Sears pet peave..

[woodturner]

I realize they probably never sold a lot of 1/2" individual nutdrivers. But they charge like $9, and probably pay $1-$2 each. It sure would be nice if they could stock them for when I need one.

The store pays around $6 for that $9 retail price driver. Of course, that is Craftsman, so there is a warranty cost as well.

The economics of retailing and manufacturing are not intuitive for most people. For example, you may wonder why that nut driver costs so much less per unit when bought in a set. It's the packaging - the fancy full color packaging we demand as consumers is the dominant cost in many products.

[cgallery]

The store pays around $6 for that $9 retail price driver. Of course, that is Craftsman, so there is a warranty cost as well.

The economics of retailing and manufacturing are not intuitive for most people. For example, you may wonder why that nut driver costs so much less per unit when bought in a set. It's the packaging - the fancy full color packaging we demand as consumers is the dominant cost in many products.

If you can buy them as part of a set for $4.25 each, then I assure you that their cost is more likely about half that, or my original $2. Perhaps even less.

Sets are priced at "so much less" because it is smart retailing. If you buy one nutdriver, they make a $6 profit. If you notice that "the set is a better bargain," they make $15 or $16 profit. It is classic upselling.

Packaging doesn't even enter into it, then use very simple plastic hangers that probably don't cost more than a dime or two.

[Charlie]

Deleted by me.

[LCHIEN]

If you can buy them as part of a set for $4.25 each, then I assure you that their cost is more likely about half that, or my original $2. Perhaps even less.

Sets are priced at "so much less" because it is smart retailing. If you buy one nutdriver, they make a $6 profit. If you notice that "the set is a better bargain," they make $15 or $16 profit. It is classic upselling.

Packaging doesn't even enter into it, then use very simple plastic hangers that probably don't cost more than a dime or two.

I agree with Phil, the rule of thumb for costs is that it doubles at each stage - manufacturer makes it for $1 (cost of materials labor and overhead), sells it for $2 to the wholesaler, wholesaler sells it to the retailer for $4, retailer sells it to the public for $8. The quantity of the transaction goes down at each point, the manufacturer will make a production run of 100,000 and sell to 10 different wholesalers and the wholsalers will sell 1000 to each retailer who may have 100 stores an sell 10 at each store, and joe public buys 1 at a time.

Buying a set of similar objects is like getting a quantity discount.

That's in addition to the effect Phil suggested about buying one tool size for $6 or a whole set for $10 - they make more net money from the set and at the sub-$20 price point is an easier sell.

Price margins go down on higher priced objects... a car is marked up only a few hundred dollars on a $20,000 cost but there have been lots of markups along the way.

I think groceries are an exception - the markups on these seem to be in the few cents per item and I imagine this is because we buy so much groceries on a trip, we're like a wholesale consumer.



Of

[germdoc]

I hate sealing driveways.

A couple of years ago I sealed my 200' driveway, spent a LOT of money, took a whole weekend, and my neighbor drove up the common part of the driveway before it had cured DESPITE a previous conversation about such and a sign telling her not to do so.

I'm glad I sold the house before the whole driveway broke into pieces and slid down the hill (as it was in the process of doing).

Re' Sears: if the price is right, let the buyer beware, etc., etc. A few years ago they had their Rikon-made 10" bandsaws on sale and I snapped one up--great purchase, good customer service.

[woodturner]

If you can buy them as part of a set for $4.25 each, then I assure you that their cost is more likely about half that, or my original $2. Perhaps even less.

Sets are priced at "so much less" because it is smart retailing. If you buy one nutdriver, they make a $6 profit. If you notice that "the set is a better bargain," they make $15 or $16 profit. It is classic upselling.

Packaging doesn't even enter into it, then use very simple plastic hangers that probably don't cost more than a dime or two.

As I said, the economic realities of retailing and manufacturing are NOT intuitive. While what you suggest seems intuitively correct, it's not accurate.

The burdened store cost for most products is 1/3 of retail - so the store pays $6 for that nut driver they sell for $9. Discount stores like Walmart trim those margins, so they may only make gross profit of 15% to 20% on a product, rather than the 30% department stores like Sears strive for. Keep in mind, too, this is gross profit - they have to cover all of their operating costs from that. Net profit is 5% to 10% if they are lucky.

Packaging costs are often half the cost of the product - that's why the sets cost less per unit. Instead of printing the fancy 4 color card for each nutdriver, they can print one card for several nutdrivers. When you consider that even the small cards on something like a single nutdriver cost more than $1 to print, even in million piece quantities, it's easy to see how the box and packaging can contribute half the manufacturing cost of the product.

[woodturner]

I agree with Phil, the rule of thumb for costs is that it doubles at each stage - manufacturer makes it for $1 (cost of materials labor and overhead), sells it for $2 to the wholesaler, wholesaler sells it to the retailer for $4, retailer sells it to the public for $8.

The "rule of thumb" for retail is 1/3 - manufacturer gets a third, distributor gets a third, retailer gets a third.

So the manufacturer gets $3, the distributor or wholesaler gets $3, and retailer gets $3 for a $9 product.

Could be different in other markets and industries, but I can confirm from many years of personal experience that the "rule of a third" is the norm for US manufacturing and retail operations. As I noted in the other post, deep discount stores like Walmart try to trim those margins a bit, typically by by-passing the wholesaler and keeping their costs low so they can live on a 15% to 20% gross margin rather than 33%. But they also try to pressure the manufacturers to sell for lower cost - which is one of the reasons you won't find our products at Walmart.

I think groceries are an exception - the markups on these seem to be in the few cents per item and I imagine this is because we buy so much groceries on a trip, we're like a wholesale consumer.

Actually, markups on brand name groceries are about the same (1/3), sometimes greater (40% to 60%) depending on brand. Ever wonder why the generic or store brand costs half the name brand? It is often the same product made in the same factory with a different label. May be a little savings in the packaging - three color instead of four color printing, lower quality paper - but the primary difference is lower markup.

[cgallery]

As I said, the economic realities of retailing and manufacturing are NOT intuitive. While what you suggest seems intuitively correct, it's not accurate.

The burdened store cost for most products is 1/3 of retail - so the store pays $6 for that nut driver they sell for $9.

We aren't talking about burdened cost. And the "burdened store cost for most products is 1/3 of retail" is nonsensical. The overhead of the Sears store on the Magnificent Mile is probably twice that of the store in the mall near me (where they have a very favorable lease).

Discount stores like Walmart trim those margins, so they may only make gross profit of 15% to 20% on a product, rather than the 30% department stores like Sears strive for. Keep in mind, too, this is gross profit - they have to cover all of their operating costs from that. Net profit is 5% to 10% if they are lucky.

No argument that I'm talking about gross profit. They make a gross profit of $6 on an $8 nutdriver, and when they're all done, shareholders may see a few cents of that. The rents, payroll, logistics, advertising, etc., eat almost all of the $6 profit. Never said it didn't.

And WalMart doesn't sell much for 15 to 20% above cost. WalMart knows that to be successful, they only have to be a little less expensive.

Packaging costs are often half the cost of the product - that's why the sets cost less per unit.

If you're talking about women's cosmetics, you're right. If you're talking about tools, you're absolutely, 100%, incorrect.

Instead of printing the fancy 4 color card for each nutdriver, they can print one card for several nutdrivers. When you consider that even the small cards on something like a single nutdriver cost more than $1 to print, even in million piece quantities, it's easy to see how the box and packaging can contribute half the manufacturing cost of the product.

4-color cards in qty. 1M do not cost $1. I can get all the die cut cards you want for pennies each.

[cgallery]

The "rule of thumb" for retail is 1/3 - manufacturer gets a third, distributor gets a third, retailer gets a third.

So the manufacturer gets $3, the distributor or wholesaler gets $3, and retailer gets $3 for a $9 product.

I've been in retail for over 25 years, from the day I turned 16 and went to work for Heathkit. I've never heard such a thing. Manufacturer sets their price to maximize profits based upon their production capacity. Distributors add 5-10%. Retail cannot survive on less than forty percent, and will try to get as much as they can.

Could be different in other markets and industries, but I can confirm from many years of personal experience that the "rule of a third" is the norm for US manufacturing and retail operations. As I noted in the other post, deep discount stores like Walmart try to trim those margins a bit, typically by by-passing the wholesaler and keeping their costs low so they can live on a 15% to 20% gross margin rather than 33%. But they also try to pressure the manufacturers to sell for lower cost - which is one of the reasons you won't find our products at Walmart.

Sears, WalMart, Target, Best Buy, etc., are all large enough that they all work directly with manufacturers and don't entertain distributors. Distributors are for small retail.

Actually, markups on brand name groceries are about the same (1/3), sometimes greater (40% to 60%) depending on brand. Ever wonder why the generic or store brand costs half the name brand? It is often the same product made in the same factory with a different label. May be a little savings in the packaging - three color instead of four color printing, lower quality paper - but the primary difference is lower markup.

While lower velocity items in a grocery store may enjoy higher markups, the high velocity items Loring was referring to enjoy single digit marups.

And the generic is less expensive because it doesn't have the advertising and marketing costs built in.

[billwmeyer]

I was in retail for 16 years, and I would agree with CGALLERY. His statements on markup are right on the money.

Also, packaging is a high expense. The die cut cards are not too expensive, but don't forget the blister pack, bag or however it goes with the die card. Also it costs more to handle each item as compared to a multipack. Also the legal department has to scrutinize anything written on the package. Then it has to go into another box to ship and be handled more. Packaging is a large expense, especially on small items. On higher priced items it can become somewhat insignigicant.

Bill

[woodturner]

No argument that I'm talking about gross profit. They make a gross profit of $6 on an $8 nutdriver, and when they're all done, shareholders may see a few cents of that.

But the point is that Sears gross profit on that $9 retail cost nut driver is $3, not $6.

And WalMart doesn't sell much for 15 to 20% above cost.

That is their goal, but they don't always achieve it.

Ever wonder how stores can have sales and clearance, when they sell products below their cost? Why a store would do that? It's because the carrying costs of the inventory exceed it's value - so the longer they keep it, the more it costs them. Some stores clearance, other stores (e.g. Walmart) often write it off and destroy it.

If you're talking about tools, you're absolutely, 100%, incorrect.

Don't know about women's cosmetics - I only know that my information is accurate for the business areas where I have direct experience, which is tools and electronics.

4-color cards in qty. 1M do not cost $1. I can get all the die cut cards you want for pennies each.

Great!! Please give me a source. If I can shave even a few pennies off the 4 color glossy cards, the CEO will LOVE me ;-) What are you paying for 4" x 6" four color glossy two sided diecut contoured cards from camera-ready artwork in 10M piece quantities?

[woodturner]

Manufacturer sets their price to maximize profits based upon their production capacity. Distributors add 5-10%. Retail cannot survive on less than forty percent, and will try to get as much as they can.

Could be true for some businesses, but in electronics and tools, the norm is 1/3, 1/3, 1/3 (approximately)

Sears, WalMart, Target, Best Buy, etc., are all large enough that they all work directly with manufacturers and don't entertain distributors.

It's not about the store size, it's about the volume of a particular product. One of the things that surprised me is how low the volumes are for those stores. How many HDTVs of a particular model would you think Sears sells in a year? For their best seller, it's in the 10's of thousands, not hundreds of thousands. As a manufacturer, if you aren't going to buy at least 100,000, we will send you to a distributor or wholesaler. Our business is volume-based, due to the economies of scale, and we can't afford to deal directly with smaller purchasers. As a result, we deal almost exclusively with wholesalers, and the retail stores you mentioned (except for WalMart) buy through those distributors/wholesalers.

Walmart is a bit of an "odd duck" - they want to deal direct and trim out the "middleman". In addition, they want to dictate terms to the manufacturers. Some will do it - obviously, since Walmart stores do have products - but a lot will not, which is why several very significant brand names are missing from Walmart stores.
Distributors are for small retail.

And the generic is less expensive because it doesn't have the advertising and marketing costs built in.

That's a little bit of it, but mostly it's the lower markup (according to my uncle the grocery store exec).

[woodturner]

Also, packaging is a high expense.

At least we agree on this :-)

Some years back, we were working on a consumer electronic product that would retail for $48 - so we had to get the wholesale price to $16 (1/3, 1/3, 1/3 rule of thumb). We got the electronics down to $8 - but we couldn't get marketing to budge on their pretty $10 color box.

We tried having them printed in the far east (quality issues, shipping costs were high). We looked at manufacturing in the far east ($4 manufacturing cost, $6 shipping cost, quality issues).

In the end, we ended up selling it for $18 and it retailed for $54. Definitely affected sales - I don't think we sold more than 50M of that product - but it turned out to be the only compromise we could make happen.

[woodturner]

I was in retail for 16 years

Much of this information is closely guarded - stores don't want customers to know what their real costs are. However, as a result of a lawsuit, much of Walmart's pricing structure is available on the web.

It's like car dealers - what does a car dealer pay for a $20K sticker price car? Consumer Reports suggests that they pay 3% to 6% below that price - the "invoice" price. Sometimes they talk about a holdback in the range of 3%. So CR would have us believe they are paying at least $18k for that car.

Even a lot of car salespeople and even managers accept that model. There is no "middleman", cars are sold from manufacturer to dealership. There are a a lot of "games played" to hide the true cost of the car. But according to a VP at Ford, the "real net cost" to the dealership for a $20K is about half that - $10K.

Keep that in mind the next time the car salesperson tells you they will make no profit if they sell at invoice. They may well believe that, but it's not the complete picture.

[cgallery]

But the point is that Sears gross profit on that $9 retail cost nut driver is $3, not $6.

I guess we will have to agree to disagree on that.

Great!! Please give me a source. If I can shave even a few pennies off the 4 color glossy cards, the CEO will LOVE me ;-) What are you paying for 4" x 6" four color glossy two sided diecut contoured cards from camera-ready artwork in 10M piece quantities?

PsPrint, qty 10k, 4x6 from a die in their arsenal (hundreds to chose from), $.076 each. That is 7.6 cents each.

If you can take a container of them, and don't mind 60-90 days lead time, you can get them for half of that.