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Do You Hear What I Hear?

December 22, 2010
Years ago, my father played a weekly game of poker with a group of his friends. Usually it was at our house and because I was pretty young, they would let me hang around but never let me play. The memory of those weekly games has blended together over time; however, I remember one night vividly. The pot had gotten bigger than normal and one of the players was betting and raising a lot. At the end, another player “called” the high roller. Turns out the high roller had the winning hand. When he started to rake in the pot, the guy who called him said, “You know, if I had known your hadnd was so good, I would have never called you. I think you should let me take my money back.” I don’t think I need to tell you that not only did he not get his money back; he was never invited back to play.

 

The same sort of thing happened to me this week. Using the excuse of extraordinarliy high gas prices, an unnamed manufacturer changed the terms of their freight program by raising the guaranteed freight rate by a few points for an increase of almost 33% over the old guaranteed rate. I have seen this happen in the past. I shouldn't have been surprised. What makes this so galling to me, though, is  the manufacturer had me sign a document in order to place my early buy. That document explicitly guaranteed my freight to be a certain percentage for the season. There was no verbiage in the document that gave them the right to raise the freight rate at a later time. The document only said the program ran from the beginning to the end of the season.

 

When I raised my concerns to the vendor, their response was, “if they didn’t raise the freight rate, they would have to raise wholesale prices to compensate for the high gas prices.” They didn’t want to raise their wholesale prices because the cost of printing new price lists and updating their computer system would be more than the price increase would have brought in. Finally, they insisted if they raised wholesale prices, the guaranteed freight rate would have been calculated on the new prices, adding even more to a retailer’s cost.

 

This may come as no surprise to you; but, I was not happy.  if you create a program which is intended to make it attractive to place an early buy, you need to stick by that program. You need to stick by it even if you made the wrong guess about where freight rates would be during the span of the program. Just like the poker player who never would have called if he had known he had a losing hand, the rules don’t allow a do over.

 

I took into account all parts of the manufacturer’s early buy program before deciding to place an early buy with them. This included the early buy discount, the reorder discount, the dating, and the freight program. The reorder discount and freight program determined what discount I would give clients for custom orders. I think I would have placed the early buy order even if the freight program hadn’t been so generous. However, I would have accommodated the higher freight rate in my custom order pricing. Instead, I have to rethink that part of my pricing model for 2011. I don’t know, and won’t know until the season is under way, if this is going to affect special orders with this vendor.

 

I believe there were several things the vendor could have done to change how retailers received the news of the higher guaranteed freight rate. First and foremost, their early buy document should have plainly stated they had the right to change the program at any time. Second, instead of increasing their freight rate, they could have added a fuel surcharge to all of their invoices. Yes, I know this is still an increase in what their product costs me. In spite of this, since freight companies have used this technique for several years, I am more accepting of it. Finally, if they used their previously agreed to freight rate on the cost of merchandise and didn’t include the fuel surcharge, retailers would not be doubly charged. By the way, with a fuel surchage they would not have incurred the cost to print and distribute a new price list or to update their computer system.

 

Regardless of how distressing it was to get this “shoved” down my throat before the season ever begis, I think it is a sign of things to come in 2011. Lots of manufacturers raised their prices at market - - - some as much as 9% or more. I was concerned then that U. S. vendors were pricing themselves out of the market. Now, only three months later, the price of a gallon of gas has reached an unprecedented high and cost of raw goods is going up again. Is this increase in one manufacturer’s freight program a herald of a midseason price increase? Oh my, when the song said, “Hark the Herald angels sing” I never thought these were the lyrics they would be singing!

 

Happy holidays to everyone. I hope Santa brings us all great sales figures in 2011.

 

Yours in confused retailing, Bruce