suppliers... pricing... and where do you stand?

[hanihotdog]

 

The dynamics of the bulk industry give suppliers the upper hand. I am not suggesting that I disagree with the strategy (even though I am on the wrong end of it!!). Disclaimer, we used to invest in bulk vending, but made a conscious decision 10 years ago to stop growing bulk and focus on other opportunities..

First lets take a look at the industry landscape. The bulk capsule industry has one large supplier, and a few smaller suppliers that make up 90+% of the market. The suppliers have a relatively good barrier to entry, in that they have capsule manufacturing technology and large warehouses. The cost to find customers is relatively high because the market is so fragmented. It would be very difficult for a new entrant to absorb the technological barrier while finding the tens of thousands of small customers that are necessary to cover overhead. The threat of new entrants is low. Economists would call this an Oligopoly. If you are not familiar with an oligopoly...http://economicsonline.co.uk/Business_economics/Oligopoly.html

On the flip side, the bulk industry has thousands of buyers. CMILLER (an AA Global employee?) pointed out that most customers are very small.. The “large supplier” is a 40million dollar a year operation!! The average buyer probably has annual purchases of <$5,000!! Do you think a small mom and pop has bargaining power over a 40 million dollar company! I am not suggesting that the suppliers do not value the customer, just pointing out that they dictate the terms.. not the vendor.

That said, suppliers do not operate at a level where they can sell the most goods. Instead, suppliers will try to differentiate their product from the competition in an effort to cut production and operate at the level that maximizes profits. For instance, the “large supplier” has a license with a major sporting league... The supplier could operate at a normal margin and sell a boat load of product, or they can increase pricing and sell less product, but at a much higher margin to maximize profits.. The small scale buyers cannot stop the supplier from doing this because the supplier has the upper hand. The small scale vendor reacts to competitive forces in their market, and must chase revenue to outperform the competition because industry commissions are based on sales not margin.

You do have a choice to find a substitute. Maybe you can buy a product like bouncy balls or gum that do not require a capsule? I strongly recommend that!! The true substitute is DIY. Pay someone to capsule for you and you will find that you are hardly saving money. The bulk suppliers pay people with special needs as low as $.75 /case to capsule. There is a price floor set at the true DIY cost. You will almost never see prices below that level.

Here is an illustration of how projected sale based pricing works:

Assumptions:

This is a 2” product analysis.. Product comparison over a set amount of time, not until products empty out.. Suppliers cannot charge a regional fee for products that sell better in one geography over another, therefore, national averages are used. BASELINE is determined by the national average revenue per machine @ $25/case product or 20% cost of goods sold @ a 50 cent vend. The actual sales numbers do not matter because this is a “relative” exercise. Average Commission rate of 30% used... service, general and admin costs are not included.

Assume you are “the large supplier” and you want to find out what the highest possible selling price of a new item is. You have done some test market studies and you found that on average the new product will make the vendors sales increase by 37%. You want the vendors income from the new product to be >“baseline” numbers, so you solve for C (cost of goods sold)

Here is the formula for your income after product and commissions.

R=revenue, X=commission %, C=cost of goods sold as a %, P=income

P=R-R(c+x)

now lets plug in our BASELINE numbers 20% product cost & 30% Commission.

P=R-R(.2+.3)

P=R-.5R

Baseline P= 50% of revenue

The analyst at “large supplier” wants to make sure that the vendors income is equal to or greater than “Baseline.”

Substitute .5 for P and 1.37 (increased revenue from new product) for R solve for C.

Formula looks like this:

.5=1.37-1.37(c+.3)

Solve for C

Cost of goods Sold = .335

In other words, If “large supplier” finds out they have a product that will increase sales on average by 37% above baseline in a given time period, they have the power to take all of the excess profit out of the product and charge $42/case ($125*.335). The Vendor will have an increase in revenue of 37%!! Sounds Great!! the vendors account will make an extra 37%!! “large supplier” makes an extra $17/case, or an increase of 68%. Everyone made more money but you!! your profit stays the same!! You just had to tie up a little extra cash to make the same amount of money, but at the end of the day you are glad you did because you paid your customer so much money, and you stand out from the competition....

On the vendor side.. Our industry is extremely competitive. If a vendor in your area always runs an “A” product at a low cost/transaction/high revenue, they will pay the local accounts more than you because industry commissions are based on revenue not profits!! You will be forced to adopt competitive strategy in the long run. If you do not adopt competitive strategy you risk losing your accounts to them because they have a better return on space for the landlord. Example.. read posts about “havending” success replacing “service vending” with lower price point higher revenue products.

In Conclusion, The sales manager of “large supplier” once told me (with a grin on his face).. “Who makes the money.. the Pimp or the *****?”... you are a price taker.. Suppliers will force pricing of above average products “down your throat”... so what do you do about it?? As a buyer (with no purchasing leverage) your best bet is to limit niche products like capsules and focus on higher margin/highly competitive low priced products such as gum and balls. Increase your capsule prices and keep your ball/gum prices low... direct customers to your higher margin/lower priced gum and balls so that you can increase your profits.

[rodney69]

Although I do agree with your biggest profit idea, I don't think that that would be all I would offer. I'm not sold on 2" in anything except where it moves quickly, but if you are going to be in restaurants and commission spots, you almost have to offer capsules. You have to be competitive. 

It's not just the suppliers that run the vendors. It's the competition that we face that pushes us to expand. Also, balls are about a 20-25% product cost while capsules at .50 are around 15% or less. You can stick with things that always sell like sticky, balls and gum, but I have lots of locations that bouncy balls sell way to slow. 

I also know that for some suppliers, the margin isn't made on one sale. It's on the idea of many sales like ours is as well. Everyone always blames the sellers and forgets to look at the rest of it like fuel costs.

 

We can look at it any way we want, it's supply and demand. 

 

For me, I will put out as many gumball machines I can, but I will also add the equipment necessary to keep up with the competition, change price points and move on. 

 

Complaining about suppliers isn't going to help, not saying you are but many have. The price is driven by the economy, by China, the American way, and everything else. 

 

Look at the city in Cali that just made minimum wage 15.00, every business that operates there will have to increase everything else. The idea behind min wage was for a teen looking to add money, be taught how to work, and to get through school, not a parent that chose min wage or didn't do well in life.

But that's another discussion! LOL

[Makes Cents]

I agree with most of what hanihotdog said.

 

That being said there is still good profit left in bulk toys

 

When I look at my toy rack I veiw it the same way a retailer would view their merchandise racks. I have my higher margin items, lower profit items, fast movers and slower movers. My job is to balance them all out so that I am getting turns, my location is making good money and Im making good money & profit.

 

My rack schematic almost always include higher profit selections like gum and 27mm/dice mix and/or 1" cap mix, lower to higher profit 1" items and so on.  I also try and cover two price points on 1" and 2". The only thing I run at the same price point is flat but I still try to maintain a profitable mix.

 

Its true one supplier may have most of the bulk toy market, personally I try not to buy from them. Its not based on price or because I think they're doing something underhanded its just that most of bulk operators buy their product from them and I like to have items that are unique and different from everywhere else.

 

Competition will always be there. I know guys splitting containers and piggy-backing and filling their garages and storage units with good product that I sometimes pull from. They can't compete in the licensing arena but I dont like most licensing stuff anyway.

 

The great equalizer is China, they will sell to anyone and its getting easier and easier everyday to import. Just look at alibaba. If anyone is driving the market its them.
 

[hanihotdog]

are you suggesting that the average mom and pop vendor can purchase less than 5 cases direct from China at a better delivered price than the domestic suppliers? if that is the situation please PM me the factory name and your contact there.

[Makes Cents]

are you suggesting that the average mom and pop vendor can purchase less than 5 cases direct from China at a better delivered price than the domestic suppliers? if that is the situation please PM me the factory name and your contact there.

No these guys are larger operators who are networking and can buy by the container, the smaller guys like my self usually have to go thru importers but once you reach a certain point it can be done.

[hanihotdog]

I agree with your point, buying direct from China is certainly an option. But I think you would agree with me that importing containers is not a viable optionfor 99.9 percent of the market, and therefore does not interfere with or disrupt the supply chain.

[Makes Cents]

I agree. My point was there are alternatives to the large importers and us smaller guys can find value of buying from them. Also I think there are opportunities to network with vendors who do import. The guys I know importing are not as big as you might think they run one or two trucks and sell to operators and are operating out of garages.

The bulk toy supplier chain used to be a big mystery to many operators requiring buying trips to china but websites have drawn back the curtain and the manufacturer exporters are actively looking for buyers. The barrier to entry is not what it once was.

[hanihotdog]

makes cents. .

I think we are talking about two different things... macro vs micro.. My post are referring to a macro environment.. an aggregate of the entire industry. When you look at the micro climate you will find variances and anomalies left and right.

[caserri]

This whole thread gives me a headache. You guys need to get out of vending and start working on a cure for Ebola.

[sherlock]

 

In Conclusion, The sales manager of “large supplier” once told me (with a grin on his face).. “Who makes the money.. the Pimp or the *****?”... you are a price taker.. Suppliers will force pricing of above average products “down your throat”... so what do you do about it?? As a buyer (with no purchasing leverage) your best bet is to limit niche products like capsules and focus on higher margin/highly competitive low priced products such as gum and balls. Increase your capsule prices and keep your ball/gum prices low... direct customers to your higher margin/lower priced gum and balls so that you can increase your profits.

 

 

The points made by the OP are true. But, the same can be said for a lot of industries.

The set-up described is the way business works in most every industry I've been a part of.

 

The good news is that there is still profit to be made in capped items.

Not saying hanihotdog implied we should get out of capped product altogether.

Just making my own points regarding capped items.

 

Geography and size-of-community may vary the product choices one can use to succeed with caps.

But, you can find options and don't have to do away with caps altogether.

 

There are a few capped items that provide me with a lower COG and higher sales-numbers than bouncy balls do.

May take a little trial and error by you as an individual vendor but I am hopeful we could all find such items among the dozens of capped products available...even through the "large supplier".

[sherlock]

I think we are talking about two different things... macro vs micro.. My post are referring to a macro environment.. an aggregate of the entire industry. When you look at the micro climate you will find variances and anomalies left and right.

 

It's important that we keep this in mind.

The variances and anomalies found in the micro environment are what can lead to success for vending business owners regardless of who the "pimp" and who "the street-walker" may be when the industry is viewed as a whole.

[musser]

I think hot dogs point was that the price increases leading to a vend price increase are artificial. The "high perceived value" mantra in my opinion been a bunch of sales bs trying to convince us that somehow raising our prices while real income of our customers is falling is the path to success. Let me put it this way; bulk vending used to be a goldmine, its a copper mine now. Yep we still make money but work a whole lot harder for less return than ever.

 

Really good licensed items can command a high vend price (NFL comes to mind) but most of the so called 1" items should simply be put in 2" caps and the 1" items cheapened or the bottom tier changed to gum, balls, candy.

[Makes Cents]

Vending operators embraced the higher price points only looking at profit but failing to look at the decreased sales volume the higher price point would bring.

 

I agree the price change was artificial, there is no real perceived difference in value in items that are 25 cents or 50 cents. Many of the items are the same identical items run at 25 cents in the past. Compare that to  the old L.M. Becker stuff where you could see the difference in value.

 

I think another contributor to lower volume though is smart phones. Kids and adults today have their heads buried in screens they dont even see the racks on the way out. Its a wonder theres not more parking lot accidents.
 

[musser]

Good point I agree so we have lost a market because there is NOTHING we can sell to attract a large part of our former market. So, again to our point, if we are now selling to a lower income tier than ever before our suppliers are very out of touch with reality.

[hanihotdog]

I think hot dogs point was that the price increases leading to a vend price increase are artificial. The "high perceived value" mantra in my opinion been a bunch of sales bs trying to convince us that somehow raising our prices while real income of our customers is falling is the path to success. Let me put it this way; bulk vending used to be a goldmine, its a copper mine now. Yep we still make money but work a whole lot harder for less return than ever.

Really good licensed items can command a high vend price (NFL comes to mind) but most of the so called 1" items should simply be put in 2" caps and the 1" items cheapened or the bottom tier changed to gum, balls, candy.

[mjacks]

I think hot dogs point was that the price increases leading to a vend price increase are artificial. The "high perceived value" mantra in my opinion been a bunch of sales bs trying to convince us that somehow raising our prices while real income of our customers is falling is the path to success. Let me put it this way; bulk vending used to be a goldmine, its a copper mine now. Yep we still make money but work a whole lot harder for less return than ever.

 

Really good licensed items can command a high vend price (NFL comes to mind) but most of the so called 1" items should simply be put in 2" caps and the 1" items cheapened or the bottom tier changed to gum, balls, candy.

When I started converting my locations from .50/.25 to 1.00/.50 and went ahead and bought some $1 mix 2" items thinking I would need the extra oomph to maintain sales levels but it didn't pan out that way.  The nicer stuff didn't sell nearly as well as my old .50 standards and I have since gone away from anything priced to sell at a $1.  I make the same amount of money but I only move 1/2 the product to do it.  I essentially doubled my profit margin with out changing the product.

 

I am not saying I don't rotate product but I stay at the price point of $30-35 box (2") instead or having to go to anything more expensive than that.

[hanihotdog]

MJax, are you saying that you sold 30 to $35 per case items at a 50 cent vend? or were you selling $25 per case items at a 50 cent vend? if you were able to increase price points by 100% and sell the same stuff with no drop in gross sales.. I'm really impressed! Good for you!

[shepherdsflock]

I would make the argument that 1" capsules are more cost effective for a small time operator than bouncy balls. When you include the shipping cost on heavy bouncy balls, they are every bit as expensive at capsules unless you order several cases at a time. Then add that I can sell 1" capsules for 50 cents in any of my locations and struggle to sell bouncy balls for 25 cents, and you begin to see why I don't have very many bouncy balls in my locations. What I have started to have success with is selling Nerds gumballs for 50 cents each. And flat items at 50 cents are still very cost competitive; though I've been thinking about experimenting with 75 cent vend prices.

[rodney69]

My flat cost hasn't changed hardly at all in 8 years, maybe shipping a little bit, bouncy balls have gone up 20%, capsule prices at TNT only 10% at most. Though they are not as big as some as the company's, their stuff sells better.

I have to agree with Sheperd'sflock, capsules are cheaper on shipping and if not buying in bulk BB's come up to a high cog. Mine only sell good in one or 2 locations. The rest of the locations I would make more on candy in volume than on those! 

[hanihotdog]

we only buy bouncy balls in large quantities.. pallet loads. that is an excellent point that You bring up about small orders. especially if you're not in a close proximity to the major distributors. We are not far from the major distributors. this is counter intuitive, but shipping bouncy balls by the skid load is cheaper than shipping plush toys by the skid load because of the density 125 freight class versus 250... at least that's how it has worked out for me in the past.

[Makes Cents]

My flat cost hasn't changed hardly at all in 8 years, maybe shipping a little bit, bouncy balls have gone up 20%, capsule prices at TNT only 10% at most. Though they are not as big as some as the company's, their stuff sells better.

I have to agree with Sheperd'sflock, capsules are cheaper on shipping and if not buying in bulk BB's come up to a high cog. Mine only sell good in one or 2 locations. The rest of the locations I would make more on candy in volume than on those!&nbsp;

What are you buying to get 10% cogs. Most of TNT 1" caps I see on the site is $17.00 so .068 ea. Are you getting it cheaper and, if so, what kind of quantity do you have to buy?

[mjacks]

MJax, are you saying that you sold 30 to $35 per case items at a 50 cent vend? or were you selling $25 per case items at a 50 cent vend? if you were able to increase price points by 100% and sell the same stuff with no drop in gross sales.. I'm really impressed! Good for you!

To put it more simply I increased the price from .50 to 1.00 with out changing the avg cost of the products.  I thought revenue would slip a bit but it didn't.  I simply sell less capsules and pull in the same amount of quarters doing it.  I think parents give their kids a fixed amount of money to spend and the kids put it in the machines. 

[redmms250713]

To put it more simply I increased the price from .50 to 1.00 with out changing the avg cost of the products.  I thought revenue would slip a bit but it didn't.  I simply sell less capsules and pull in the same amount of quarters doing it.  I think parents give their kids a fixed amount of money to spend and the kids put it in the machines. 

 

your selling 2" at $1? What is popular for you?

[musser]

That's a fact hot dog

[BouncyBalls]

What are you buying to get 10% cogs. Most of TNT 1" caps I see on the site is $17.00 so .068 ea. Are you getting it cheaper and, if so, what kind of quantity do you have to buy?

He was speaking of the increase of COG's.