SCORE

Considering Imports

by Shody Chow, SCORE LA Mentor

Remark: readers must use their best judgment on using the information provided, and not take unnecessary risks in importing

Imports

Part 1

During the past 10 years as a SCORE Counselor/Mentor, I have met numerous clients who want to import. Some of them have developed a new product, and wanted to have it manufactured overseas in order to enjoy a lower price, while others could not find suitable domestic production or felt that the product quality may be higher in a foreign country. We then proceed to discuss the need to patent the product if possible, and the brand and logo. Other subjects that we cover could be the country of origin, vendor selection and qualification, channels of distribution, minimums and production quantities, quality assurance, pricing, shipping options, import risks, defining the customer followed by sales and marketing issues.

Some clients wish to import but do not yet have a product in mind, and wanted ideas and suggestions. I then proceed to ask them what they know, what they like and what relationships they may have. If the client is an expert fisherman, then it may be a good idea to look at fishing gear. If the client has a close friend or relative in India, then consideration should be given to imports from India. If the client knows a buyer who works in a supermarket, then perhaps the focus can be on products sold in supermarkets.

I ask the client whether he or she has travelled overseas, and if so, to which countries. I always encourage the client if possible to travel abroad, visit the retail stores in the foreign countries and synchronize holiday trips with visits to international trade shows. On a trip to China, I noticed that there is a small solar panel on every balcony of some high-rise condominiums. I assume that the solar panels generate electricity which is used somewhere in each home. When I visited a department store there, I noticed there were many household products with small solar panels being sold. Perhaps there is an opportunity to find one or two interesting energy saving products by doing further research and contacting the Chinese manufacturers.

The US is a developed market. If you are importing a product that is already available here, you will be competing with other importers who are more experienced, better financed and have existing relationships in the supply chain. There are usually more opportunities in growth areas, rather than mature businesses.  Americans are becoming more health conscious, so there is always room for a new player that can supply unique health and beauty products. With the aging population, the market for senior citizens is growing, which gives opportunities for new suppliers.

The challenge for most importers is sales and marketing. If you can do this well, you will be successful. Start-ups in general do not have the capital to do mass advertising and branding, and in general will have to rely on social media and networking.

Rather than wholesaling the imported product to stores, some start-ups have chosen to sell directly to the consumers online. In this way, the investment capital is spent mainly on the start-up costs and inventory, as there will be little accounts receivables to worry about.  After defining the customer, the client should use social media to drive the target customers to the website. The client has to develop a great website that is well-presented and easy to maneuver, and has a story that the customer remembers. The marketing message should be strong with a “wow” factor, so that the target customer will respond positively “this is great, I want to buy now!”

Some clients would prefer to wholesale their products directly to retailers or distributors. Since the retail price is market driven, there should be sufficient margin for the importer as well as the retailer. Department Stores may work on a keystone mark-up of 50% with a retail price of about $100 if the wholesale price is $50. Supermarkets and wholesale clubs work on lower margins and for some products it is as low as 20%.  Some upscale stores and specialty stores may work on a margin higher than 50%, and this could vary by product and competition. The wholesaler in general needs a mark-up of 35% to 40% to be profitable to cover operating costs including financing for the inventory and accounts receivables. Some importers/wholesalers may enjoy a higher mark-up if their product is patented or they have the exclusivity from the vendor. If the product is extremely competitive, then it may be necessary to work on a lower mark-up, at least at the beginning, in order to be attractive to the retailer.

Part 2

The foreign manufacturer usually quotes a price on a free on board basis. For example, if you purchase a shirt from a manufacturer located in Eastern China, their price per piece or per dozen will be based on FOB Shanghai port. The manufacturer provides you with the packing information – pieces per export carton, weight per carton and the measurement of the carton. This information is needed to figure out the freight cost to the port of entry. If the product is heavy, the freight cost is based on weight, while it is based on volume for light-weight products. If you are in Los Angeles, the port of entry is Los Angeles Airport if shipment is by air and Long Beach/San Pedro if the shipment is by sea.

For small shipments, it may be more cost effective to ship by a courier service such as UPS, FedEx and DHL.  For large, urgent shipments, the choice may be airfreight. For medium size shipments, the shipment may be less-than-container-load by sea on a pallet in a container that may be 20’, 40’ or 45’ long.  Most importers appoint a freight forwarder to handle their airfreight and sea-freight shipments. Large freight forwarders have their in-house customs broker, while the smaller ones work closely with an independent customs broker. The freight cost per piece is substantially lower if you purchase large quantities and can make use of the 40’ or 45’ containers.

The importer needs to come up with an estimated landed cost for each product, as this is their actual cost in the pricing calculation to figure out their mark-up. The landed cost includes the vendor’s FOB price, the freight, insurance, import duty, if any, freight forwarder handling charges and delivery costs to your warehouse. The freight forwarder is able to figure out the import duty rate, which is available online at the US Harmonized Tariff Schedules website: https://hts.usitc.gov/current

It is understandable that there is a lack of trust between the importer and the overseas manufacturer when they work together for the first time. The vendor may request an initial deposit, say 20 to 40% upfront, and the balance to be paid after the goods have been produced, prior to shipment. The payment is usually done by telegraphic or wire transfer from your bank. For large shipments, a letter of credit may be preferred, but this may result in substantial bank charges. Payment terms are usually negotiable and can evolve over time when the importer and manufacturer have built up a good relationship basing on actual experience of purchase orders, deliveries and payment history.

To reduce risk, the importer should try out small shipments at the beginning to gain experience in the communications with the vendor, import process, product quality, on-time delivery, working with the freight forwarder, actual landed cost etc.