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Wednesday, August 11, 2010

No. 16: Profit is the Cost to Keep Your Company Running

A medium-sized foodstuff wholesaler exclusive for restaurants applied for court protection in Tokyo. The company started business by supplying foodstuffs to privately-owned noodle shops and grew quite rapidly by opening its own prepared foods corner in food supermarkets. It accumulated lots of knowledge and know-how on the prepared foods business and received a rush of orders for consulting on how to run a prepared food corner from food supermarkets with which it had no business relations. The consulting business helped the company increase the presence in the foodstuff wholesale business greatly. With the growing profits from the consulting business, it expanded the foodstuff wholesale business and opened an account with nationally-known restaurant chains.

Leading national restaurant chains that have lots of outlets across the country are very attractive for foodstuff suppliers. Total sales are easily calculable by multiplying the sales per outlet and the number of outlets and they will automatically increase every time the national chain builds a new outlet. However, the market is highly competitive because many suppliers seek the opportunity to underprice the competitor to get big orders. No existing supplier can lower its guard under any circumstances, however big they may be.

Your competitor will replace you the next day should you be unable to respond to the national chain’s requirements immediately. Even if the national chain changes the menu all of sudden, you have to respond to the change immediately even though the stocked foodstuffs for delivery become dead stocks. All suppliers have no way but to accept strict conditions to keep doing business with national chains. Accordingly, their business is very much like a roundsman and the profit rate is extremely low.

It is not advisable for a medium-sized supplier to do business with a national chain. A medium-sized suppler should take note the following four points if it tries to open an account with a big national chain. (1) Every business cannot be free from economic fluctuations. You get big sales when economy is brisk, but you lose big sales when economy becomes stagnant. (2) Your presence in the market is lower than bigger competitors. Because of your low presence, you cannot have good bargain power to secure enough profit. Namely, your profit rate tends to become even lower.

(3) Market is liable to change all of sudden. A big chain may acquire another big chain, or it may be merged with another big chain. The resulting big chain may not appoint you as supplier. (4) Your credit rating is lower than bigger competitors. Because of your low credit rating, you cannot get favorable conditions from the bank and you have to pay higher interest rate than your bigger competitors. It is necessary to purchase a large quantity of goods at a lower price to supply a large quantity of goods at a lower price. This business practice is hardly possible for a medium-sized supplier.

As shown above, it is not a good idea for medium-sized companies to do business in a big market. They should pick a small market and increase the share in it by virtue of the ability to respond customer’s requirements without delay. Likewise, a big company should not do business in a small market. They should do business in a big market by virtue of economies of scale. This company should have focused on opening its own prepared foods corner in food market making the best use of its expertise. It is very important to keep in mind that profit is the cost to keep your company running.

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