Business SMART:

Manufacturers Can't Make Real Money
 

By: Dennis A. Conforto
A-Z Media Group

For a long time now I have written articles about why it’s hard for retailers in the scrapbooking industry to make real money. Now, I would like to talk about why it’s hard for manufacturers to make money. If you’re a retailer reading this article you should care deeply about the profitability of your trading partners or partnering manufacturers. If you’re a manufacturer reading this article, of course you will want to read it for obvious reasons.

Here is my list of the top five reasons manufacturers have experienced an increase in difficulty in making real money:

1. Brand, brand and more branding. The lack of branding control at the retail store level for manufacturers is nothing short of staggering. Frankly, it is the single largest mistake the industry has made. For too long manufacturers were willing to allow retailers to cherry pick their lines rather than forcing the retailers to choose them as their key manufacturing partner! Today manufacturers are paying the price for what I call the fast and cheap non-partnership sell. While the industry was booming nobody cared because even if you were doing things wrong the rewards were great. However, the good times for now are gone so doing things right today means everything to a manufacturer’s bottom line. The result of this is that manufacturers know deep down that their brands within the typical independent stores are scattered to the winds. All the time and effort to create the perfect show booth, to match up products with design teams, and to increase the average transaction price for their products within a retail store are wasted because today the retailers are allowed by the manufacturers to “cherry pick” which in turn destroys that manufacturers brand on the retail floor. The result of cherry picking is just as hurtful to the retailer as it is to the manufacturer.

2. Free, free, and more free. Manufacturers and retailers have long been hooked on free goodie bags. They become an addiction - once given its hard to break the cycle. Manufacturers are getting more and more frustrated with the constant request for free products. Think of a manufacturer who literally gets requests for free products from all 3,000 retailers they serve. Do it for one and you end up doing it for all. National Scrapbooking Day is fast approaching and retailers along with buying groups will start going to manufacturers for more free products to give away to consumers for that sales event. Yet, how does free do any good when the lack of partnerships are not in place to allow the brands to control and share co-branding space? It’s not that free is bad; but free without a powerful partnership in place is totally counter-productive to building brand loyalty and profits. Free is good when you are working on a well thought out charity fundraising event. But only those that are profitable in the end can afford to do even a limited amount of free. When you give free and take free merchandise don’t be fooled that that action is a loyalty program. Loyalty programs are built around sustained sales and profits of both parties. Free does not fulfill either one of these goals.

3. New, new and more new. Manufacturers spend way too much time working on the introduction of too many new products. As the industry quickly figures out that having three major trade shows is one too many, the number of new product introductions will be reduced. But even still, they will not be reduced enough. Even with a two trade show industry too much money is invested into too much new. Manufacturers clearly make money by having solid products with a life cycle that is 18 to 48 months. A product with a life cycle of one show is clearly a money loser. The problem is the manufacturers are too disconnected from the consumers who enter into these retail stores. What we need is less new merchandise and more new consumers. However, many manufacturers are clearly stuck on how to do that. Two companies at CHA figured out how to get more exposure. First was EK Success who reached a licensing agreement with Martha Stewart. Her magazine and TV show will introduce millions to the category! That is great for EK Success and Martha Stewart and for everyone else in the industry. That deal is a gift that will give and keep on giving for years to come to every manufacturer and retailer in the business. The other manufacturer was K & Company who signed a license with Girl Scouts of America. The great thing about that product category is its long life cycle. Once again, hundreds of thousands of new consumers will be created from this alliance. Everyone wins because they are creating more new consumers. However, 100 million women need to see the message of scrapbooking at least 4 times a month for the industry to really have the huge growth that it deserves.

4. Advertising, advertising and more advertising. Manufacturers spend good money on marketing and advertising their products, however, they seem to want to spend it in all the wrong places. It’s awesome to spend good money on the converted scrapbookers found within the scrapbooking publications. However, if they spend 100% of their budget on that alone they are doing nothing to grow the market. Here is the truest statement I will make about the industry; the converted scrapbookers are now shrinking not expanding. There is a natural seven year cycle that the converted go through and what is important to note is at the end of that seven year cycle of scrapbooking the vast majority burn out and move on to something else. The question for manufacturers is simple, “What are you doing to fill up the pipeline with brand new consumers?” Without the newbies coming in at a faster rate than those that are dropping out, the industry will shrink as it did last year by the tune of $300 million in sales. In 2007 if we repeat that same decline there is no question it is going to cost a lot of companies more than a decline in sales and profits. The fact is that we will see manufacturers and retailers in the scrapbooking industry fail at an alarming rate. However, this can be avoided if the manufacturers team with the retailers in forcing more new consumer advertising to take place. Scrapbooking growth is going to happen state by state, city by city and street by street. We have to do more and we must do more if we are going to turn the industry around. The funny thing is that the more the industry learns the correct way co-op funding should work the faster they will know it is really free money and it grows industries; just look at the bedding industry, the auto industry, the furniture industry, the consumer electronic industry, the apparel industry and on and on and on. Co-op funding is a standard best practice in retail and should be in our industry as well. One of the reasons it’s a standard practice is because if you have a co-op program that works as a manufacturer then you are the worldwide expert at selling your products at retail. This means you know exactly how your displays should look, what ads work, and how to get $250 in sales per square foot. While manufacturers in the industry are great at knowing how to sell their products the question begs to be asked, “How much do they really know about selling their products at retail?” The answer is, some do but most don’t. And that kills the profits of the everyday manufacturer.

5. Turn, turn and more turns. Finally the killer number for any industry’s profits is inventory turn rate! This industry is over inventoried by $800 million of which $500 million is dead inventory owned by retailers and $300 million by the manufacturers. The industry under spent collectively $100 million in advertising which in turn caused the industry to go into a slump that resulted in a slide backward in sales totaling $300 million. Had we spent the money we should have on advertising, our sales would have gone up about $600 million - a net swing upwards of nearly a billion dollars. The question is, “Why didn’t we spend the additional ad dollars?” Because the industry’s money was and still is tied up in dead inventory. There is no question the industry has the money, the problem is that it is in dead inventory! Now here is the deal, a lot of the dead inventory is not dead at all. It’s just dead for the converted scrapbooker. For the newbie it’s all new and all very exciting; for the oldies coming into the store its old merchandise. What a catch 22 we have as an industry. What is so frustrating is this problem is so easy to solve but hardly anyone is doing anything about it. One reason is because change is painful. Taking the higher road in best practices is hard work, and everyone is looking for that quick, easy and cheap sell. However, doing what we have been doing is clearly not working and to keep doing it is the definition of insanity. The time has come to change; however, change should have happened when we were on our high, not on our low. Either way up or down we need to change. Everyone sees it now, everyone sort of kind of knows what to do but everyone is kind of sort of not doing it… And that is just not SMART.

As you can see, there are five reasons why manufacturers are having a hard time making money. If you are a retailer you also now know the five reasons you are having a hard time making real profits. You can see how all these reasons are linked. What that means is there is no one single silver bullet that will help us increase our sales tenfold. It requires a lot of small changes, but they are all doable. It would be one thing if we had no clue what to do, but the truth is that more and more industry leaders are agreeing on the issues. More and more are talking about changing the way we do business, now we must simply act. Talking it is going to solve nothing, acting with purpose does. At the end of the day we must believe our best days are yet to come and acting on that vision is what being SMART is all about.