Failing to remember one of the very basic mantras in running a company is potentially threatening many small cosmetic businesses. The adage, “turnover is vanity, profit is sanity, but cash is reality,” can never be underestimated or ignored but it can be very hard to implement because of the complexities of the industry which is pushing many manufacturers towards higher MOQs.
Why the skincare market is harder to sell into
The skincare market is becoming harder to sell into. There are more products hitting the market specialising in ever fragmented niche sectors, whilst the buying population, and the overall number of units each person buys remains relatively static. This means there is less opportunity to consistently sell large numbers unless you have huge promotional budgets, and are prepared to fight commercial battles on price, not quality.
There is also another nasty sting at the moment. As money becomes tighter consumers are more likely to buy less of what they love and trust, rather than trade down, which means chasing bigger numbers becomes even more difficult.
Why MOQs are rising for small cosmetic brands
Cash is the commercial reality, and small luxury brands need to accept smaller turnover, but at a higher premium, to keep cash flow moving. To do this, a business must overcome two hurdles. The first is order less which means manufacturers need to drop MOQs. This is not easy because whereas manufacturers try and hold prices where they can, it becomes impossible when raw materials, transportation and energy costs are all rising. To negate these rises and keep clients happy, they seek greater efficiencies which come from larger runs which edges up their MOQs. The second hurdle is the mindset that paying more per unit for less units is bad business; it is not. What is bad business, is buying more stock than you need. Buying more stock than you can sell quickly has 2 negative aspects:
The hidden cost of overstocking
- The first is on cash flow: quick stock turnover is essential for cash flow, buying more than you need or can sell relatively quickly ties up money. Money sitting in stock is static and whereas it might look good on a balance sheet, that money could be better utilised building the business through advertising, promotions, trade shows etc.
- The second negative is freshness. Products may be designed to have 24 or 36-month shelf life, and the last thing a brand want to do is selling aged stock. It sends out all the wrong message and no matter how good or legal an 18 month old product is, it does nothing for a brand’s reputation, and many export opportunities will collapse if the stock that is available for sale is greater than 6 months old, regardless of how natural the ingredients are.
The insane thing is, that as a business realises that they need to free up cash tied up in stock they will often start running discounts and promotions which erodes the advantage that lower prices promised. To make matters worse, the money that’s needed for promotion is tied up in stock, which creates a very nasty vicious circle.
How to break the cycle
So, how does a business restore the status quo? It is simple. Aim to only buy what you can comfortably sell in 6 months freeing up capital and ensuring everything you sell is fresh and new. As mentioned above, capital is retained in cash and can be used for running and promoting the business, which should, if done properly, lead to greater sales, at which time the 6-month re-order quantities will start rising and the cost of goods start falling.
Small batch cosmetic manufacturing with Jarvis
Jarvis have always understood this and pride ourselves on helping customers in this position. Our standard minimum order is 500 units and although more expensive per unit than say a run of 5000 units, once people understand and see what that means in terms of cash flow, it opens many more commercial possibilities. Small runs do not mean compromise on quality or opportunity to scale up. We operate to exactly the same standards as far larger international companies and are equally qualified to offer superior quality and skill sets, being certified to ISO 22716, 9001, 14001, 13485, and can scale production to thousands of units a day. Just as we maintain the highest quality accreditations, we also offer unique innovative development opportunities, regardless of run size.
