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Is China the answer for us?

October 23, 2007

Two years ago, I brought in a container of Woodard chinese wrought iron. I was surprised by the exceptional quality of the product since the chairs cost me ony $27. Freight which was about 50% of the value of the container bringing the total cost of a chair to about $40. I was able to sell a dining set for $399. Boy, did I think I did good!  So did my customers; the product sold like hotcakes.

But after a couple of months, I noticed several things. First, my American-made wrought iron sales slumped. The year before I was selling a four piece set of wrought iron for $699 with no problem. I had to sell almost twice as many of the Chinese sets to make the same profit.  Second, my delivery system was getting clogged with these sets. Instead of delivering four sets worth over $2,000 each a day, I was delivering four sets worth $400 each a day. My margin on this furniture was much less than I anticipated.

Why am I telling you this? Because manufacturers’ are  realizing the same thing is happening to them when they try to supplement their domestic line with less expensive off-shore products. Manufacturers see an oppportunity to bring in the cheap, but high quality, products being created in China. But, retailers who bring in the product can’t do custom orders from China. So, the manufacturer, sees their U. S. production facility as the way to fulfill those custom orders. Seems like a great deal for a retailer, bring in containers of value priced merchandise for your warehouse, but use the U. S. production facility to fullfill your cusom orders.

Sounds good but is it really? Early buy plans exist so that manufacturers can keep their production lines busy during the off-season. They also exist so that importers can schedule their containers to be sure they get here before the season starts. Both plans are revealed at the premarket or regular market. If a vendor goes to market with a viable container program, they hope to sell as many containers as they can at those markets. If they have a domestic plant,  they also hope they can sell enough of that product to keep their production lines busy here.

Step in the retailer. Large, multistore retailers will take advantage of the less expensive container program. Many of them don’t offer or want a custom order program; so, the most of their early buy orders will be just for containers. That doesn’t keep the U. S. factory busy! Some smaller retailers might be able to take advantage of these container programs. If they do, they usually have to reduce the size of their domestic early buy. That doesn’t keep the U. S. factory busy! And then there are the retailers that can’t take advantage of the container programs at all. They cant help fulfill the offshore manufacturer’s requirements for big numbers and their orders are usually too small to keep the U. S. facility busy!

All of the sudden, the manufacturer sees big numbers in their lower cost container program, but their domestic program goes into a slump. They still have the costs of their U. S. infrastructure (reps, clerical, production, etc.) and now their margins are lower even though they are selling more units. The manufacturer will have to reevaluate the viability of their U. S. production facilities or their container programs. My guess is they will go with the container programs because the numbers are so big. If they do, they will become more dependent on large multi-store operations, leaving the independent specialty store with one less supplier.

Have you experienced this? If so, how have you addressed it? I would like to hear your thoughts on this, whether you are a retailer, rep, or manufacturer. IMHO, this is the cause of many of the problems at the core of our industry.

Yours in confused retailing, Bruce