Industry Giants Flounder
Having their cake and eating it too while falling to their death in the rush to zero profits.
Recent announcements from Macy’s, Sears, Kmart, and the Limited show that the retail industry is indeed in trouble, and they are not the only ones. As Amazon tightens their grip on the economy, Parrot announced today that they are too laying off 35% of their employees. Hobby giant, Hobbico, released a statement regarding a “delay” in payments to their employee stock-ownership program, and the longtime Atlanta store, Showcase Photo and Video, announced they are ‘going out of business‘.
This is a reflection of what I have been talking about with my staff for a long time. Most products in these, as well as in other industries are the same price, online or in a retail shop. However, due to the ease of letting your fingers do the shopping, merchants still struggle for a share of the pie.
Consumer electronics and hobby products are products that tend to be easy compare prices on. That is to say, you really can’t price shop a sweater (that btw has a 300% gross margin), but you can easily price shop a Sony TV, a Horizon hobby Champ or a DJI Phantom. At the core, consumers only really care about price for these products. While you might think service is king, the reality is consumers sort by lowest price, while demanding the best before and after the sale service and support. But can you really have your cake and eat it too?
Merchants Are Suffering
Merchants have gotten the short end of the stick as consumer trends and shopping habits change, and manufacturers squeeze out distributors. Many manufacturers are opting to sell direct. By doing so they are now directly competing with their long time partners that have supported and helped them to grow their brands.
This is compounded by direct competition out of China where manufacturers sell direct to US consumers many times falsely identifying the content of boxes and bypassing US customs or by selling sub-standard products all while knowing that most consumers will not go to the trouble and expense to try and get support or return a defective product to China due to the associated cost. These countries also grossly manipulate their currency and these foreign governments continue to fund manufacturing, allowing factories to sell direct for prices that are below the actual cost to manufacture the goods.
Each industry is different, but in the US most customers simply do not understand (or care) how businesses work. Most are unaware that retail hobby and electronics stores operate on profits that have been driven to less than a 20% gross margin. What this means is that a typical beginner model airplane that might sell at a store for $99.99, cost the store $79.99. But to really get the full picture you have to do all of the math. For instance that model aircraft product that sells for $99.99 at the store (and online) has the following cost associated with it.
Doing The Math:
For instance that product that sells for $99.99 at the store (and online) has the following cost associated with it.
- Shipping to store from vendor $9.00 (typical model aircraft)
- Shipping to customer from store (if internet based) $9.00
- Credit card charges (3%) $2.99
- General store overhead (15% for a very efficient operation) $14.99.
- Salaries, insurance, advertising, licenses, medical, supplies, rent, heat, air, phone, taxes, repairs etc
Total cost to sell the product $35.98
So in reality, the total cost of an efficient online or retail operation to sell that one $99.99 model airplane is $35.98 but remember the company has to pay $79.99 for the product that they sell for $99.99 so there is only $20 in gross margin for them to pay that $35.98 bill with. So in this example, they lose $15.98 on this sale.
This is just looking at one product, some products have margins that are slightly higher and others lower. A product with a higher sales price does have higher profit dollars but the math remains the same. Based on this, the general picture for a retail shop in the hobby or consumer electronics industry is not good. This is why you seeing what is happening at Hobbico, Showcase and to companies in various other industries.
Does the consumer know where they are shopping?
Recently (12/2016) I had a client email me to say that they were unsubscribing from our email marketing newsletter. He said he was a long time customer and an ex-military man who was disappointed that we were selling Chinese made drones. He said that he was a long time model aircraft customer and would no longer shop with us due to us selling these products. Disappointed in his note (and loss of business) I did my homework.
I responded that our model aircraft business was indeed down and there were, in fact, fewer new aircraft to promote. Our company was indeed promoting with the consumer trends and demands selling drones. I told him that I understood his frustration, but I also need to feed the 20+ employees and their families who I was responsible for each month. I also mentioned that after researching his account with us, I found that he had not made any purchases with us since 2009 (over 5 years). On top of that, I noted that based on his Facebook and other social platforms (which he had shared with me), found he had been buying products direct from China. I did not get a reply.
Convenience is King
Consumer shopping convenience is a large driving force. Some retailers think they can fight back by listing their products for sale on Amazon and other open markets. While convenient, these markets are in (in my opinion) killing choice and the competition by squeezing all of the profit out of products. When consumers buy on open markets like Amazon, they may or may not actually be buying from these companies. Most Amazon transactions are from companies selling on their platform. While this opens up the internet to small retailers, most do not fully do the math to understand the ramifications.
For instance, to list that small model airplane discussed above, Amazon will first get a $35 fee per month. This fee is for the privilege to sell on their platform. Then they (Amazon) will get a 15% commission. Amazon does take care of the 3% in credit card charges, but there is still an additional 12% that the retailer needs to account for (15% – 3%). If you want to be in on the Amazon Prime program, there are additional expenses. You have to ship your products to their warehouse, rent the floor space to store the goods, and pay extra for product handling. On top of this, Amazon is smart. They recognize high performing products and contact the manufacturer directly. They then offer the products themselves, in some cases undercutting the price of their affiliate sellers, further driving the price and profits to zero.
Someone posted that video games were the issue with our industry and kids were not interested in the hobby. I somewhat agree but that is not the point I am trying to make. When I started, the average age of our clients were over 60. Now with drones and better aircraft and the linking of computers and FPV the average age is in the 30’s and we are promoting in the schools as they like the computer part.
This article is however more about the low margins for merchants. Online shopping is not bad , the internet shopping has come about due to consumer demands want for easy shopping and that is all and well good. Companies like mine and others are happy to fill that consumer demand and ship to clients (over 50% of our business is shipped) but what we can’t do is fill the demand even with a very low overhead (my shop is in a warehouse) if there is not enough profit in the product to keep even our internet based doors open.
Why for instance would a company launch a new product that is in high demand that you can’t get anywhere else and sell it to the consumer and their dealers at what is basically cost so no one makes any money. That small $100 plane in my example above could easily be sold for $119 making everyone another $20 but no, the MFG sells it for $99 so we all must sell it for $99 and as such no profit and we all go out of business.
A small mom and pop store could even survive on very low sales if there was any profit in the products. The issue in the CE and Hobby industry is there is no profit, why?
The slide continues. I have heard that other large distributors in this space have slipped from over 300 million in sales to around 100 million in just the past two years, costing hundreds of jobs in the crunch. Some large industry resellers even large internet players have slashed operations, moved to other industries or closed down altogether.
Your Job and Industry are affected, Is there a solution?
We are all consumers and always want the lowest price. I too am guilty of that price sort button when it comes to consumer electronics products. However, if these trends continue and large players like Amazon, and others continue down this race to zero profits path, retail stores will no longer exist. While you might not care or pay attention to stories like this, your business, and job, regardless of the industry, is affected. Remember as profits go lower, companies have no recourse but to cut the highest cost first. In most cases, salaries and jobs are the first to go.
The end result is everyone loses.
I am interested to hear your feedback (see below)
Photo Credit: 010317hobbicostock.png