Discounting - When you can profit by selling at a loss

[infoscott]

My day job is working as an operations manager in a small retail chain. We're not vertically integrated, so when we pay an invoice to a third party vendor for product, that money is gone and we're stuck with the product (like buying from a seaport or the AI). Selling at a discount from full retail can still recover a lot of our cash expense when margins start out pretty good. Disposing of the product would certainly show a loss with no recovery of our expense.

It gets a little weird in Capitalism when you are vertically integrated and "buying from yourself". Unless you fiddle with the prices, there is a full markup in every step of the supply chain, especially with warehouses (which I usually manually set as a 10% up-charge for incoming product anyway). If you sell your own product at a huge discount to your own price, are you really losing money? One way to figure this out is to add up all your cash costs along the way, but implied is a operations burden that isn't always well quantified in product price.

This problem has struck me in particular with farming. Being in the beverage business means also being in the farming business. If an independent farm is to at least break even, it has to sell all of it's production (whether discarded or used in transactions) at a price that covers all its production costs. But the farm goods' prices do not change based on how much of their output is actually sold. We have to assume spoilage for crops that are harvested but not sold. Since prices are not elastic, unsold crops means the farm has to be running at a loss, which shows up on the CapLab P&L as an employee expense without corresponding revenue.

In my current scenario of Real Estate Mogul, I farmed one season's crop of tobacco in the corn/lemon off season because I missed planting times for desired crops. (I'm playing Mogul at standard difficulty, range brand, beverage specialty, but also producing drugs and foods and of course buying lots of real estate.) The idea was to have at least something to show for carrying the farm's fixed costs. But a large farm, even at Level 1, produces a LOT of tobacco, and it is of course all low quality. The seaport was selling much higher quality tobacco at a price I could not compete with, assuming there was an AI who would buy my crop at all. Now I had a storage problem, and built a DC warehouse early in order to store all this tobacco. It was a race to get it all off the farm and into the warehouse before the corn planting season.

The initial plan was to be in the beverage, drug, and food industries, with regular priced retail locations. The only way to move this tobacco was to turn it into cigarettes and sell it at a "loss", at least from the perspective of the game setting prices. But there is a large margin in cigarettes, so although there may have been an opportunity loss, there wasn't necessarily a cash by selling cheap smokes (obviously not wasting branding on these generics). I just had to find a way to dump them into a city market where I had no brand image to lose. Since I was range branded, any city would do.

Looking around, I found the city with the lowest price cigarettes, and naturally the lowest index. I think the low market price was keeping the AI out of this market, but it was perfect for me. I built a discount megastore, put two purchasing units for four sales units but spaced the way I normally would with a 4 and 4 layout, an inventory unit, no training, and started selling like crazy. It's 1994 and I'm still selling cigarettes, and the DC warehouse still holds tobacco, but I don't need it yet for distribution, but now I have the megastore in full training mode.

Being In The Liquidation Business, Accidentally Or On Purpose

In real life there are many fine firms who base their business model on liquidation; Ross, TJ Max, and DSW (Designer Shoe Warehouse) to name a few. There are also many other retailers who maintain outlet or discount business segments; Nordstrom's Rack and the former Filene's Basement come to mind. When net margins are slim and business is accountable to public shareholders, it has to squeeze revenue wherever it can. So at least in Capitalism (II/Lab), every player who is in charge of a supply chain has to think about how they are going to liquidate excess production if they want to grow as fast as possible.

I see two possible business models for making this work; doing it yourself or getting the AI to do it for you. I prefer to turn off Internal Sale and let the AI buy my liquidation product at a huge discount (the third party liquidator model). Depending on who specializes in what and how developed the AIs' supply chain is, that is often not possible. But if the AI does not have market penetration in every city, that is often precisely the opportunity to liquidate it myself (the factory outlet model).

This is the kind of discussion that goes on in my real job. At one time we had an "outlet store" across the street from our main store. That's not really possible now, and I've suggested we use Amazon third party or Ebay platforms to create a virtual outlet. Neither idea seems to have traction. No matter, my virtual empire will continue to liquidate these cigarettes and recover my costs.

Which brings me to the point of this strategy tip: In every scenario, from now on I will always work out a scenario for product liquidation and excess capacity utilization. It's also making me rethink my strategy of which size firms to build (maybe going larger earlier), and probably renovating the firm floor's layout as the business grows. Regardless, every one of my games from now on will have at least one discount megastore located either in the cheapest city or the most expensive city. Avoiding waste is probably the trickiest part of business, and a part that would make sense to profit from in Cap Lab by using factory outlet stores.

[counting]

I think most viewers on the forum would be delighted if you could put these strategy posts in the form of Business Journals with screen-caps (Or even save files)

[infoscott]

I think most viewers on the forum would be delighted if you could put these strategy posts in the form of Business Journals with screen-caps (Or even save files)

I'll have to figure out how to do that, at least with save files. My luck with screen shots and file sharing services have been terrible, and the jpgs posted here "disappear" from view after a few seconds.

So far these write ups have been descriptive/narrative, but have been toying with the idea of writing more in the business journal format.

[counting]

I think most viewers on the forum would be delighted if you could put these strategy posts in the form of Business Journals with screen-caps (Or even save files)

I'll have to figure out how to do that, at least with save files. My luck with screen shots and file sharing services have been terrible, and the jpgs posted here "disappear" from view after a few seconds.

So far these write ups have been descriptive/narrative, but have been toying with the idea of writing more in the business journal format.

you can upload files and images directly to the forum. Just select them below the Upload attachment and then click the Add the file button. A screen will pop up showing upload in progress.