And if you have a warehouse full of valuable saran wrap just sitting there, are you really going to take your chances with fire, theft, accidental damage, etc, or are you going to insure that investment? How much of your profit will insurance eat?
These are the basic reasons.
If you buy a crapton of IBM stock, you can pretty much stick it in a Scottrade account and pay pretty much no maintenance costs until you decide to sell it five or ten years down the line. Also, stocks have tended to provide more returns, on average, than inflation, and people do expect to make money just holding stocks.
You aren’t as likely to make money “buying and holding” a thousand boxes of Bic pens or 10,000 boxes of Dixie cups because 1) they cost a significant amount of money to store, and 2) they aren’t likely to appreciate in value any more than inflation.
In addition, physical goods can degrade if not stored properly, and even if stored properly, could be subject to recall for safety purposes and/or be banned for sale a few years down the line because they can cause cancer in baby seals.
Maybe you open up the vault in 20 years to find that your 10k cases of Dixie cups have become a moldy heap of scrap paper. Hope you enjoy cleaning it up!
Another reason is opportunity cost. If you spend a million dollars on merchandise that you are going to store for a few years, that is a million dollars that you can’t use to grow your business elsewhere. You could have at least put it in a money market account or something and made 2% interest. Jesus is reported to have spoken about this concept.
This is one of the reasons why interest rates are so important to the business world. If the Interest Rate ™ is 5%, and you figure that you aren’t likely to make much more than 2% actually running your business, maybe it would be better to stick it in the bank and hang out at the beach until next year. The rate defines a baseline level of performance necessary for real growth.
I know a few people who do that on a smaller scale. They are known as hoarders. They tie up all their resources and often loose on the intitial investment. All around it is a horrible strategy.
Right. The supermarket owner sells a can of beans for .99, and his costs (for buying the can wholesale, and for operating the store) are .96. His net margin is 3 cents, just under 3%.
But once he’s sold that can, he’ll buy another one and sell that, making another three cents. For a supermarket, he might be able to do the cycle ten times in a year. So he’s made 30 cents that year, off an investment of 96 cents, which is a yearly return of 31% or so. That’s a bit simplified for a real Return on Investment calculation, but the point is, while supermarkets are a very thin margin (3% is I think typical, compared to, say a clothing store which might be 30%), they’re still profitable because they sell their entire inventory many times each year (as opposed to the clothing store, which probably expects to sell its entire inventory maybe once each year).
Goldman-Sachs has infamously done this with Aluminum. They (via a recently acquired subsidiary) bought a bunch of Al cheap, and are stockpiling a large chunk of it to drive up prices to sell at a later date.
The win-win for G-S is that they are also a commodity trading company. So demand changes for their Al tells them in advance how to bet on the market. Of course, that would be wrong so they would never, ever do that.
Saran Wrap? Pffft. Go with fuels, metals, grains, etc.
I used to work in haulage. Back in the 90s the buzzword was ‘Just in Time’ which meant that haulage operators had to provide a service that got the parts to the assembly line just before they were needed. Before this, manufacturers would keep up to a years worth of parts in stock; partly as a hedge against inflation but mostly as a buffer against supply problems.
The main reason for switching to JIT was the cost of inventory. Every part that is sitting in a warehouse waiting to be used is costing money and possibly becoming obsolete. This philosophy filters right down the supply chain with each stage holding as little of whatever they use as raw material as they can. The steel plant does not want $millions worth of unsold stock waiting for an order, he wants an order that specifies regular deliveries through to next year and beyond. This will then affect the mine where the ore comes from in the same way.
At times of high inflation it might be possible to snap up a bargain in some popular consumer good, keep it (or better still not actually take delivery) for some time and then sell it. This works best if you can do what the supermarkets do and delay payment until well beyond the time that they are sold on.
The product area that might best fit the OP’s question is produce. Some types of fruit and vegetables are commonly warehoused for part of a year, to be sold out of season.
Stockpiling it to drive up prices is different that stockpiling it and waiting for prices to go up.
NYtimes, 7/20/13:
A Shuffle of Aluminum, but to Banks, Pure Gold
Opening graf:
MOUNT CLEMENS, Mich. — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
Billions! Those reprehensible shrewd bankers–as usual–and the cost to consumers. Don’t forget, the NYTimes is non-political in their news, unlike say, Fox.
Time to rename the company to Aluminumcan Sachs.
Cornering the market on a commodity isn’t at all comparable to buying a bunch of branded consumer goods and warehousing them for a couple years.
bob++ got it.
Just In Time is still used today and carries over to things like Lean Sigma principles. You always want the least amount of inventory possible at all times. Sell it as fast as you get/make it.
Why? Carrying costs. Like everyone mentioned, carrying inventory costs money. You pay to store it, it’s tied up money that’s not making money, you pay to insure it, you pay taxes on it as you hold it, it can be stolen or damaged, etc.
Busineses with very low inventory turns aren’t making money.
Press N Seal is thicker than Saran Wrap and easier to work with. Although it is still sticky, I rarely have to toss out sheets that have become a tangled mess, which frequently happens for me with Saran Wrap. It’s also less transparent than Saran Wrap, which may be useful for some applications.
Amazon has a number of reviews from people who have switched, as well as those who still prefer Saran Wrap. I just found it amusing that the example product chosen by the OP has become obsolete at least for me.
In addition, there’s taxes. According to the Thor Power Tools decision, you have to declare the value of the Saran Wrap as assets and pay taxes on it each year. Over five years, that will eat up any cost of inflation.
To expand on what bob++ said a bit:
In business school, one of the things that gets pounded into your head is that even though on a balance sheet inventory is listed as an asset, it is a liability. Carrying excess inventory is almost never a good idea. The goal of most companies is to carry the absolute minimum amount of inventory necessary. All sort of companies, from auto manufacturers, to Walmart, spend an enormous amount of time and effort figuring out how to minimize, rather than stockpile, inventory.
In this instance, you are looking at “investing” in Saran wrap. The profit that you are getting from this is completely dependent on inflation, which means there is no actual profit, and actually a loss, for three basic reasons:
- The inflation wipes out 100% of any profit from the start
- You will have warehousing costs
- Any investment has a cost of funds, whether it is an actual cost (taking a loan out), or an opportunity cost
So using this strategy will result in bankruptcy in short order. The only exception would be if you can identify some sort of commodity that will appreciate far more than inflation. This is why people speculate in gold, oil, etc. Consumer goods will almost never fit this description, pretty much by definition.
How is this point not the main point in every post in this thread? I feel I must be missing something important about economics. Or is it just that everyone else is assuming the OP realises this obvious risk and only needs to be educated on all the costs involved in such a gamble?
Isn’t this basically what antique dealers do with many of the items they buy? They sit an item on the shelf with a present day market price that this ridiculous and wait until the price comes in line with what someone is willing to pay, perhaps five or twenty years later.
I don’t think antique dealers buy new things and wait for them to become antiques.
But they do buy new antiques (like 1970’s cookware) and hold onto them thinking that they will appreciate. That and some people do buy new things (silly collectibles) and let them sit in the belief that they will appreciate. Hell I bought new gold jewelry back in the 90’s and justified my purchases in the belief that they would be worth more in the coming years than I paid, turned out I was correct. In 2010 I cashed out on a load of big gangster style chains with gold coin medallions I bout when gold was $350 an ounce and used the proceeds to pay for my house when gold hit $1800 and ounce. Bought it brand new retail and still sold it for a decent profit.