A Critical Look: Vanishing Margins

Photo Credits: Pixabay

Photo Credits: Pixabay

If you've ever seen Pawn Stars, you basically know how retail works: a retailer purchases a product from someone, usually a distributor or manufacturer, and resells it to you, the consumer, for a higher price. The retailer uses that money to pay his supplier for the product, and takes what is left over and uses it to pay his staff, the electric bill, or any other such necessities. Anything left over after that is usually reinvested into the business or invested elsewhere.

The difference between the retailer's cost and the retail price is called the margin. For a business, margin is everything — it's what allows the business to operate.

Over the past few years, hobby manufacturers and distributors, faced with declining sales and increased competition, have independently come upon a solution to their shrinking revenue — squeezing retail hobby shops more and more by cutting the margins the hobby shop can operate at.

This isn't limited to a single brand or company — this practice has been adopted by both major distributors and product manufacturers. They raise the prices that retailers must pay for products, but leave the manufacturer's suggested retail price (MSRP) the same, putting hobby shops in a pickle: do you raise prices over MSRP and risk backlash from your customers, who will in turn choose to purchase online, or do you try to make due with smaller margins and risk closing down when you can't afford to pay your staff? Either choice harms the hobby shop's ability to operate.

Now, to be fair, some distributors and manufacturers have begun to play nice, and some haven't done this at all. Traxxas has not, to the best of my knowledge, raised dealer prices at all (though there are other gripes I have with the company). Horizon Hobby, who once was at the center of my frustrations on this issue, has since begun to make amends by both raising margins for dealers and implementing a MAP policy, not just on big-ticket items, but everyday parts and accessories as well. The program is in its infancy, but it is showing promise, though it only covers their proprietary items, and not brands they don't have direct control over.

After talking with my sources within the industry, it seems like the largest offenders are those that sell through distribution - companies like Testors, Evergreen, RPM RC Products, and Du-Bro, among others. Margins on products from these companies are getting thinner and thinner, with no end in sight. Online retailers, who generally have less overhead costs per customer, might be able to sustain their businesses on these shrinking margins, but shops like ours can't.

As the cost of living across the country continues to rise, and as minimum wage and other costs increase alongside them, so too must the prices consumers pay for their hobby supplies. Manufacturers must lead the way on this, raising MSRP in concert with dealer costs. If nothing changes, there could eventually be no more stores for these companies to sell their products through, and any of the manufacturers will tell you how important hobby shops are for the industry as a whole. It's time for them to either prove to us they believe that, or reveal themselves as liars.