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Retail Store Scalping Wii Consoles on eBay
C0rinthian writes "ArsTechnica reports that the games retailer Slackers has been keeping their stock of the Nintendo Wii off their store shelves, and is instead selling the system on eBay for $400-500. (A $150-$250 markup)" This follows their look at the other side of the coin: why some retailers insist on Wii Bundles.
Are they not allowed to do to sell them on eBay? Legally it's fine. Nintendo doesn't want them to, but they have to be very careful about cutting off shipments or Nintendo could get busted for price fixing.
In a capatilist society it should be possible to buy any item, no matter how rare, with rarer items being more expensive. Should we blame retailers for doing what economic theory expects them to do? When supply is low and demand is high price should rise until supply = demand.
The way I read your statement, you're making an assumption that I'm not entirely sure is true. It appears that you are assuming Nintendo wants to meet demand.
To be fair, I don't think they are intentionally holding back on production solely to produce scarcity. I think the statements they have made (of wishing they had more product) are honest. However, I also believe that this is not a marketing and sales issue, but a financial one.
Nintendo might be able to ramp up to meet demand, but the problem is one of understanding demand. What no one is sure of is what the real demand is. If they are producing 1.5M units/month, is real demand 1.501M units/month? 3.0M units/month?
The risk that Nintendo faces is the same risk that many telecom and networking companies experienced in 2000-2001. In that case, a capacity shortage of certain components led to over-ordering of the product, and thus when production was ramped to meet the (artificially) inflated demand, the equipment companies sat on billions in inventory that they were forced to write down (because no one wanted to buy it).
This is a slightly different situation (no artificial demand, just hard to forecast the real demand), yet the same lesson applies. I believe Nintendo is taking a cautious approach to its product ramp. Since the supply chain is something on the order of 4-6 months from initial orders to final assembly, they face huge inventory risk if they significantly overshoot demand. Their conservative forecasts and production have lost them some sales, but it may be less risk to lose sales than to risk sitting on a ton of inventory.
They are calling foul. http://slackers.com/
Does anyone have the inside scoop on why -- over a year after introducing this product -- Nintendo has not been able to ramp production up to meet demand? It wasn't a surprise that they couldn't meet demand last Christmas. But, this time around they've had a full year to get the production line up to speed.
I don't have the inside scoop but it isn't hard to see what is going on when you know a thing or two about business.
Suppose you are going into business for developing a widget and you have determined that you can sell the widget for $15. Now suppose that to make the widget you have two components: fixed cost and variable cost. The fixed cost you (almost) can't do anything about; whether you make 1 widget or 1 million this cost stays the same (later we'll see that isn't necessarily true, but it still works against you). Fixed cost would include something like the cost of the building for your factory. Even if your factory only produces one widget, you still gotta pay for the building. So then there's variable cost which as you might guess is the cost associated with each particular widget--it increases and decreases depending on how many widgets you make. Variable cost would include things like raw material or parts you buy from a supplier. When you order more, the cost goes up, when you order less, the cost goes down.
So let's say for your widgets, which are special widgets that only you know how to manufacture, have a variable cost of $5 but a fixed cost of $2,000,000 a month. And that fixed cost only applies to one factory that can make your widgets. Let say if you wanted two factories making widgets, your fixed cost would roughly double to $4,000,000 a month. But we'll only consider one factory for now. So how many widgets do you have to make and sell to break even? Simple, that's just the fixed cost divided by the contribution margin where the contribution margin is the sale price less the variable cost: $2,000,000 / ($15 - $5) = 200,000 units per a month.
Now throughout this we have not considered the capacity of the factory. So let's say that the factory can produce up to maximum of 300,000 units a month. Well, 300,000 is greater than your breakeven which is 200,000 units so you can actually make money off of this factory as long as it produces more than 200,000 and you sell all of those units. Easy enough.
But now you start selling your widget and notice that because your widget is really special, it is in hot demand. But you recognize that at some point, demand will drop when everyone who wants one of your widget will have one. So let's say demand for your widget turns out to be 400,000 units a month. HMMMM. We have a problem. Your single factory can only produce a maximum of 300,000 widgets per a month so in order to meet demand you would have to setup another factory to produce the remaining 100,000. If you setup the additional factory your fixed costs will jump to $4,000,000 instead of $2,000,000 a month. If we now recalculate your break-even point, it will be: $4,000,000 / ($15 - $5) = 400,000 units per a month. But you've already determined that demand is only 400,000 units a month so by setting up the additional factory, suddenly you are no longer making a profit!
To summarize:
ASSUMPTIONS
Fixed cost of factory: $2,000,000 a month
Factory capacity: 300,000 units a month
Variable cost per unit: $5
Actual product demand: 400,000 units a month
Selling price of the unit: $15
Break-even point on one factory: $2,000,000 / ($15 - $5) = 200,000 units
Profit on actual demand (meeting 75% of demand): (300,000 - 200,000) * ($15 - $5) = $1,000,000 a month
Break-even point on two factories: $4,000,000 / ($15 - $5) = 400,000 units
Profit on actual demand (meeting 100% of demand): (400,000 - 400,000) * ($15 - $5) = $0 a month
Nintendo's situation probably has vastly different numbers but the same concept applies. If the make a speci
Let me just say right off the bat that I do not have any special information regarding the pricing of Nintendo products. What I do have is years of experience as an owner of a reasonably successful electronics reseller. We didn't sell consoles or games, but the industry is not so different that there is going to be that much difference. I won't offer anything in the way of secrets or inside information, so you will have to read between the lines, but broadly speaking some or all of this is going to apply. Guaranteed.
Which means I'm going to accept, without any further comment, his assertion that he "pays $246" for a Nintendo Wii console that he is supposed to sell at $249.95. I would not be the least bit surprised that he has a piece of paper somewhere that says so. And then I'm going to say that when he says he pays $246 for a console, you should not interpret that as meaning it costs him $246 for a console. If it does, he has no business being in the industry he's in.
He may be factoring in the cost of financing his buying from his wholesaler (or a company specializing in this field), but if all his inventory is off the floor plan then generally speaking he is not really making money and should get out. This is where you don't have the necessary financing so you use the inventory itself as collateral, and it's expensive financing; akin to a credit card rate for consumers compared to a bank loan rate.
Typically there is something associated with the floor plan he makes very decent profit on but he needs certain items around to get you to buy the other items, but whatever. I hope I don't have to say out loud what a game reseller would possibly have around that makes lots of profit when the consoles don't.
If he is financing his entire inventory this way he is in bigger trouble than slim console margins. Properly done, it's fine. You get $249.99 the very morning the truck drops off the items, and pay $246 some time in the near future. The $4 is yours at zero cost and zero outlay. That is profit any way you look at it. It limited by supply, but it's still profit.
The alternative is to use your own money (probably financed, but at a much, much lower rate) and seek to reduce your costs to the maximum. This is the better way to make money but your operation has to have the cash flow to do it.
In that case, the invoice price does not include any discounts he had damn well be taking advantage of if he plans to stay in business. One example: shipping discounts. These are based on a variety of factors and can vary from free shipping to a cash allowance that comes off that $246. Another: early payment discounts. Again, they vary, but if he is not paying his invoice quickly and getting the early payment discount then he should be doing something else. They vary widely, but one real-world example is take 10% off the invoice price if your payment is received within 5 days after delivery to you; others may not be so generous but they still give you something. There are volume discounts, there are deals you get at trade shows for your commitment to buy in the near future, there are cozy relationships with your supplier who may be selling you other things, which may be where the discount applies that otherwise would not had he not bought the consoles, and so on, but these are just the mundane details.
Note that if you are on the floor plan, the guy you pay the high interest rate to is the guy taking advantage of all these discounts, because he owns your inventory. A savvy reader will figure out how likely it is that this type of lender is going to pay $246 for a console that he sells for $246. Sure, that interest income is nice, but they are all about the money and don't leave any on the table if they can avoid it.
I'm not suggesting these exact opportunities exist with this exact transaction or line of business, but I am suggesting that the impossible is, well, impossible. So if the story about his cost versus his sale price is too tough to be believed, it probably