One problem which occurs for manufacturers is having excess packaging for a product that has been discontinued, undergone aesthetic changes or has ingredient changes. The manufacturer often is left with excess packaging materials sitting in their warehouse that is now being replaced by a new iteration to be sold to regular customers.
The best and most cost-effective outcome is to continue making the finished product in the old packaging, then on a certain date, start making the product in the new packaging. With excellent timing, the old packaging runs out the day before the production date change. In a perfect world, this is a good idea. In reality, this strategy often doesn’t work out as planned.
In many cases, older packaging remains in inventory which hasn’t been made into finished product. It is possible that a manufacturer can be sitting with thousands of dollars in unused packaging and certainly doesn’t want to see this inventory thrown in the trash for a significant loss.
Many manufacturers have approached The Lansing Group to assist them in selling a supply of obsolete packaging to be made into finished product and sold outside of their regular retail channel. The goal for the process is that the product is sold and upon receipt of orders, then product will be produced.
The sticking point becomes pricing. Most alternate channel or overstock buyers want product that is priced at least 50% or more below the everyday wholesale selling price. Pricing for leftover packaging usually doesn’t work under that scenario.
Let’s assume the Good Cookie Company (GCC) has excess packaging for its Chocolate Chip Cookies and wants to reduce the price to make it attractive to overstock buyers.
Assume that GCC makes the cookies at $0.70/bag and sells them at a 35% Gross Margin or $1.08/bag on an everyday basis to the retailer. The cost of goods is $0.70 and includes raw materials, factory overhead, etc. This is the break-even point. If the cookies are sold at $0.70/bag the manufacturer does not lose money out of pocket, breaks even and alleviates the packaging problem.
An alternate channel or discount retailer will calculate the discount off the everyday wholesale selling price, in this case $1.08/bag. With the 50% discount, the buyer would pay $0.54 for the product.
At this pricing, GCC loses $0.16/bag ($1.08 – $0.54 = $0.54. Then deduct the $0.54 from the $ 0.70 cost of goods and you get $0.16/bag loss. In most cases it probably is cheaper to throw out the packaging and take a write-off than to lose $0.16/bag (of course, this depends on the cost of the packaging).
With smart planning, there are alternatives to reduce or sell the raw material inventory. One option is to offer a deeper promotion to select customers who can buy larger quantities of product. If GCC normally offers 15% promotions, they could offer a deeper special promotion at 35%%, to their customers to move out volume and still break-even on the cookies. (This is computed by giving a discount of 35% or $ 0.38/bag off the everyday selling price of $1.08 which, in this case is equal the cost of goods of $0.70.)
Use this strategy with caution as employing it with existing customers may create expectations for on-going deep promotions.
Another option is to offer the deeper promotion to new customers and put together an attractive new distribution program, using the older packaging before switching to the new packaging. The cookies could be sold at less than $0.70/bag, shown as a new distribution discount to the retailer. This would help alleviate the packaging inventory as well as play an important part in gaining a new customer. In many cases, new distribution and other introductory allowances reduce the selling price of an item below the manufacturing cost. But that can be an advantage as a new customer has been gained and ongoing purchases will be forthcoming.
The key in this situation is to reduce the manufacturer’s loss on a packaging change or even provide a benefit, such as the new distribution program or helping a regular retail customer aggressively market some product at a deeper-than-normal discount.
Selling Excess Packaging vs Selling Overstocks
How does this differ from a standard overstock problem? With a normal overstock situation, the products have already been produced and, due to any of a number of issues, are unsaleable to the manufacturer’s regular customers. Because the product has been produced, there is a sales problem, the inventory is losing value each day it sits in the warehouse. Thus, the manufacturer will be willing to sell it at a deep discount to recoup at least some of their money, rather than have it expire and become a total loss.
With the excess packaging change issue, the finished product has not been produced. It is often cheaper to take the write-off on the packaging inventory than at the breakeven point to make new product, as discussed above.
As your overstocks or package change needs arise and you want to discuss your options, contact Dick Lansing at The Lansing Group: