Ideas for better business

Why isn't my candle business profitable?

April 2017 Edition

Yesterday, we had a candle maker visit our warehouse to talk with us about planning her 2009 glass and candle supplies purchases. Although her business grew over 100% in 2008 after the launch of a new lotion candle collection consisting of several Libbey apothecary and status jars, she claimed that she has been unable to take money out of her business. Further, she told me that she is unsure whether she made a profit. When I asked her about whether she understood what a balance sheet or income statement was, she said, “what do you mean?”

Based in the northeast, she runs a solid direct-to-consumer candle business which includes both short and long term leases at several malls, mall kiosks and trade shows. I spent some time crunching numbers for her so that she could take a hard look at her cost of goods (for turning glass jars into a finished candle) and selling expenses (direct expenses related to her ability to get in front of consumers). What I found surprised me: her gross margin exceeded 70% on product.

After pressing her for more information, I discovered why she was not profitable. I found that she overexposed herself to contingent liabilities such as strict lock-in periods and profit “riders” in her lease agreements with landlords. In addition to forcing her to maintain payroll during slow selling periods, the profit “rider” clause cost her almost a third of her gross sales. When combined with rent, processing fees and labor, her selling expenses accounted for more than twice her cost of goods. This greatly concerned me, as it reduced her actual operating margin to less than 15%. I immediately put together a simple P&L and balance sheet so she could understand what was happening to her money.

The truth is that she has very strong cash flow due to the nature of her direct-to-consumer model, fast turn rates, just-in-time inventory and ultra low costs of goods, i.e., the glass jars and candle supplies she buys in bulk to make her candles. As such, it is unlikely that she would go out of business unless foot traffic is incredibly low. What’s more, the glass jars that she selected for her line are selling extremely well. Her customers are value-oriented candle users that are looking to get the best deal for the highest quality: her soy lotion candles have a two-in-one value packed in modern and unique Libbey jars that give them outstanding shelf appeal. The result is that her candles easily compete with overpriced mall alternatives.

Subsequently, I realized that she neither had quality, marketing or sales problems and no issues with cash flow or cost of goods. Her problems were as follows: (1) she failed to negotiate acceptable terms with her vendors, (2) she doesn’t understand her true selling expenses and (3) she isn’t pursuing a wholesale model to avoid or mitigate liabilities.

I’ve found that retail is a great “opener” to build your brand and customer base, but at the end of the day adding a wholesale component is essential. This would involve giving up some gross product margin, but this would be immediately offset by reduced selling expenses. In addition, working with retailers and sales reps expands your footprint through multiple sales channels simultaneously, without taking on any liabilities. While product margins may end up lower, net margin – your actual profit – will be significantly higher. Based on my initial assessment? Adding a wholesale component would put 35% in her pocket!

Increase Cash Flow

One of our specialties is helping business owners maximize their cash flow and profits on every order. To do this, we start with an education in bulk buying fundamentals by explaining the inherent advantages of purchasing glass jars in larger quantities and shipping them via common carrier on pallets. Next, we explain the advantages of planning purchases to coincide neatly with payment terms from credit card issuers. As an example, I’m going to show the potential savings on 22 ounce Libbey apothecary jars (which make 16 ounce apothecary candles).

A large percentage of candle makers are ordering multiple cartons of 16 ounce Libbey apothecary jars about 2 or 3 times per month. The wholesale list price for residential UPS deliveries is $1.84 with a standard flat glass lid ($0.25 more for an upgrade to a black metal finish). To the Midwest or South from New England, UPS rates add about $0.80 per unit to the landed cost of these jars for a total of $2.64 per apothecary. Since they are using about twenty boxes every two or three months, these candle companies are adding $400 to their cost in freight.

By ordering two months of inventory at one time, or 500 16 ounce apothecary jars, they would reach our first bulk discount level of $0.10 per jar. Average freight per jar to the Midwest and South is approximately $0.30 per jar for 500 jars or less. As such, savings would be $0.60 per apothecary jar or $300. Scaling the order to 1000 jars would reduce transportation cost to $0.15/jar and they would reach our next discount level of $0.20/jar. The savings would be $0.85 per unit or $850 for 1000 apothecary jars!

Although bulking up might seem like a stretch, if purchases are timed properly to coincide with the beginning of your credit card billing cycle, you can easily increase cash flow and enjoy the above mentioned savings simultaneously. Most credit card companies will run a 30 day “charging” period in which you can run multiple transactions. After the cut off date, they send you a statement covering the previous billing period and give you a grace period of typically 14 days (10 business days) to pay your bill.

Therefore, if you charge your pallet order on the first day of a new billing cycle, you will have about 44 days remaining to pay the bill without incurring any interest expenses. If you are ordering two months of inventory, then you will likely have at least 50% of the apothecary jars sold before the credit card bill is due. As such, you will have the cash to pay your credit card bill off completely without spreading yourself thin. You immediately saved 22% on 500 or 32% on 1000 apothecary jars. As an added bonus, using a rewards or cash back card will give you the benefit of earning airline miles or cash rewards for purchases. This is equivalent to an additional savings of 1 or 1.5% depending on the issuing bank. The bottom line? Be smart about when and how you purchase apothecary jars, create a plan to cover a longer period of usage, get the bulk discounts and place your orders on the first day of your credit card cycle to take advantage of normal terms from your creditors.

Does the quality of you glass jars affect your profit margins?

To most business owners pricing a product packaged in glass jars is both complex and confusing. Many factors contribute to the final price of a product. Name recognition or brand, novelty value, target market, point of sale location, competition and buyer expectations all affect profit margins. The wrong pricing structure can be fatal for a business. On the other hand, if prices are strategic and appropriate to the environment where the products are sold glass fillers will see outstanding results.

For example, a shopper walking through a high end mall is not expecting a good value based on price only; rather, they are looking for unique jars with affordable luxuries inside. In this case, the consumer assumes that the product will be priced at a level above what they would see for lower cost equivalents at a box store chain such as Wal-mart or Target. The higher quality and novelty value generate their enthusiasm for making a quick purchase. Mall retailers can charge a premium for the unique presentation of glass packaging in such a setting.

A recent article in The Economist criticized China for building an export-driven economy based on lower quality, simple products at cheap prices. Now consumers both in and out of China look at anything made there as “cheap” or low quality. As such, they have created an artificial ceiling in terms of wholesale and retail prices charged for anything “made in China.” With the economic downturn affecting order volume and frequency, thousands of factories have closed. They cannot afford to operate with razor thin margins unless current volumes persist.

And the reverse is also true. Unless your business is capable of competing with price-based importers, I would highly recommend sticking to the basics of glass packaging: buy the highest quality jars you can possibly afford. The more unique, sparkling and well packaged your products, the better the impression on retailers, wholesalers and consumers. In addition to margin increases from higher retail and wholesale price points, quality glass jars help further differentiate your products from competing offerings in the same retail locations. The result is a net increase in profit margin – the percentage of profit dollars you make on each item sold – as well as gross profit – the total dollars earned on the sales you generate. Simply put, you can command a premium while simultaneously selling more when your product is packaged in high quality glass containers.

Our 2008 study analyzed data gathered from a 1000 surveys of our best customers (about 9% of our total). We’ve found that distributing high quality Libbey glass jars is exciting; Libbey’s brand, quality, design and integrity make their containers exceptional for candle, gift and gourmet packaging. Our customers have discovered (albeit after initial price resistance) that upgrading to signature Libbey styles enables them to charge on average 35% more. For most, their sales increased on average 22 to 46% within six months of launch with the new Libbey designs.