Furniture Manufacturer Direct Sales

A furniture manufacturer gets some well-informed and thoughtful advice on how to structure a direct sales operation so as to survive tough market conditions that are destroying his multi-step dealer sales volume. December 27, 2008

Our business is really at a crossroads and I don't quite know what to do. We manufacture well made, low cost pine furniture and have traditionally sold to dealers. However, many of our dealers are marking our prices up 2-3 times. So if they pay us $100 for a bookcase, most will try to get at least $200, and some even $299. Well, at those prices, and taking into consideration today's economy, the stuff just isn't selling. We'll be out of business in less than a year at this pace.

We've done the cut-our-price thing so that the retail is cheaper. But we've learned the hard way that we work for free to make the dealer money. We can't keep on giving away product at a loss to make other people money.

We've noticed that when we sell our product directly to the consumer at the dealer price, it sells right away. Our list wholesale price is profitable and worthwhile for us, and is one hell of a deal and value for the end consumer.

We really want to pursue the direct sales channel. But we do have a few dealers who are great people and I don't want to step on their toes. But we can't cut our prices to them to compete with our list prices. I don't want to mark up our retail price, either, because then it doesn't sell. I should point out that most of our dealers only order one or two items at a time, usually they are pre-sold from a showroom catalog. For stocking dealers, we can provide volume pricing and incentives to give them a lower cost.

Any advice? I know some of the Amish around here have a one-price policy and don't care who they sell to.

Forum Responses
(Business and Management Forum
From contributor S:
This is always a problem for the middle sized company that has been successful at selling at retail (sort of a factory outlet) and now wants to move into wholesale. There is no real easy solution - but here's how we've evolved.

First, set up a separate wholesale arm under a new company name. Calculate a rock bottom cost of manufacturing at the door for your stuff, add 10 - 15% or so for margin. This is your wholesale price.

Then, act as if you are a wholesaler dealing with yourself, and calculate that your retail arm is buying from your wholesale operation at this price. Double it. This is your MSRP. Run a semi-permanent sale on your items priced at MSRP, calculated to cover your retail costs, and provide additional profit. This is the "on-sale" price of your retail operation.

Your other retailers can buy at your wholesale price and they can mark up however suits their fancy. They are just another retailer in competition with your retail arm - which pays the same wholesale price they do.

There is no magic in this system, and it does require that you carefully segregate your wholesale costs and your retail costs in order to be balanced. But it does allow you to wear both of these hats.

From contributor T:
While I am not necessarily agreeing with this approach, another idea for implementation is to create a new product line that only you can sell direct.

From the original questioner:
We have decent product line now. We don't have the time or the money to develop a new product line just for retail. We've spent the past 10 years perfecting our existing product line. We're at the point of if we don't generate some sales in the next two months, the doors will be permanently closed.

We are thinking of leaving enough room in our retail prices to sell at a discount to qualified retailers who will purchase our product in volume. Part of the problem we have now, is some of our retailers only buy a few hundred dollars a year, but want exclusives, want you to drop ship, etc., want to buy only one item at a time after they've sold it, and then want you to finance them. We're having many dealers who want us to give them photos of our products for their website and drop ship for them. But they still want to double or triple our prices and do no work.

From contributor S:
I think that the suggestions I’ve made above are pretty much on target. Your problem is to segregate your retail and wholesale operations and compute separate costs as if you owned two businesses. Once you know what your costs are at the “front door,” you can build a wholesale policy with the knowledge that your sales will be profitable. At the same time, your retail business will differ from other retail businesses only in the fact that you happen to own the primary supplier.

It’s customary in much of retail sales to expect to double the wholesale price. This is called “keystoning,” and the retailer’s margin is needed to cover purchases (around 50%), overhead expenses (around 30%) and still allow (let’s say) a 20% profit margin. Retailers are often in competition with other retailers, and this equilibrium is about where they need to be in order to prosper. If they try to triple your wholesale prices, they’ll be undercut by competitors. If they don’t double their prices they’ll go broke eventually. No sense in getting nervous about this – it’s just the way it is. It costs a lot of money to run a retail operation.

It’s completely different for drop-shipping arrangements with Internet retailers. These sellers may wish to keystone – but it isn’t going to happen. They have no inventory expenses or carrying charges, they have no rent, they have no employees, they have no problem with aging or leftover stock. The can easily live with a 150% markup and usually this falls off to 130% or less. The reason is that they also have competitors that will undercut them until some sort of equilibrium is reached.

Unfortunately, they often don’t know this. They’ve built a web site based on the idea that they can double wholesale prices –“that’s what stores do” – and the belief that they can pocket the whole Monte. They tend to suppose that the reason their competitors are selling for much less than double your wholesale price is that your wholesale price is too high. They don’t realize that their competitors are actually marking up less than 100% and paying more at wholesale than they suppose.

So what to do? Here’s the only thing you can do. Set your MSRP at twice your minimally profitable wholesale price. Offer wholesale buyers 50% off. Set your retail operation up separately and segregate it from your wholesale operation. Sell your product at the MSRP minus whatever “sale” discount allows you to keep this part of your operation profitable.

I’m not suggesting anything coy here – rather suggesting a framework for how you have to think about your finances. You don’t have to get a new business name or a new account or anything else – I’m suggesting a set of principles for how you have to think out the numbers.

As to exclusive territories, minimum orders, and the rest of it – these are details. You can give away what you can afford to give away in individual cases – and not give away what you can’t afford to give away in others. With most drop shipping, incidentally, there is no reason to establish any sort of credit or payment plan as the retailer has already been paid by their buyer. They should pay cash – no account. Accounts are reasonable when they have to wait for their money before they can pay you – but this is not ordinarily the case in drop shipping agreements.

From contributor L:
Having manufactured furniture in the past, I fully agree with contributor S's assessment. The retail business is full of things to drive up your costs without yielding any benefits to you. All sorts of perks to get the sales people to sell your product over someone else's. Dealers want you to provide "lose leaders," dealers want exclusive territories, but not based on maintaining a certain level of sales. Internet sellers that use the drop ship method generally pay the wholesale price plus an added fee to cover the small lot shipping costs to the manufacturer or importer. Display ads and placement charges can be pretty high on Google. They in essence auction off location on a cost per click basis for display ads (those running down the sides of the page - if you click on a regular listing in the main part of the search page, the cost is much less for the seller).

From contributor J:
I think I understand where you are coming from. Due to global macroeconomic conditions beyond your control, are you basically saying that your product is now worth what you need to sell it for to make a nice profit, but no more? Are you saying that your product line can no longer support a two tier distribution network? I used to work for a chain of specialty unfinished furniture stores that went belly up. The reason was because the price of our American made furniture was way too high when the stores down the road were selling Chinese stuff that was pre-finished, half price, etc.

A lot of the cost was due to bureaucracy, in my opinion. First of all, the manufacturers made a very healthy profit on the pieces, then they had independent sales reps who got a 15% commission (which of course was built into the wholesale cost), then you had freight on top of that at about 25%.

Ironically when we had our two month long going out of business sale, we were able to liquidate our complete inventory at cost in about 40 days. Some of those pieces had been on the showroom floor for well over a year. Too bad we couldn't have made the stuff ourselves - we probably would've cleaned up.

So if you have the ability to be a price leader, by all means please do so. I disagree with doubling your retail price so that you can play the typical retail game. I completely understand that's the way it used to work, but we are supposedly in a new economy? Maybe leave a little wiggle room so that you can offer 10-20% for high volume purchases to qualified dealers. But I don't think I would put myself out of business by selling stuff too expensively just to protect other businesses. If your dealers find a product a couple dollars cheaper elsewhere, they will jump ship anyways.

From contributor A:
I feel your pain! Fact of life, though, is that the retailer has a very expensive cost of doing business. Two to three times cost is normal and that reflects the true cost of doing business. That said, sales reduce the overall margin, so at the end of the day the average sale price is something less than two or three times cost.

To better understand,
Who pays the freight to the dealer and to the dealer's customer?
Who makes good on the customer purchase that is returned only because it "didn't fit with my decorating, colors, other stuff"?
Who carries the inventory and the cost associated with it? Inventory is unspendable cash.
Who carries the credit or pays the credit card fees?

Who pays for minor repairs resulting from transportation or showroom damage?
Who pays the sales cost and the staffing for a display area or showroom or store?
Who buys the advertising in various local media?
Who takes the beating when an item won't sell and gets marked down to less than cost?

The auto industry employs a manufacturer rebate, buys the advertising and underwrites promotional activity, as do many other businesses, and we certainly don't do that. Times are tough, creative marketing can help.

From contributor D:
Contributor S's ideas are all textbook application of how to combat the wholesale/retail complications you face. So, if that is truly your problem, adhere to her words, which I will not recite.

In reading your two posts on this thread, I sense something deeper. I think that you may be entering panic mode, which could be good. I also get the idea that you are from the old school where “the customer is always right” and that you have been letting some of them bully you around.

In normal times, a business can handle a little bullying and being walked on without even noticing it. We write it off in our minds as good customer service, or think that all the bending over backwards will pay off someday. The fact is, it won't! If you let customers walk on you, they will start stomping, and not stop until they drive you into the ground.

You must decide which customers treat you right, and retain their business. The customers that expect the world and offer nothing, cut them loose! Fast!

Some people do their best work under pressure, like myself. Others fold like a lawn chair. I hope you are of the former, and not the latter. Recession is no time for people who fold under pressure! In this recession, you have to rewrite the rules in your business daily. All that dealer protection and exclusive nonsense is out of the window unless these dealers are capable of providing you everything you want, and obviously, they are not.

You have to do whatever you have to do to survive! Man, go sell those things on the side of the road if you have to! The Amish you refer to here may have a good point.

There is nothing that this business can throw at you that there is not an answer for. Every negative can be turned to a positive given the right attitude, and atmosphere to flourish. Being here on this board asking for advice with two months of reserves left is a good sign that you are on the right track.

Recession is the best thing that can happen to any company. For recession forces a business to operate the way it should have been operating all along.

From contributor U:
Save your business and cut the retailers loose that are killing you. You need to boost sales; if this is via going direct, do it. The very fact you are two months away from closing your doors means you have many areas to look at - Lean, throughput, debt ratio, and of course, sales. The retailers that need their 200.00 markup don't need or care about you. I once did the wholesale thing, and they were my biggest customer. They cut my throat, and that company is close to going belly up. I saved my butt and moved on, toughed out the rough times, and am a lot better off.