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Tuesday, July 31, 2007

Loosing a Customer

In case you don’t know, or in case you work for the Argentine Federal government, Argentina is experiencing inflation. How much is hard to tell since the numbers are being fudged all the time and the government’s official stand on this topic is that there really is no inflation or at least not enough to be a problem.

However, I am not going to talk about inflation and the Argentine economy. There are other sites and resources to go to for that sort of thing. I want to talk about a victim of this inflation.

When we started selling to The Coffee Store I quoted a very economical product for them with the agreement that they had to eventually have other higher margin products of ours as well as allowing us to use their retail shelf space to sell our brand name products. I did this to get our foot in the door. I mean once they start offering our cookies they are going to sell so many of them that I can afford to not make so much on the economically priced and low margin cantucci that they give away with their coffee.

They wanted and insisted that the brand name products I leave on consignment. I really disliked the whole consignment scenario thinking it more appropriate if you are selling bubblegum or chocolates at kiosks not for high end gourmet cookies. However, they did argue that they had great exposure so I went ahead and agreed reluctantly and hoped that they would prove me wrong.

So far there are three components to this approach and I will expand on each one:

1. Economically priced cantucci that they give away with their coffee

2. They would add higher margin products to their product mix.

3. I would leave, on consignment, our branded products.

1 & 2. We made countless samples of different cookie flavors and different sizes. We also rushed to modify one of our brownie pictures so that they could use the picture (and eventually our brownie) in a promotion they were thinking about having. None of those things panned out. Instead, we started to see sharp increases in just about everything related to our factory and the cookie making business. Obviously we had to pass those increases on to our clients.

What kind of increases did we see? Well from the period between January of 2007 and May 2007 we saw our chocolate chips go up 48%, margarine 70%, butter 39%, eggs 27%, etc. In addition, in July there was a wage increase handed down by the government that was retroactive to April. These price hikes are felt immediately when you have low margin products so our economically priced cantucci needed to have price modifications consistently, on a monthly basis. Since May we have seen more price increases, but that’s not a problem right.

All of these price variations have forced me to have monthly meetings with my largest clients and for the smaller ones they just have to take it but I at least let them know beforehand what’s coming. This is really not all that much fun. There is a lot to prepare for these meetings. Basically I have to prove to them, every month, how the price increases I am suffering every month are impacting the price of the cookies they are buying. All my clients have reached the same conclusions as I with the exception of The Coffee Store.

3. There were some stores that really did not like working with consignment either. As a result I changed things around so that for those stores that would pay on delivery I would give them a discount. This was a cost cutting measure for everyone. There were plenty of stores that took me up on the offer, but there were holdouts. And as I would have guessed, the locations that sold very little really had no intention of ever going off the consignment trap. I mean, I give them cookies to decorate their shelves with and they don’t pay anything until they sell something. It was completely painless to them. It is also the very last time I ever give anything out on consignment.

So in the end, the Coffee Store managed to prove to some of their franchisees that consignment does not really work and to the others that it is a great way to decorate your store; not only did they not add any more products but decided to throw in the towel.

Yep, The Coffee Store is no longer a client of ours. There was a mutual realization that this was not going to work. However, it is still sad when this sort of thing happens. So what did I learn from this failure?

I will never leverage entering into a business by giving stuff away (low margin items and consignment).

I am the one at fault here because they just asked, I was the dope that went “yeah, okay”.

I will never sell anything on consignment again, ever. If a client does not believe in your product enough to buy it then they will never be any good at selling it themselves.

I will never give credit to franchisees again ever.

So who is the victim here? I honestly believe it is The Coffee Store.

What do you think?

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