I should clarify that my idea would be to only do this with a few different products.
Example:
As of today Saran Wrap is priced on average at $2.49
ABC Company buys 10 truckloads of Saran Wrap, this bulk gives them a sweet deal and they get it for $1.49 a piece.
ABC Company then warehouses it and just let it sit for 5 years.
Saran Wrap in 2019 is now priced at $3.49
So instead of making $1 per roll, they have doubled their profit.
I realize not many companies probably have the capacity to stick a few million dollars into one item and just let it sit. But the return on investment would come out to around 6% per year (math might be off a bit) which is not a bad return at all.
Buy low, sell high? No, I think you’re the first person to have that idea.
Nowadays, they would do that with long-term futures or options and not warehouse any physical goods. Also, your analysis doesn’t account for the cost of storing the goods, the risk involved or inflation. There’s no such thing as easy money.
Not really–I mentioned that companies generally don’t do what you said, which directly answers the question posed in the thread title. They use options and futures contracts because the associated costs are lower. Then I pointed out that your estimate for potential ROI was overly generous.
Oh, and companies can’t just a buy a product for 1.49 and sell it for 2.49 without incurring retail costs, like the costs of owning a supermarket or something similar. If it was possible to make a dollar of pure profit on a 1.49 item, people would just enter the market until the price difference was arbitraged away.
The problem is that the thing that’s raising the price of Saran Wrap is general inflation. So while the price they can sell Saran Wrap for rose a dollar over a period of five years, the value of that dollar fell by pretty much the same amount.
[QUOTE=
Oh, and companies can’t just a buy a product for 1.49 and sell it for 2.49 without incurring retail costs, like the costs of owning a supermarket or something similar. If it was possible to make a dollar of pure profit on a 1.49 item, people would just enter the market until the price difference was arbitraged away.[/QUOTE]
There is a difference between gross profit and net profit.
You would in fact make $1 gross profit. The cost of owning a store is assumed, didn’t think i would have to write a business proposal to get a question answered.
Besides my question is “Has this retail method ever been used”
This is rarely done because warehouses cost money. Someone pays for that warehouse to start with, and it costs money to maintain it. In addition it locks up the investment for the time you wait, accumulating costs and returning nothing.
Whenever the increased value exceeds the costs associated with storage you can be guaranteed someone is doing it now. This is why people buy gold. They at least have the perception that it will sell for more than it cost them to purchase it, store it, and the potential income lost if the money was invested elsewhere.
I’m sure that at some point or another in nearly 400 years of free-market capitalism, nearly everything has been tried at least once. But I answered your question in the second post in the thread, when I said that it’s generally not done that way.
And while gross margin can also be called gross profit, net profit is the general meaning when people use the word profit, and is the more meaningful term when talking about interest rates.
Oh, and since saran wrap isn’t a commodity, you have to hope that the manufacturer doesn’t change the formula or packaging between now and the next five years. More risk.
Another risk is that the manufacturer of Saran Wrap changes the product or even the packaging. In that case it’s obvious that you’re selling old stock. (Plus a six-percent return is actually pretty low. I imagine any supermarket operator could do better.)
We have a family friend who operated a convenience store in New York and I think he did this with cigarettes.
One of the biggest risks is that the product you’re storing could become obsolete. Hasn’t happened yet with Saran Wrap, except in my house where it’s been entirely replaced by Press 'N Seal. I haven’t purchased Saran Wrap in years. I’m just one data point, but if the entire country moved on from your product, you’d really be stuck. I just hope no one tried this method on blank VHS tapes.
Or the price of Saran Wrap in 2019 is .99, and they've lost .50 on each roll, plus the cost of the warehouse and the opportunity cost of their money. Prices for items don’t always go up, due to changes in the market, raw materials, or manufacturing methods.
There are lots of basic commodities that are “warehoused” until the owners need them – think of oil fields, coal mines, etc.
There are several problems. Suppose you buy a petroleum reserve. First, you need the money to buy it. Then you need money to maintain it. You have to get that money either from your current profits, or from credit. In either case, money has a cost, and you’re betting that future profits will more than make up for the money you’ve already sunk into your petroleum reserve.
If you bought that petroleum reserve a month ago you paid $90 a barrel for it. Today it’s worth $80 a barrel.
But that’s basic commodities. Your question was about retailing. Suppose you got a sweet deal on a warehouse load of CRT monitors or Microsoft Zunes?
And that basic saran wrap? It used to be made out of PVDC. Now it’s made from LDPE. How’d you like to bet on buying a multi-year inventory of something that gets chased out of the market because consumers are concerned it might be a health risk?
Some commodities have seasonal price cycles so it may make sense to store them until the price is high. For instance, natural gas can be stored until peak consumption periods like winter (when it’s used for heating) or summer (when it’s used to produce power for air conditioning). For another example, turkeys can be raised in the summer and frozen for sale around Thanksgiving.
NB: I will not pretend that all these apply to Saran Wrap but I will keep it the example.
Possible expiration/legal requirements: Even foods that last forever have a date for legal reasons, and non-food may decline in quality or regulations may prevent you from selling old product (unless you go for the “fell off a truck” route). Also, I can see where something like Saran Wrap might melt in a hot warehouse, or the sheets may otherwise not peel correctly due to environment, plain age, or planned obsolescence.
And cigarettes would certainly decline in quality no? At least if I’ve forgotten them somewhere and later found them, they are noticeably worse. Do humidors work for cigarettes? Yeah, make that factory sized.
Stockpiling gasoline is a stock “idiot plan”, e.g.: Always Sunny. Gas doesn’t last long.
If you bought it for $1.49 in 2009, your inflated cost would be $1.65. Could be worse.
I am not familiar, so how is it better? In a tissue lab setting I used some film which I thought was better in every way to Saran Wrap because it doesn’t stick to itself. People might be put off the food uses by a product used to cover brain tissue though.
A much better example of what we do is the same thing, just with a faster turn around. If the Saran Wrap (or, rather the Reynolds) distributor called up his super market chain to get the order for this week and happened to mention that the price of Saran Wrap was going up from $1.66 to $1.85 (so in the store it would be going from 2.49 to 2.79) next week, the buyer might say "well, I was going order 100 cases (his normal order for the week), but I’ll take a thousand instead.
So, he’s now saved (assuming 12 per case) $2280. Of course, OTOH, he has to keep those somewhere, worry about them getting damaged when some high school kid backs a forklift into them or leaves a case of rotten tomatoes on them or there’s a roof leave or whatever and on top of all that, they have to pay for them all in 30 days.
So, if it was my store, I probably wouldn’t buy 6 months worth for that little savings. But if the price was going up significantly, it’s good to buy ahead a little bit. 5 years, like the OP stated is probably unheard of, but a month or two out because of a price increase is pretty common.
Don’t forget, we still raise our price with all the other stores, so it’s one of those few times in the retail world where there’s a little extra money to be made.
Now IANAA (I am not an accountant) but I believe return on investment and gross margins are not the same thing, especially when you’re talking about the ROI of the overall business vs the gross margin on individual products. (After all, if gross margin was the only thing a supermarket operator cared about, he/she would drop many of the products in the store. Milk, for instance.)
BTW, a possible example of what the OP is suggesting is that in the first decade of this century, Southwest Airlines bought futures contracts on jet fuel prices that reduced its expenses at a time of rising fuel prices. It saved billions as a result.
One possible downside; you guess the movement of prices incorrectly and lose your shirt. And then your investors are calling for your head for speculating instead of running your business.