April 23, 2012
Jim Salinas has answers to some of your questions
It is highly unusual to pre-publish an article. However in this case, it is the right decision and I have decided to release the newest “Just Ask Jim” column by Jim Salinas. His entire column is printed below, and will also be published in the upcoming issue of American Quilt Retailer, Vol. 18, May 2012, Issue 105.
This “Just Ask Jim” column is copyrighted, 2012 by American Quilt Retailer and permission to reprint it in any form must be received in writing. If you are interested in reprinting it, e-mail me at sfuquay@americanquiltretailer. Please use “JAJ permission” in the subject line, and I will answer as soon as possible.
Susan Fuquay, publisher, American Quilt Retailer
Just Ask Jim by Jim Salinas, American Quilt Retailer, Vol. 18, May 2012, Issue 105
— Why do vendors sell to online businesses that sell at predatory prices?
— Fabric chains discounted their products and put the traditional fabric stores out of business. Online discounters are going to do the same thing to independent quilt shops. Why don’t fabric vendors protect shops by not selling to discounters?
— If Apple® can insist that all retailers carrying its products sell them at the same price, why can’t fabric vendors enforce similar standards? For example, the basic iPad® sells for $499 wherever you choose to buy it.
— A collective group of quilt shop owners are concerned that online retailer Fabric.com may put some quilt shops out of business, the way Amazon.com has put book stores out of business. What are your thoughts on this subject and should we feel threatened?
— Some of the best fabric vendors don’t sell to chains but they sell to online businesses. Since almost everyone has a computer in their home, I think selling to these providers is worse than selling to a chain. What do you think?
Things were getting a little dull there for awhile, but holy cow! All heck has broken loose! It appears that vendors have become the enemy! Never mind that some vendors have spent 30 years or more building businesses that in many ways have actually helped create the industry we all enjoy. It is rather sad that we now live in an age where a single, articulate, well-crafted posting in an online forum can rattle an entire industry and mount a rush to judgment on businesses that, by any measure, should be known as “friends to the industry.”
It is more than sad that we also live in an age when anything can be said on the Internet; any position can be postulated regardless of how damaging it may be and regardless of the facts. Opinions can be presented as facts without being tested against fair and balanced debate. Simplistic remedies for vexing challenges can be set forth without consideration of the unintended consequences such action might bring. Unfortunately, such is the world we live in today.
There are so many issues tied up in this brouhaha! Trying to address them all in a comprehensive, linear, and expansive manner would require an epistle and probably be beyond my skill level. I will give you my thoughts in talking point form. Bear in mind that my “self-image” is still that of a retailer. I was a retailer for so many years! My first impression on most issues is still from a retailer’s point of view rather than that of a vendor. I must point out that I am not a vendor today; I am a peddler! My customers spend more time in my main office than I do. I am never there! My thoughts are my own. I am fortunate to work for a company that in 14 years has never steered me to a particular point of view. No doubt there have been times when they disagreed with me, but I never heard about it.
The questions and comments coming to me are advancing the premise that vendors should not sell to online businesses that retail their products at predatory prices. This sentiment is aimed at large online businesses and very specifically toward a particular online fabric retailer — Fabric.com. Furthermore, many of the comments coming my way are challenging vendors being able to sell to any retailer (brick and mortar shops, fabric show vendors, Etsy retailers, eBay retailers, website retailers) that sells at a retail below “full” markup.
So in no particular order, let me put some talking points out there to be considered:
• The word “predatory” is inflammatory. To accuse Fabric.com of predatory pricing because they sell new collections at $8.98 per yard is not fair. (By the way, Fabric.com is not my customer, so I have no personal agenda here.) $8.98 per yard represents a gross margin of profit from 40 to 45 percent depending on the brand. This retail price is an average discount of 15 percent off most vendors’ MSRP. Is this really predatory pricing? It may be aggressive pricing for this industry, but aggressive pricing and predatory pricing are two different things. Do you really want the vendors telling you how to price your goods? Can you imagine the amount of staff vendors would have to add, not to mention the legal exposure, to police retail price points? Do you realize that this cost would have to be recouped in the price of the vendors’ product? Bigger is rarely more efficient than smaller! This is what free markets are all about and, of course, this is currently at the core of a huge national debate. We all have our opinions on this, but I believe that unfettered capitalism has produced and will continue to produce the highest standard of living for the most people of any other economic system on this planet.
• Some have stated that big Web-based retailers receive discounts that enable them to price their products lower than others. Really? You actually know this to be true? You know exactly what each vendor’s pricing policy is? I don’t think so. The vendors in this industry support a more level playing field than in any other retail category with which I am familiar. In fact, it is almost unfair! Perhaps your shop has been open for 20 years. You have supported your key vendors year after year and are spending $50,000 per year with them now. Along comes a small, new shop across town that can barely scrape together enough money to create an opening order. Is it fair that they will pay the exact same price that you do? Business does not normally work this way! Whether it is heads of cabbage or Boeing airplanes, larger orders get better pricing in the real world. This is not only fair, it is actually totally fair. There are cost efficiencies associated with larger business relationships. Having pointed this out, let me assure you that not all vendors extend discounts to bigger customers in this industry.
• “If Apple can insist that all retailers sell their iPad for $499, why can’t fabric vendors do the same thing?” Where do I start with this one? Well, for one thing, Apple is the biggest company in the world based on market capitalization and can pretty much do whatever it wants to do. Indeed, many believe they do have a monopoly and their pricing policies no doubt will continue to be challenged. By the way, I love Apple products and am an Apple shareholder, so my observation is not intended to be judgmental. Well, what do you know! As I write this column, The Wall Street Journal “Market Watch” is reporting that Apple is being sued over e-book price-fixing by the U.S. Department of Justice.
• Then there is the sentiment that it is actually worse for a vendor to sell to a big online retailer than to chains because every home has a computer in it. In essence there is now a “store” in every home, and powerful search engines direct traffic to these stores.
This is being presented as a new, digital age phenomenon that is going to be the ruin of brick and mortar retail. Well, I don’t think so. In 1896 Sears, Roebuck and Co. launched its spring and fall catalog. It was promoted as “the cheapest supply house on earth … our trade reaches around the world! We make every effort to assure our reader has the lowest prices and best values.” Sears initially had the only mail order catalog, and of course, it had an alphabetized index. This index could help you find a shotgun or new underwear. Talk about a powerful search engine, and every home had one!
Don’t you know brick and mortar general stores were concerned? Some no doubt withered away, but others strengthened their operations and prospered! They learned that their businesses could provide a social outlet, service, expertise, speed of delivery and variety. Brick and mortar retailing has undergone a changing landscape over the years. From general stores, small strip centers, large strip centers, shopping malls, department stores and big box retailers, the landscape is constantly changing, but independently owned brick and mortar retailers continue to prevail! The retailers that improved their fundamentals prospered. The retailers that could not change perished. That is simply the nature of things.
When you are in business, there is always a new threat, a new problem, or a new challenge with which to deal. Just like the stock market, you have to climb a continual “wall of worry.” Focus on your fundamentals, be nice to your customers and enjoy what you do!
• “The chains put the independent fabric store out of business, and the big Web discounters are going to do the same thing to quilt shops.” Do you really believe that the fabric chains conspired to put the independent, traditional fabric stores out of business? I worked for four major fabric chains and held key positions with all four. Never once in all of these years did we have this discussion! In the heyday of home sewing, to be frank, small, independently owned stores were not even on our radar! We were too busy competing with other chain stores! In the latter years of the essential demise of that industry, we were too busy trying to survive to pay much attention to small independents. It was cheap, foreign labor that killed traditional home sewing.
Contrary to the beliefs of many, there is no conspiracy afoot among bigger Web providers to put smaller brick and mortar providers out of business. They are smart enough to realize that we do not have an industry without the bedrock of a diverse, creative, and enthusiastic brick and mortar base. Everyone is simply trying to find a business model that works for them.
• Who you choose to buy from is a huge issue. This is called vendor allocation. Vendor allocation decisions should be based on productivity. Where can I put my money to get the best possible return? What vendors have the highest visibility in the market place? What brands have the highest acceptance level at the consumer level? What brands give the shop owner the best sell through and smallest amount of markdowns? What brands offer the best customer service, the best on-time and complete deliveries, and the widest selection? Make a list of the attributes that are most important to you, from the quality of the boxes used in shipping on up, and then grade your vendors accordingly. Emotional issues regarding who sells who what should not be a part of this exercise. Is it really smart to buy marginal product just because Fabric.com doesn’t have it? Think of the huge investments in marketing the premier vendors make in promoting their brands. Don’t you want this marketing horsepower working for you?
• Isn’t price integrity at retail important? Of course it is! It is unrealistic, however, to expect the vendors in the industry to be the pricing police. This is a complex issue. On one hand, vendors can protect their brands from being diminished by extraordinary pricing. On the other hand, there are restraint of trade issues to contend with when a vendor refuses to sell to a business due to pricing policies. As is frequently the case, it is the lawyers who win in these disputes. This is a small industry. No one has the time, staff, or money to fight these battles.
Thirty years ago, when I was a district manager for Hancock Fabrics, a regional manager was touring my stores with me. We went into a Cloth World store and saw a new collection of cotton interlocks on display. It was a beautiful assortment of colors. All of the bolts were draped out with precision. The group was obviously selling, because some of the bolts were small. These interlocks were selling at a higher price than we had them at Hancock. Now remember, in those years, Cloth World had superbly merchandised stores with very high standards set for overall presentation, color-wheeled displays, and uncluttered, visually pleasing stores. Hancock, on the other hand, had big inventories, highly compressed presentation, and more relaxed store standards (less payroll).
The store manager approached us and my regional manager asked him, “How can you sell the same item for $2 more per yard than we sell it right across the street? I just don’t get it.” The manager’s response was not malicious or sarcastic. You could tell it was simply an honest reply. He said, “I think it is because we make it look like it’s worth more.”
What a devastating response. Of course, he was right. This was such an impactful event that I remember it as if it was yesterday. Rather than lobbying the vendor to not sell to his competitor, this manager simply made it look like it was worth more and urged the vendor to keep filling his orders!
The stores in my territory that have solid fundamentals in place, great customer service, and that are making it look like it is “worth more” are having solid sales increases and enjoy fabulous consumer support. Unfortunately, the shops that are cluttered with old inventory, not being supported with timely, visual merchandising and that have sloppy store standards are falling by the wayside. The Internet is not to blame for this.
• There is one issue that I totally agree with when it comes to online sales. Online retailers should have to collect sales tax on all of their transactions! I am amazed that this is not the key issue that brick and mortar shop owners have with the Web! This issue is straining our infrastructure and is totally unfair to brick and mortar shops. This will change because it simply has to!
• The size of Fabric.com has been vastly overstated! “Some vendors say they don’t sell the chains, but they do sell Fabric.com, which is so much larger than the chains. Who are they kidding?” Oh, come on. Are you serious? The fabric that Fabric.com sells is only a tiny, tiny part of Amazon.com’s business! This part of the huge, overall business also sells apparel fabrics, decorator fabrics, crafts, knitting and crocheting supplies, and gifts. When you narrow it down to 45-inch cotton prints and solids, you are looking at a business that I estimate to be three-tenths of one percent of the size of JoAnn Fabrics! This is way less than one percent. When you add in the other chains, it would take me quite awhile to even figure out where to put the decimal point! It may surprise many to know that Fabric.com is not even the biggest vendor in the premium cotton trade. This whole issue has truly become a “tempest in a teapot,” blown totally out of proportion.
• Assume that Fabric.com buys five identical full collections of a vendor’s line. That means that they have 75 yards of each stock number to sell at $8.98 per yard. You may know that 40 percent of all Web-based fabric sales are international sales. This leaves 45 yards per stock number to be sold in America. As you know, this industry is becoming a “print to order” industry, with very little reprinting being done. When it is gone, it is gone! Do you really believe that 45 yards of any one stock number being sold at $8.98 per yard is going to ruin every brick and mortar shop in America? I don’t think so. Some might say, “Well, if we don’t stop them they could get even bigger and start buying hundreds of full collections.” Don’t you think that vendors are smarter than that? Vendors don’t want to wake up one day with just one customer and will not let that happen.
• Let me make one last observation. Fabric.com was launched in 1999. Until the recent posting that “rattled the industry,” most shops were not even aware they existed. As owners rushed to the site, however, panic set in. “There are premium brands there being sold at $3.98 per yard and $4.98 per yard!” Really? Yes, there are one and two-year-old goods on the site being sold at these prices. These are clearance goods at clearance prices! Click on them and you will see one or two bolts left, not full collections! I have spent the last 12 years helping the industry understand inventory management strategies. Every shop in America should have their old, stale inventory at these prices! If you still have two-year-old collections in your store priced at $8.99 and $9.99 per yard, the Internet is not your problem!
Your vendors are not your enemy. They get up every day determined to run their businesses the best they can. Every customer is precious. There are no conspiracies. Good grief, two people can’t keep a secret, much less hundreds! Vendors work hard to gain your trust and support. They realize that ultimately what is best for the industry is best for them. Give them the benefit of the doubt in our ever-changing, fast moving world.
Jim Salinas has close to 40 years of experience in the fabric industry. He was a store manager and then district manager with Hancock Fabrics for 17 years and later vice president of merchandising and marketing for Cloth World, director of fabric merchandising for Michael’s Arts and Crafts and executive vice president of House of Fabrics. He has been a sales associate for Moda Fabrics since 1997 and lives in New Braunfels, Texas.
Copyright 2012, American Quilt Retailer