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Industry Giants Flounder

Industry giants flounder and fail falling to their death in the rush to zero profits due to consumer demands. Credit: 010317hobbicostock.png

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)

Cliff Whitney

Photo Credit: 010317hobbicostock.png

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29 thoughts on “Industry Giants Flounder

  1. Erwin Atchison

    Spot on Cliff. What I have been telling people for some time now. I had a postal employee customer tell me he has delivered a (as in one) roll of toilet paper. They were one block from a supermarket. I suppose we could add LAZY to the cause. Amazon will not be happy until they are the only retailer. Wonder what will happen to prices then? Prime will probably become parcel post.

  2. Bob Afflerback

    The above is interesting and and very well thought out. I try very hard not to shop on line. But as the Hobby and Speed Shops around me go out of business it becomes increasingly harder and harder not to.
    Supporting your local shop makes it possible to get things in an emergence. You bought that $200 kit on line. Now you are mad that the local shop closed because you just damaged your last propeller and it will take 3 days to get one off the internet. You saved $20 by buying the kit mail order but you can’t fly it for 3 days because you didn’t support your local shop ad he closed.
    The local Speed Shop closed about 5 years ago. I went to start my race car last summer and the carb leaked gas all over the top of the manifold. I had 2 choices. If I bought the gaskets mail order I would have paid $9 shipping and handling and had to wait a week. Or, I could drive 35 miles one way to the next closest shop and buy the gaskets. All because it was cheaper to buy the big equipment mail order.
    We need to start teaching economics in school again.

    1. kevin

      Economics is about numbers. There’s no problem with the numbers; Amazon is doing a good job with the numbers. What needs to be taught is business ethics. Amazon is the on-line version of Walmart. I don’t shop at either one.

  3. Cliff Whitney

    Thanks for the comments! Someone posted elsewhere that video games were the issue and kids were not interested in the hobby. I somewhat agree but that is not the point I was 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 the average age is in the 30’s and we are promoting in the schools as they like the computer part.

    The article is however more about the low margins for merchants. Online shopping is not bad , what it is, 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.

    The issue is we are selling very high quality products for little to no money and the MFGS are forcing this. For instance a company launches a new product that is high quality, and in high demand that you can’t get anywhere else. But they sell it direct to the consumer at what is basically dealer cost so no one makes any money. That small $100 plane in my article example could easily be sold for $119 making everyone another $20 and it is worth $20 more and if we sell 100 units that is another 2K and would help pay the rent but no, the MFG sells it for $99 so we all must sell it for $99 as every one can easily price compare it and as such there is no profit and we all go out of business.

    A small mom and pop store could 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?

  4. I am impressed with the concise accuracy of the article you wrote. Thank you for your work writing it. In a word, Awesome.

    Kevin

  5. Tim

    Unfortunately my first exposure to this was in your industry, Cliff. The “big two” in Champaign have been the importer, manufacturer, wholesaler, distributor, and retailer of hobby products for decades. If a retail hobby store relies on these giants for their products and support, they also happen to compete with their price while also paying their invoice. Always strange to me and clearly has reared its ugly head like a snake eating it’s own tail. Thanks for not falling prey to this and doing your own thing.

  6. This comment about Amazon’s practices, really angers me, “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.”

    Apparently they are a company with no ethics and the dollar is the bottom line. I hope the new administration looks into this and levels the playing field somehow for small businesses.

    Every one hurts when businesses close. You may think you don’t need local business but where are people going to work? Where will you get items in an emergency? How will your town’s government run without a tax base that is not a drain on your town as the business doesn’t have children that need to be educated? How high do you want your local taxes to go to be able to afford to keep your schools open?

    Small communities where everyone knew their local business people and supported them so they in turn could support other businesses need to make a comeback.

    A motto I helped develop for a family farm operation is Buy Local, For Life! It says everything.

    Great article!

  7. Bill Stevick

    Hobbico created their online store “Tower Hobbies” years ago where they sold products direct to the consumer for less than they sold them to the hobby shop. I had a hobby shop so I know this to be true. I dont have one anymore, guess why?

  8. Great article a Cliff and I agree 100%. I have been telling people how important it is for the shops to survive because they bring new blood into our hobby, and that’s why we are working with HobbyTown. The Amazon model is worse because they make it super easy for anyone to list against the same product listing so for every 50 merchants who finally realize they are losing money slinging product on Amazon, there are another 50 ready to slot in and give it a try. All the while the profits are driven to zero and Amazon walks away with their 15% and exclusive access to that customer.

    I think the biggest problem is the pricing frenzy driven by Amazon, Hobbico and Horizon on parts and accessories which is where the shops can make up the margins to survive. Kit prices and margins, while low, have been stable for a while with map pricing, but everybody seems to neglect parts and accessories where the margins need to be higher to bring the averages up. Until this changes, the industry will continue to decline.

    Honestly the big guns like Hobbico and Horizon are now reaping the rewards of uncontrolled pricing in our industry for the last 5-6 years and the loss of shops is bringing fewer people into the hobby to replace those that leave naturally. I have been telling them all that for a long time now, but nobody seems to listen.

  9. Stephane Hampartzoumuan

    Great article.

    Have the same issue in my shop far far away from the US.

    I am based in Lebanon and having the exact same issue.

  10. Jason Reagan

    Most likely, brick/mortar retail will decrease to the point that only a select number of showroom-type retailers will exist in the public square.

    Retailers that can offer a consumer some kind of personal experience — only accessible in person will thrive. For example: Yankee Candle Company or Bath and Body Works. Until we can smell things digitally (ha!), experiential/sensory-intensive retailers will survive in the malls and shopping cities.

    Others will be replaced by warehouse retailers delivering by autonomous ground vehicles and drones.

    As far as China goes, they will eventually have to address quality issues and competition will cause the best retailers to rise to the top. One could even see the rise of a “Chinese Quality Market” ratings service (a Consumer-Reports-like app for Chinese retail).

  11. Chris Sabel

    This industry started its downward spiral when the ARF appeared on the shelves. With the desire for immediate gratification came the downfall of building a project, going to the hobby shop for supplies and the desire to learn.I don’t mean to be a negative nelly but the industry itself caused this. I have a custom drone business and I also build fixed wing.
    9 times out of 10 the local chain hobby shop doesn’t have what I need. So now I order online. Stop supporting this type of behavior, stop buying Chinese , Walmart, Amazon and try to retake what was given away.

  12. Great stuff, Cliff! 100% agree with both yours, and Kendall Bennett’s comments above.

    The big boys in our and other hard good industries, have been playing this game for years. Where they pay mere lip-service to the challenges faced by retail stores, but mostly ignore the less tangible benefits of having actual physical locations to lend credibility to their products. Just like counterfactual news headlines on social media – it is nearly imposible for the average consumer to ‘know’ the difference between your ‘quality-controlled’ item, with tested english instructions, etc., and the similar looking ‘direct-from-China’ item on a web page or marketplaces site.

    RE: Kendall’s comments, I’ve been advocating for MAP pricing on parts. Amazon is now looking “off platform” for price comparisons as well, and withholding the Buy button on items where the price may be lower than all the other merchant’s pricing – accelerating the race to the botton.

    I think, the big picture here is, that our elected officials are choosing winners by letting Amazon and others off the hook by not requiring them to collect sales taxes, or allowing states to go after them. There are bipartisan bills that have been stalled in both houses of Congress to address this issue.

    On the local level, politicians often are actually giving taxpayer funded incentives to Amazon, to open warehouses in their states or counties in the name of ‘jobs;’ ignoring the long-term damage they are doing to their main streets and communities.

    We need to stop actively penalizing physical merchants as we do now. Stop tilting the playing field in favor of one side or the other. Profit is not, in fact a bad word – it is necessary for a democratic, capitalist society to survive and thrive.

    M.

  13. Chris

    The economic disruption of the Internet continues. More consolidation of the product distribution channels into a few players and disintermediation of value chain players operating between the manufacturer and consumer will continue. The local brick and mortar stores and smaller internet distributors need to move away from selling ARFs and focus more on emerging hobby-related technology where the consumer needs local goods and services. CAD and 3D printing is one new wave of the hobby. Watch the recent FliteTest show about the 3D-printed P-38. I would like to be able print exactly the plane and version I want, but lack the skills and equipment to do so. I rather print my plane at a hobby store than buy a lesser quality, soon obsolete 3D printer to do so at home. More services supporting customized products, less focus on commodity products, more sustainable profit.

  14. MIke Reynolds

    Cliff,

    Your article was spot on. I work for a global electronics manufacturer, and we make everything from CT Scanning machines for nuclear medicine to electric toothbrushes… virtually anything with a printed circuit board in it. Once the devices are made, especially with anything consumer oriented, the OEM companies are pressing increasingly hard for contract manufacturers to hold the inventory (at our expense) until the absolute last moment, then ship either direct to the consumer or direct to a Amazon-like distributor… cutting out the entire chain of distributors, re-sellers and retailers that once provided consumers a safety net of inventory to respond to fluctuation in demand.

    In order to respond to these changes in the supply chain, we’re in a constant struggle to understand changing import paths, IOR/EOR responsibilities, Harmonized Tariff Codes, cost of capital, DL/IDL expense, SG&A expenses and lots of similar minutia that as a sales person my whole career, I NEVER had to concern myself with. All of these are the result of companies trying to eliminate the supply chain and push those minutia to one end or the other of the chain.

    The electronics and hobby markets aren’t alone. I grew up in the auto parts business. Back in the good ‘ol days, when you walked into a parts store, you ran immediately into a huge island of oil and anti-freeze. There were a few other things on the customer side of the register, but mostly chemicals. There were several stools at the counter, most of them taken up with mechanics, shooting the bull for an hour while they bought a starter for whatever they were working on. The counter itself held racks and racks of parts books. Green, pink, blue and white books for different pricing tiers, and a precious few guys behind the counter that really understood cars and these pricing books. Now, when you walk into that auto parts store, they still have a little oil and anti-freeze along the walls, but the consumer area is filled with higher margin merchandise, many more “impulse” items that keep the store’s doors open, and a tightly computer controlled inventory behind a very sparse counter. If the part you need isn’t an “A” or “B” class product, it will be a few days before they can get it in, no exceptions. The economies of scale have changed, the mom and pops are gone, along with the expertise behind the counter. There’s no need for a “parts guy” anymore, because they never see a professional mechanic. I cringe every time I walk into one of these cookie cutter stores anymore, but to be honest, all I ever go there for is the consumer products they put out front anyway… the business has adopted to suit a changing market.

    Ever since I first set foot in your retail store, probably 10 years or more ago, I’ve been fascinated by the business, and at the same time wondering how you keep it growing. You’ve adapted to changing markets, projecting future trends and placing your best accordingly, and I’ve always admired you for your ability to keep from getting sucked into the black hole (or the red one , in this case). You helped me buy my first airplane, then parts to fix it, and countless planes and parts since then, and I really appreciate the local presence you keep, at the store, the flying field, and in the community. I’ve taken a hiatus from flying for a while, but just about ready to get back in. When I do, I’ll absolutely support your commitment to the hobby.

    Thanks,
    Mike

  15. Tom Evans

    Cliff “convenience IS king” is very true and in my view is one of the only things that will keep the local shop in business. Unfortunately whether it’s CA glue or a piece of brass tubing what I hear at the local shop is “we can order it for you”… NOT WHAT I CALL CONVENIENCE! Mostly because I can order it too!! Let’s not cry the blues to hard here….. I’m all for making a profit and if the store has what I need I happy to pay the premium to keep him in business. The issue however is the local stores aren’t paying attention and all to happy to say “we can order it for you”. So sad as it is I’m now an Amazon Prime customer and virtually anything I need is now only 1 brown truck and 2 days away.

    Please remember this Cliff —– You offer CONVENIENCE in you business. If you’ve got it I’ll buy it!!!
    TOM EVANS

    1. Cliff Whitney

      This is true Tom, We stock over 35,000 SKUS but at 20% and below margins it is hard to have it all in stock all the time. Hot products especially. When the latest hot drone was released we had 400 orders in 1 week, but the margin is at 14 points and we have to pay for them up front so 400K goes off to china only to get 5 a week delivered on allocation and our capital is tied up. When this happens the cost of the money plus the other issues I describe come into play. I don’t bash online and we do not charge a “premium” for any product, Our prices are the same in store as they are on line and the basis of my story was about margins. I embrace the internet and our retail store but to some degree no matter what I have in stock (over 1 million in inventory) folks will want something else. Our fulfillment ratio however is over 94%. What I might suggest is if your local shop offers to get it for you, let them do it but have them ship it to you, you will get it in the same amount of time if you ordered it yourself and that store might be able to stay in business a little longer.
      Good winds

  16. Michael Wahl

    Hi Cliff,

    Yes, I completely understand the predicament of the hobby industry and the retail industry in general but I wanted to share a slightly different viewpoint to add balance to the discussion.

    As far as the hobby industry is concerned, I totally agree that a $99 airplane has (at best) razor sharp profit margins. However, I understood this as part of a calculated risk on the side of the industry to get the consumer to commit to a specific brand/model (e.g. common with helicopters) and then buy spares at an ‘inflated’ price. I have often marveled – being a mechanical and aerospace engineer – at how much I have been charged for the simplest of parts. Yes, I understand that spare parts involve packaging, shipping, warehousing and not all spare parts get sold. Furthermore, looking at the parts design you wonder whether the parts were deliberately designed to break (designs often violate the most basic structural engineering concepts) or whether the manufacturer did not test enough to discover design or manufacturing flaws before going into production. Lastly, the service aspect: models are often released before you can get spare parts – sometimes it takes many weeks for parts to appear (and immediately sell out) – to get your e.g. helicopter back up and running. In fact, whenever I saw especially rare parts at my LHS, I would buy more than I needed – just in case. And, I would gladly pay the high spare parts prices just to be able to fly again… Funny how psychology works (-:
    So, yes, I feel for the hobby industry but at the same time I feel sometimes a bit taken advantage of by the hobby industry as well.

    Best regards,
    Michael

  17. Cliff I couldnt agree more. Your whole article is spot on. I ran a retail hobby shop for about three years. Couldnt make a living, keep up with inventory, special orders, and the like. We had customers come in every so often and ask if I had the latest Tower Hobbies catalog. In an effort not to p__ 0ff a potential customer, I said sure. They would look up a particular kit (this was before the ARF craze) and say thanks and leave. Then come back in a week or so for glue saying I forgot to order it with the kit. I asked, “what kit did you get”? In this case it was a Goldberg Anniversary Cub. I said “huh” I had one on the shelf. He said yeah but yours was $5.00 more than Tower’s price. I agreed, and asked how much he paid for shipping, and he said $7.00. I said “huh”. He paid for the glue and left. Obviously this was a long time ago, but the same remains today. Does the customer actually look at the whole picture? The retail shopper does not care about the small business. All he cares about is his bottom line. So goes our economy.

  18. There is also the issue of rip-offs for terrible quality and overpriced parts.

    Several of my planes purchased from well known companies crashed due to terrible quality components. In one case the elevator fell off after just a few flights. The replacement plane’s elevator, identical model, began to flutter after a few flights as well. A different plane crashed from loss of control when the BEC croaked in the ESC as soon as I when I moved up from 3s to 4s batteries. The ESC was rated for 4s. Both planes were brands you know.

    Those experiences would be enough for most fledgling hobbyists to say “screw this” and get into something else. When I spent $3000 on my DJI drone I knew it would be for a quality, innovative product- and one that would probably not crash unless I did something dumb or careless. But there is no way I would spend $3,000 on a fixed wing hobby plane. Chances are something would break due to no fault of my own and crash. Why take a chance like that?

  19. Dave

    I have a lot to say and not all of it positive so fasten your seat belt!
    But first a somewhat funny story. I apparently went overtime on your site and it erased my long well thought out original comment and wanted me to “captcha” but again erased everything I wrote. So because I love the hobby I decided to do this in Word. I closed out the browser but must have missed the button by a fraction because it activated an ad.
    Guess where it took me! Yep Amazon!!!
    So before I get into the long and sometimes incoherent diatribe here is advice number 1: I am an internet entrepreneur among many other things although not in the hobby industry. I long ago realized that I could not afford the resources that Amazon has to capture customers. But some of it is painfully obvious like what happened above. Learn from Goliath if you want to be David. REtracking is worth a try and may net you some significant repeat business.
    Ok now for the rest of it. I read your letter and I have to agree with a lot of it-except the part where you blame the larger retail giants for unfair practices. I compete against them too and as above they have taught me a lot. I do not intend to be Jeff Bezos CEO of Amazon and become a billionaire. I will settle for a fraction of that and a joyous life. But remember these giants of industry had visionaries at the helm and suffered some too. Amazon fooled everyone with their “bookseller” front. Then they became the largest list broker on the planet and there is no chance of stopping them in a capitalist democratic society with duly elected officials. They bid (bided?) their time and even lost money until they became the unstoppable retail giant they are. Someone had a vision and would not be stopped. How committed are you to saving your business. Are you committed enough to do things radically differently and take some risks financial and otherwise. If not you’ve already lost the battle of evolution in business.
    Ironically you mention China a semi capitalistic non elected society as major competition. Boeing says the same thing about Aerobus and others.
    I have been in the RC hobby for almost 45 years now and I have seen everything you mentioned first hand.
    When I was 6 I used to walk to the local hobby shop and spend my lunch or paper route money. Now there is a 50 50 chance that when I go this same hobby shop will not have what I want. If they order it takes 2 weeks. So you want me to spend 20% more and wait 2 weeks for the same thing I could get on line in 2-3 days with free shipping. That equation does not make sense.
    It is also not the fault of the hobby shop- more the fault of the hobby! This is a labor intensive non instant gratification super niche hobby. When I was young it was rife with smart engineering, machinist and other types of bright motivated people who loved the hobby and sold cool stuff to help with building and covering and solve typical vexing problems. But on my best day I cannot rival a CAD designed CNC executed and warehouse staff covered ARF model from China. And let’s face it most of what you sell comes from there any way. Its like saying you buy American cars. Made far more elsewhere than here. So all those innovators- where have they gone. They have been outmoded by the arf just like the cassette and the 8track and the CD and the Mp3 and the etc etc etc.
    Innovation and evolution always come at a cost. Do you miss the dinosaurs?
    While I still love to build and do on occasion do so from plans or even scratch I value convenience and time saving over where the stuff comes from. I probably spend 40% of my hobby dollars at Hobby King (gasp) and the other 60 is a mix between the big 2 in Illinois and my local shop. I accept I am paying more and may have to wait at least on some part of the hobby but I do so purely to patronize my friends at the hobby shop. Most people won’t do this.
    I remember when Tower Hobbies was a new thing ( now you say they are in trouble). I started buying there instead of the local shop because they had such a diversity of cool things I had never even seen except in the magazines. RIP R/C Modeler! Most of those were big ticket items like airplane kits or motors. The radios and small stuff I still bought at the shop. That dynamic has shifted as the fulfillment by the big 2 and HK has gotten better and faster.
    I buy from HK for the same reasons: they have really cool stuff that no one else puts on the market. Clearly if one was aware of how to deal directly with Chinese merchants and wanted to go through the hassle of shipping etc you would find that HK is no different than Tower or Horizon or Amazon for that matter: they own the list so the manufacturer has to play the distributors game. Never mind the reseller! And speaking of HK it is true that in the beginning the quality was variable. You could not be sure of what you were getting- sometimes it was awesome sometimes junk. But as one of your chroniclers has mentioned that dynamic is changing. The QC is much much better now. And if I personally have a problem I have somehow hit “platinum”status with them and I get a real answer to the problem quickly. Frankly I have had very few problems with them unfair trade deals and currency manipulation aside. That requires a political solution so see below.
    Now unlike 40 years ago you are fighting smart business people who hold the bottom line as sacred and have figured out the golden balance between what they can get away with and still make money as far as quality and customer service-but they are getting better and better at it.
    So apart from the cool factor what else makes me buy outside my dearly beloved hobby shop? Well convenience obviously. Cool things that function properly 95% of the time are rarely out of stock ship quickly and reasonably now that there is a US warehouse. And then there is the unfair trade deals and currency manipulation.
    How important is convenience. Well let me use my moronic Iphone as an example. It does stupid stuff and inconsistently all the time. I used to think it was me with my post doctorate degree just getting old and stupid. Then I read the online forums and realized tons and tons of people are vexed. The Ios is glitchy or deliberately stupid so soft ware engineers can justify their existence. And my cell company ( I have tried all of them!) is no better than the last. At least 40% of my calls drop and I live in a populated area. Why do I or anyone tolerate it. Because of the mindless addiction to technology that seems to be presaging the rise of the machines? Nope: just convenience. If society as a whole cared enough to band together and stop using inferior fallible technologies we would have much better service that might be worth the outrageous amount we pay. Heck we went to the moon in 1969 and I can’t even reliably complete a cell phone call. But not enough people care so here we are.
    Amazon has figured out that fulfillment speed and availability trumps everything in this society even customer service although they are fairly good at that too. You cannot beat them at fulfillment or even ecommerce for that matter unless you can afford the best and brightest minds in the business. Guess where most of them work!
    But you can emulate some of what they do.
    Next is again the nature of the hobby and of course our instant gratification society. Far more people are one off or intermittent customers. You can thank the Chinese for that to by flooding the market with affordable toy like stuff that gets people interested. But most will not stay deeply involved over a life time. And yet our local R/C field is now home to a fair number of people who cannot and will not every learn to fly fixed wing or even helicopters. Technology has assisted so much with flying that its not hard skill to learn any more. Maybe those people need something that improves their experience that is not yet owned by the big 3. Figure out what that might be and cater to it maybe?!
    But stay as a traditional hobby shop you are facing what seems insurmountable odds about to go the way of so many hobby related businesses (RIP Aeroworks!)
    Your castle is surrounded, the mote is drying up, there are spies in your midst and your ministers are joining the other side.
    Not a good scenario- but not hopeless!
    Lest I fall into the “just another good old days complainer”category (by the way they DID exist and they were BETTER so don’t believe it when social psychologists tell you they are mythical) here are a few suggestions that might help.
    Time to be Creative!
    1) Copy some of what Amazon does. Retracking is not expensive. If it does not work then stop and try clubs leagues or a rewards program or lottery drawing etc etc. But do something!!!!
    2) Accept your audience is divided into one time or few time customers and long time customers. Market the ones that suit your product line. Your best sellers will tell you where you should innovate.
    3) Fact: Baby boomers have more money than other demographs-debate the merits and morals all you like. While we will die off soon enough there are still a couple of decades of money left to mine and understand as a business owner you have to be comfortable with making money rather than complaining about it. Craig Jackson of Barrett Jackson auctions made a killing by selling nostalgia. Lots of fat old men could not afford a 69 ‘Vette in ‘69 but want to before they die. Maybe you could tap that vein or something similar. Just don’t tell us old timers about cataracts, slowed reaction time and vision loss LOL.
    4) Innovate in your service sector. Borders is a lousy example but they had the right idea. You need a brand and a destination that stands out or people won’t come whether its ecommerce or brick and mortar. 2 examples of hobby shops that thrived are: one place had its own race track, held regular races, had leagues and gave away some prizes. When they sold it to move to a “more centralized convenient location” in a strip mall, they closed in debt within 2 years. I knew these people and they were previously making a killing. Another shop is a few blocks from an AMA sanctioned airfield. They have a stead business. Show up at a local fun fly or club meeting. Belly to belly sell the hyper responders. But do something!!!!
    5) Innovate in general. I will use Flite test as an example. They are innovative, Their niche has not been touched by anyone else at least not yet successfully although I am sure by now someone is copying. They are having a blast or appear to be doing so. They do the hobby first and the business second but they do not compete with anyone else although by now there are imitators. I am sure when they sell their business to one of the big 3 they will have a nice life because of their creativity and willingness to enjoy the hobby first but be smart about business as well. If they can you can to.
    6) There are rich countries that do not speak English first. Their markets are not penetrated. Get someone in the hobby to translate your web site into Spannish, German etc and find out how much less it costs to advertise in their hobby outlets for your online business. At the very least you’ll learn some bits of a new language!
    7) Finally my craziest idea. Write to the president elect and tell him about the unfair trade and currency situation. Let’s face it this is basically an orphan hobby and now one cares but us.Band together as small business owners and take it to his doorstep. Let’s face it you’ll need more than one person on board and you’ll need some media that is not controlled by the big 3 if you are going to crowd source your efforts, but your letter here is the start. Make sure your spokesperson is articulate and not too deep in the hobby to communicate with people who are not all that sympathetic. If you can call attention to your situation at the level of Trump you may yet save yourself and your business. Or at the very least leveled the playing field if our president elect is sincere. I cannot imagine a dyed in the wool politician caring nearly as much. If not then at least you tried. Do nothing and you know what is going to happen.
    Do you miss the dinosaurs?!
    Time to be creative!

  20. Jim Petro

    A year ago, I commented at our monthly RC club meeting that all the hobby prices are spiraling upwards.
    Two months ago, my 27 year old grandson took a two week excursion to China and a couple other Asian countries. Number One item on agenda was to buy a fabled custom made silk suit and shirts. On his return, there was nothing new to declare in Customs because everything over there cost the same or more than in America. In Seoul, Korea, nobody wanted USA dollars and treat Americans in the most inhospitable ways.
    In the ’80s, I attempted to buy a local hobby shop whose owner wanted to retire. I felt I knew how to use the new PCs to reduce the weight of slow selling inventory by having most items singularly showcased and ordered from distributors on demand. The owner’s son decided he would try being a shop owner ……end of story.
    I’m in the upper 70s and have noted the non-inflationary (?) trend for 10 years; Prices slowly inching ever higher but concealed by the wholesale shrinkage of the contents in containers. Cliff, you told the conditions very well. Machines we were told would make the working life easier have instead taken the “middle class” jobs. Soon, there must be the implosion because markets shrivel when they can’t sell to people without discretionary money to spend.
    A lifetime Carte Blanche award needs to be offered to anyone who can discover a cure for the impending depressionary economics.

  21. Gary

    There is a lot to digest in this article, and there is no easy answer. I’ve spent over 10 years in retail and know it can be pretty cut-throat. It IS good to see other perspectives and understand where other people are coming from.

    In my case I have no choice but to shop online as the nearest hobby shop is over 130 miles away from where we live. We have had a number of people try and set up shop in this area, but there simply isn’t enough demand even for a small shop to be viable. Ironically one couldn’t ask for a better area for R/C modelling.

    However, one thing coming out in the article and some of the comments is the feeling that the consumer is somehow at fault in that they are interested in finding the lowest price and the ease and convenience of shopping online. Sorry folks, but that IS how capitalism works… buy low and sell high.

    We are seeing a paradigm shift in the economy away from brick and mortar (B&M) stores towards online sales… that is undeniable. The only real advantage that B&M stores have over online is the instant gratification factor. If the local hobby shop can’t offer what the customer wants at a competitive price NOW, they will look elsewhere. Even the “big box” stores like Wal-Mart are feeling the pinch from online sales. I’m even going to go out on a limb and suggest that in the near future (if it isn’t here already), it’s going to be impossible for a merchant to stay in business without an online presence.

    Likewise, we have seen a mass exodus of industry and non-localized service jobs out of this country to other nations… again undeniable. Why? Taxes, government regulation/litigation, and overhead in countries like China are a lot lower… enough that for many manufacturers it’s far more cost effective to pay the shipping costs to get the products here. The price of doing business that way (despite what the politicians will tell you) is that it costs this country good paying jobs, which in turn means less disposable income.

    Something we need to remember as well is that this hobby is expensive, and people trying to get by on Wal-Mart type wages are probably not going to be able to afford to get involved to any meaningful degree. Again if our economy were in better shape and people had more disposable income to play with, the hobby industry wouldn’t be in trouble.

    So what is the answer? I really don’t know at this point. I do think we have been sold a bill of goods with these “free trade” agreements which has much to do with the reason WHY local hobby shops are in direct competition with the likes of China. Yet at the same token it is futile, and actually rather stupid to point fingers at the customer who is looking for the best deal, and likewise to China who is willing to fulfill a demand.

    1. I publish an Australian RC flying magazine and in 1971 my father was Dubro’s first export customer. Dad was also the Australian agent for Kraft Systems. Unfortunately the majority of people cannot help themselves to go for the cheapest option and this argument has evolved ever since GE moved nicad battery manufacture from USA to Mexico. The distributor margin disappeared in the mid 80s and now the wholesale margin is under such pressure the specialised RC aeroplane (airplane) heli glider retail scene in this country is reverting back to what it was in the 1960s. Small operators low overhead from home of garage and one or two large importers selling direct looks to be the future. I’ve also jumped on to promoting the ARES – Firelands aircraft program as it does offer some margin for long suffering hobby shop

  22. KS

    Cliff,
    I think your store is in the wrong place. The difficulty with flying planes these days is that it is difficult to find a place to fly. Hence..people fly drones..no need for a flying field….and they buy them on line. IF I were in your business…I difinitely would have my store located at my flying field and would have an active flying club there as well. That way I have people coming into my store everyday for conversation and parts to fix the airplane or drone. People flying drones wouldmuch rather fly with other people and even have a race course. It would become the first place to come to replace a crashed plane, because it would be very convienent. When someone crashes their plane…there is a very strong NEED to replace it. I crashed my FX 79 wing the other day…but I had a spare. I was back in the air three days later…what
    a great feeling. THE FIRST REASON I’D come to your store would be to fly…..meet other people who fly or people who want to trade…or people who want FREE advise. GET WITH IT…You been in the store too long. I don’t shop at your store…no reason to go there. get it ????

    Georgia Mtn RC Club

    1. Cliff Whitney

      Thanks for the note, and for reading the industry piece at uavexpertnews.com KS.

      While I agree with you that it would be nice to have a field, the math simply does not work for owning a field in our area. Property that is easy to get to in our area is very expensive as our local club of over 300 members is finding. They have lost their lease and have been looking for the past two years for a new site. Property in the surrounding 50 miles is (a low price) around 50K per acre and for 40 acres clear would be in the 2 million range. If you were to go way out in the goonies you could get it for around 1 million but if you do the math, a club with even 300 members at $200 a year only brings in about 60K a year and just to service a very reasonable 1 million note you will need at least six thousand a month + the cost to build out the shop and infrastructure (add another 300K). While I would love to have a field, even companies like Hodges Hobbies who has hundreds of acres of sod have failed in the last 5 years. If I am not mistaken even the Georgia Mtn field where you fly is leased and development is strong in your area. If so be aware as this is what happened to GMARC.com as they did not buy it when they had the opportunity long ago and now are being thrown off of it.

      Most of our business (over 60%) is internet based and we ship all over the world. What shops need and what my article focus is really on is more about the low margins for merchants on the products we carry.

      Online shopping is not bad, the internet shopping has come about due to consumers (that s you and me) want for easy shopping. This is all and well good and we would be out of business if it was not for our internet business. I support internet shopping, and indeed participate in it daily with our low overhead internet side of the business, but what I can’t do is fill the demand for products, even with a very low overhead if there is not enough profit in the product to keep even our (and others) internet based doors open.

      The issue is we are selling very high quality products for little to no little money and the MFGS are driving this. For instance a company launches a new product that is high quality, and in high demand that you can’t get anywhere else. But they sell it direct to the consumer at what is basically cost so no one makes any money. That small $100 plane in my article example could easily be sold for $119 making everyone another $20 and it is worth $20 more but no, the MFG sells it for $99 so we all must sell it for $99 as every one can easily price compare it and as such there is no profit and we all go out of business.

      The question is why is our industry killing itsself with low margins.
      Why does our industry do this? NO other industry does.

      Drones btw are also not the issue as drones are tools that are mostly being used in industry and not by hobbyist in the form we all know. I will say however drones are even lower margin that hobby goods but are what is now driving our business as the model airplane business has collapsed around the US (the other portion of my story).

      Lastly, you say ” I don’t shop at your store…no reason to go there. get it ????”
      I appreciate the ability of folks to shop wherever they are comfortable and I understand that you do not shop at my store and I am fine with that, I am disappointed, but that is ok. I would ask that if you are buying your items elsewhere (it looks like the wing you mention is direct from China), why not at least give us a shot and support a local business that can ship direct to you at the same price, and in the same time that you can purchase the products online at another non local business. At least this way the money will stay local, supporting local families who have a passion for our industry and are focused on addressing issues like this one?

      Thanks again for your feedback and council , I will share it with my staff and associates along with the thousands of replies I have received in the last few days.

      Thanks
      Cliff

  23. I have to add that our store and my staff is much better off without the idiots who swear by the cheap chinese crap they buy direct from China or from the likes of Hobby King. These guys are not modelers they are morons and I consider it a blessing that they DO NOT come in my store and waste my or my staffs time.

    Tell Buba from the Georgia Mountain RC Club if he came in my store i would throw him out for being so stupid…

  24. Alan Wolcott

    I strongly agree with nearly everything Cliff wrote, and generally with most of the comments. (Just as I was writing this, I got an email that Hobby People is going out of business, after 45 years, which means a large online seller plus nearly a dozen retail shops). Rather than just restating those comments with my own adjectives, I would add another perspective.
    Years ago, I was in the retail hobby trade for 6 years, and as a wholesale hobby representative for 2 years. I have been involved in RC planes, scale models and slot cars for most of my life. While we have several well run hobby shops in the Denver area, we have a number more that I cannot see how they expect to stay in business when they focus on a narrow segment of the hobby industry, carry a modest inventory, have a lethargic staff, and inventory is all priced at the upper end of the market range.
    Particularly when I was in the wholesale trade, I had a few customers that were professionals, and they had large stores with good volume. But I had some smaller customers where the owner was a hobbyist who decided to open a store, and seemed to run it like a hobby: If his buddy wanted a certain product, the owner ordered two, one for his friend, and one for the store. The owner did virtually no promotion, only Yellow Pages advertising, put little effort into display, and spent most of my time there complaining about the market and their customers.
    While we all value a local business, those that are poorly run will not survive, especially as the big on-line marketers are there for comparison. Even in on-line marketing, we can see websites that put in almost no effort to help the customer understand the correct product. They just give the manufacturer’s photo, the part number and a price, and then make you wade through multiple web pages and personal info to get a shipping cost. A poorly run business is unlikely to survive, either in brick & mortar, or internet form.
    None of these negatives apply to Atlanta Hobby. My point is that not all the hobby stores that close do so only because of the tight margins and mass marketers. These were an issue in the 1970’s, but the mass marketers were the mail order catalog style businesses and the margins were not as tight as 20%. While I do think many manufacturers and distributers have harmed the retail market, now more than ever they are facing a shrinking brick & mortar industry for moving their products. And when some of those retail businesses are stagnant in their behavior, the manufacturers has to market to where the volume is.
    I think that where the real shame is, is that the tight margins that Cliff describes make it very hard for a new business to open, even a well-run one. This, to me, is where the real loss is.

  25. Randy

    Cliff,

    I do understand what you are talking about. Here is the other side of the coin though. (As far as my area is concerned)

    We had three hobby stores in my area. I preferred to shop local so that I could bring stuff back and get answers to the questions I had face to face. The problem that I had was dealing with the attitudes of the store owners or the other employees. You bring in something you bought from them and ask advice
    And they would treat you like you were stupid. I tried the three different stores at the time and it seemed
    Like that’s the kind of people that worked there. I finally got tired of dealing with them and turned my efforts to the online community and online stores.
    I’ve been into the radio control hobby since I was 20
    Now I’m 50. I don’t feel sorry for the hobby stores that went out of business where I live. They treated their customers like crap and acted like you bothered them when you had issues or questions. You can blame those stores for pushing good customers to the online stores.

    Businesses that treat me well get my business whether I can get something for a few dollars cheaper online or not. I shop at the mom and pop stores a lot in my area because I want to support them. As long as I’m treated right you get my business.

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