| |
I read a similar article in another publication about a month ago and it upset
me then. I think it was in Newsweek.
Anyway, it upset me because the reporter must have been an idoit! The phenomenon
of the "loss leader" is a myth! Yes a Myth! I remember the article talked about
a non-lego toy product that WalMart was selling below the MSRP. The MSRP for
those that do not know is the Manufacturer SUGGESTED Retail Price. The item, if
I remember, was a $20 MSRP that WalMart was selling for $15. No one else had it
for $15.
If you follow the standard mantra of MBA teachings or indoctrination, which ever
you want to call it, the standard markup by a manufacturer is about 40%. So an
item that is MSRP for $20 should be about $12 or $14 depending on which way you
work the equation (take 40% off the MSRP or add 40% to the base price to get to
the $20 MSRP). So if the information that I pass is acurate, then Walmart
selling a toy for $15 that they paid $12 to $14 for is hardly a loss leader. To
comply with the definition of a loss leader, then WalMart must sell the toy for
less than what they paid for it.
CAN ANYONE THAT WORKS FOR ANY COMPANY ACTUALLY PROVE A COMPANY CHARGES LESS THAN
WHAT THEY PAID? Companies that are going out of business or are money laundering
scemes do not count.
Keep in mind the company that made the toy may be charging $12 to $14 but that
is what they are charging to make and profit from the toy. While those margins
get smaller and smaller, I doubt any toys would be made if companies were not
profiting.
I remember reading once that toys cost 1/10 of what is paid for them at the
store. This is to say that a $10 toy at WalMart cost $1 to make. And yes, it
sucks that the manufacturer of the box that the cereal went into got paid more
than the farmers that made the grain and food stuffs that went into making the
cereal, but the nature of competition demands the farmer charge what he thinks
is reasonable for his costs. If the guy that makes the box gets paid more than
thats becuase there is no one making the box for less, assuming the cereal
company isn't looking for the most expensive box. I am certain that the ceral
company is not looking for the most expensive grain.
So a $14 dollar toy charged to WalMart cost $2 to make (I rounded up). Shipping
and transportation cost as well so I am certain that the toy ended up at WalMart
for about $9 to $7 in actual cost to the toy company leaving $3 to $7 in profit.
Since WalMart buys months worth of a production run, some companies might be
willing to shave the profit per unit in favor of profit from quantity.
However, much money is being made (or lost) WalMart is not going out of
business, only those that cannot compete. While I am sad to see the likes of Toy
giants such as FAO Shwartz go out of business, there model of business is no
longer viable in today's climate and they refused to change. In Atlanta there
was a new FAO Shwartz and it was a huge store. It was not 1/2 a mile from a
Target where the same toys were sold at the MSRP. FAO Shwartz offered the toys
are 10% over the MSRP. I guess they thought the consumer was stupid or
something. And clearly, they could not keep in business selling only items the
other stores did not have. K-Bee recently settled a class action lawsuit by
placing everything in the store on sale for a short period of time becuase of
their poor pricing practice. Look for them to be next in the toy re-seller
bankruptcy business.
I am amazed at how many companies embrace the capitalistic system of competition
and then cry when things aren't going their way. True, companies going out of
business will result in less competition, but cutting the fat from the steak is
ultimately good for the business, the consumer, and the economy.
The LEGO Company is experiencing competition from no less than 4 other
manufactures of brick like construction toys. How do they compete? What will
their strategy be? Are they on the right track? Do we want them to survive?
(Dumb question, I know). We know they offer the best product, but clearly there
are four other companies that feel either they can beat or compete with LEGO on
their turf. They are either going to do it by producing a cheaper product or by
offering the types of products that LEGO Company cannot or does not. I offer as
evidens the Best-Lock bricks and their military themes and the Mega-Blocks and
their recent Ninja Turtles licensed product.
Now not all of WalMart practices are positive. They have a way of muscleing
themselves because of their size and buying power. If a company eager to garner
their business is too stupid to give them a final price and not go below a price
that is no longer profitable for them, then nature (and business) is a survival
of the fitest. Stemple tried the same things with the parts suppliers to GM car
assembly plants. The buyers started going to part manufacturers like drop
forgers and stamping plants and tire manufacturers and saying what GM was
willing to pay for things instead of asking. In several instances the prices GM
were willing to pay were below what it cost the manufacturer to make. So the
parts people either walked away or came down to GM's price. After a couple
years, those that gave GM the price they wanted were out of business and the
businesses that said no to GM were standing there laughing at GM who was then
forced to accept from those that survived what manufacturers wanted. Of course,
this also forced some parts manufacturing out of the US but now other problems
abound for GM. The quality of the parts is less than acceptable, the parts do
not arrive in time for the just-in-time-manufacturing philosophy, and
international agreements are subject to the whims of less than democratic
governments.
The term "Loss Leader" is mostly mythology because companies like WalMart will
not share the true numbers of costs with anyone, including reporters. I cannot
see a long term successful company selling items for less than they pay for
them. Surely WalMart may give things away at cost or just above, but they cannot
be successful long term giving away 10% of the store in the hopes that you buy
the other 90%. Those $30 DVD Player's they sold after Thanksgiving could not
have cost them any money, unless they plan on getting that back in DVD Sales.
I am certain that I do not have all the facts or have all the answers, but I can
assure you that the toy business is not in trouble and there will be plenty of
toys available for placing under the tree this holiday season.
By the way, did you give a Toy-For-Tots, and was it LEGO Bricks?
Todd
|
|
Message has 2 Replies:
Message is in Reply To:
 | | New York Times on Walmart Pricing
|
| Today's (23 December 2003) New York Times has an interesting article on Walmart's effect on the toy market -- pushing toy-specific retailers to the brink. General thrust is that Walmart and sometimes Target are selling numerous toy items below their (...) (21 years ago, 23-Dec-03, to lugnet.market.theory, lugnet.mediawatch)
|
8 Messages in This Thread:
 
 
- Entire Thread on One Page:
- Nested:
All | Brief | Compact | Dots
Linear:
All | Brief | Compact
This Message and its Replies on One Page:
- Nested:
All | Brief | Compact | Dots
Linear:
All | Brief | Compact
|
|
|
|
