An Introduction to the Grocery & CPG Supply Chain Category

In this article, learn about: 

• The three fulfillment paths a grocery and CPG supplier can be running at the same time 

• Why grocery's thin margins change how much a compliance error costs you 

• The vocabulary worth knowing before you scale in (catch weight, OTIF, FSMA 204) 

Landing a buyer meeting with Kroger, Publix, or a major grocery chain feels like proof your brand is ready to scale. The shelf space is enormous, and the volume potential dwarfs most other retail channels. But suppliers coming out of general retail or DTC are often surprised by how different the supply chain underneath grocery and CPG runs once they're inside it. 

A single supplier in this category can be running three separate fulfillment paths at the same time: shipping to a retailer's own warehouse (self-distribution), selling through a third-party distributor, and delivering straight to the store shelf, all for the same product line. Layer on margins thin enough that a routine fill-rate slip becomes a real financial event, and the category is worth mapping out before you scale into it. 

Within the grocery and CPG landscape, there are three fulfillment paths that most suppliers follow:  

• Direct to the retailer’s warehouse 

• Third-party distribution 

• Direct store delivery (DSD) 

1. Direct to the Retailer's Warehouse 

This path looks the most like general retail. You ship straight to a retailer-owned distribution center (DC), and the retailer controls everything from there, including last-mile delivery to the store. It's the path most center-store CPGs with steady, predictable velocity utilize. 

2. Third-Party Distributors 

Wholesalers like UNFI, KeHE, C&S Wholesale Grocers, and Sysco buy your product and resell it to retailers, layering their own compliance requirements and EDI documentation on top of whatever the retailer already requires. A distributor also takes on the credit, storage, and compliance risk that sits between you and the retailer, which is why this fulfillment path suits products with a longer shelf life and a predictable order pattern. 

The scale of this layer is easy to underestimate. UNFI's own investor materials describe serving roughly 11,000 suppliers across about 250,000 products into more than 30,000 customer locations. That's closer to a parallel retail network than a single buying relationship, and it's worth treating it that way from the start. 

Related Reading: Working with Distributors: Onboarding, Compliance, and Disputing Chargebacks 

3. Direct Store Delivery (DSD) 

DSD is the path where you or your distributor deliver straight to the store shelf, skipping the retailer's DC entirely. This option is most common with fast-turning or perishable items, where shelf life doesn't leave room for an extra stop at a DC. Fresh bread, dairy, and other perishables often need to move from truck to shelf faster than a warehouse stop allows, whether that warehouse belongs to a distributor or the retailer itself. 

Why Grocery's Margins Change the Math for Suppliers 

Food retail profit margins averaged 2.1% in 2025, according to FMI's Food Retailing Industry Speaks 2026 report. Roughly 11% of retailers reported operating losses for the year. Those numbers explain a lot about how grocery retailers react when something goes wrong. 

Grocery runs on volume rather than markup. Shoppers buy groceries every week, so they know what staples should cost and will switch stores over small price differences, which limits how much a retailer can mark up center-store items in the first place. Perishable categories add to the squeeze, since unsold or spoiled product is a direct loss rather than a markdown. Layer on the fixed costs of refrigeration, real estate, and labor-intensive receiving, and there's very little buffer built into the business model to begin with. 

A category running on margins that thin has almost no room to absorb a compliance miss. If you've sold into general retail before, you may be used to an occasional shipping error drawing a minor deduction and nothing more. In grocery, that same error can strain the retailer relationship, simply because the retailer has so little margin left to absorb the disruption while it gets sorted out. 

The Vocabulary You'll Need 

Grocery and CPG comes with its own shorthand that doesn't always come up in general retail: 

• Catch weight items are priced and invoiced by their actual weight rather than a fixed per-unit price, common in meat, produce, and deli. A case of chicken thighs can ship at a slightly different total weight every time, so invoicing has to account for that variation instead of billing a flat rate. 

• OTIF and fill rate are shorthand for on-time, in-full delivery performance, and one of the main compliance benchmarks you'll be measured against. Grocery's delivery windows run tighter than general retail, and retailers track this closely given the margins involved. 

• FSMA 204 is the FDA's food traceability rule, requiring suppliers to maintain Key Data Elements tied to specific points in the supply chain called Critical Tracking Events. The compliance date sits at July 20, 2028, after a 30-month extension from the original January 2026 deadline.  

How Deductions Work in the Category 

A lot of new grocery suppliers are surprised to find two separate deduction systems running simultaneously, from the retailer and the distributor. A retailer applies deductions after invoice. Each one is coded to a specific compliance failure, the model Kroger and most grocery retailers use. A distributor handles it differently, often through a hold placed at the receiving dock before the invoice is even settled. KeHE calls this a UDR, short for Unloading Discrepancy Report. UNFI runs its own dispute process through a system called ePASS. 

Both carry real deadlines, and missing one usually means losing the ability to dispute the charge. The codes, documentation, and response windows differ enough between a retailer deduction and a distributor deduction that each deserves its own full walkthrough. 

Related Reading: Disputing Distributor Deductions and Chargebacks 

What to Track Once You're Operating in the Category 

Once you're live in grocery and CPG, a handful of benchmarks become your ongoing scorecard:  

• OTIF 

• Fill rate 

• Compliance rate 

• Inventory turnover 

• Chargeback rate 

Each carries specific context. What counts as a passing OTIF score, for example, can vary between a retailer and a distributor, and between a center-store product and a perishable one. 

Running All Three Paths at Once 

The Good Crisp Company, a gluten-free snack brand, sells into Whole Foods, Walmart, Kroger, Hy-Vee, HEB, Thrive Market, and Target at the same time, a working example of what managing multiple retailer relationships, and the fulfillment models behind them, looks like once you're operating across the category. 

Bubs Australia tells a different kind of scale story. The infant nutrition supplier onboarded more than 50 new retailers and shipped over 1.25 million units during the 2022 U.S. infant formula shortage, rapid, crisis-driven expansion rather than the steady growth most brands plan around. 

Where to Go From Here 

This piece covers the category's basic structure. The metrics benchmarks, deduction codes and dispute windows, and cold-chain and perishables handling live in our companion pieces on The Supply Chain Source. 

This article references the FDA's food traceability requirements under FSMA 204 for general informational purposes. Talk to your own regulatory or legal counsel to understand how the rule applies to your specific products and operations.