat ops expense—fold it into your true cost-to-serve and evaluate accordingly. Factor storage into your pricing model with real granularity; your most profitable SKU on paper might be the least profitable one in motion. And don’t forget to track shrink, mis-picks, and accessorial fees—they add up.
Warehousing Costs are usually presented as different “touch” actions your product might go thru:
Per pallet storage charges
Inbound/outbound handling fees
Breaking pallets or case picking
Inventory reconciliation counting costs
How to Protect Your Margins
Use the Cost-to-Serve Pricing Calculator to model true unit economics
Forecast and update COGS quarterly; revisit formulas, freight, and inputs
Only print and produce against confirmed POs—no projections
RFQ your freight lanes, co-packers, and warehouse providers regularly
Review all promo participation and broker agreements with a margin lens
Track retailer compliance charges; build them into your forecast
Treat every hidden cost like it’s already on your P&L—because it is