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----------------------------------------------------------{ October 24, 2008 }Pickle Economics
A few years back I read an article about a disastrous relationship between the Vlasic Pickle Company and Wal-Mart*. I’ll give you the short version.
Vlasic had a great business selling their premium brand pickles to most major grocery chains across America. They offered quartered sliced pickles, pickles sliced horizontally, small jars and larger jars. Whatever your preference was for premium kosher dill pickles, Vlasic had a package for you. And because they offered products that met their customer’s preferences at a fair price, they made money.
Then one day, the Vlasic sales guy for the Wal-Mart account was told that Wal-Mart wanted Vlasic to supply them with unsliced pickles in a gallon jug that would retail for $2.97. At that time Wal-Mart had 3,000 stores and promised to move 240,000 gallons of pickles each and every week. Even though the profit margin for Vlasic was less than $.03 per jug, the volume was so huge, Vlasic jumped at the opportunity.
The consumer reaction to the cheap gallon pickle jug was better than expected. Whole fields of cucumbers were committed to Wal-Mart business which caused supply problems for their core business. More and more resources were directed to Wal-Mart at the expense of their profitable specialty business.
To complicate things further, the low priced, low profit Wal-Mart pickles were now being bought by the same customers who had previously bought the smaller jars of premium priced, sliced or quartered pickles.
The end result was Vlasic traded their unique and most profitable product line for the low margin, high volume Wal-Mart business. All the costs that were absorbed by the most profitable segment of their business now had to be shifted to the Wal-Mart business. Their cost model had changed and there was too little margin in the Wal-Mart business to cover it. Vlasic lost millions of dollars of profit and eventually filed for bankruptcy protection.
So what lessons can we all learn from the “pickle story”? In my mind they are:
Lesson #1 As business owners or managers we have to accurately capture each and every cost associated with running our business. The key words here are accurate and every. Often times we tend to estimate or use average costs. The danger is we usually tend to estimate costs too low. By using an average cost to determine pricing it is possible to penalize good customers while giving a price benefit to a not so good customer.
Hard costs are easier to identify and quantify. But many companies don’t provide for unplanned maintenance costs, major equipment repair, depreciation, insurance, overtime and other unanticipated costs. These kinds of costs are real and need to be provided for in your pricing plan.
Lesson #2 No amount of increase in sales volume can be made to be profitable if you’re selling price is lower than your total costs.
Lesson #3 Joe Cortez is a boxing referee in Las Vegas. Before every bout, Joe brings the boxers to the center of the ring and after giving the final instructions, he tells them, “Guys, you know me. I’m fair, but I’m firm.”
If we truly know our costs and properly manage those costs; and if our expectation for profit is reasonable, then our pricing is fair.
Being firm is the hard part. We all encounter “goofy” competitors who are pushing similar products to ours at ridiculously lower prices than ours. Maybe they’re trying to buy market share, or move obsolete inventory, or just steal your customers. How to react to these situations is a judgment call that only you can make. But keep in mind that wood fiber supply is tight, operating and material costs are up and credit is tight.
2009 could be a year in which good businesses get better and strong companies will get stronger. Why? Because the stupid and desperate competition will not be profitable. And more importantly, with credit being so tight, they won’t be able to borrow enough money to survive.
In the end, if our pricing is fair, if we manage our costs, if we take care of our good customers and collect our money, we’re all going to be OK.
As we approach the end of 2008, we at Amerimulch thank you for your business and the trust you have placed with us. We wish you the best for the Holiday Season. We hope you have time to spend with family and friends during this special time of year. Also, don’t forget to hug your loved ones and tell them you love them. Tomorrow is not a guarantee for any of us.
*Fast Company Magazine #73 Dec. 2003 “The Wal-Mart You Don’t Know” By: Charles Fishman
Posted at 01:15 PM | Link to this Article