Monday, December 2, 2013

Why Convience Stores, Fast Foods and Supermarkets Sell Soda Water as "Pop"

My early years saw me as a manager of a small convenience and gas station store. I got used to the terminology  of "lost leaders" Gross profit margins and marketing stimulus. The whole concept is based on your inventory and how it contributes to profitability. Today's aircraft are much like that convenience store. Buy a large Slurpee for $1.99 and get a free Hot dog. At first I didn't understand the salesmanship in that lost leader (Slurpee/Dog Deal) drives the aviation industry. Configuration is simply packaging appeal. JetStar fills its seats like popcorn with 335 seats on one 787-8. Then ANA orders  46 business seats of Slurpee's with its 112 Vienna sausage tins back in economy for its marketing scheme. Before you let loose of your cookies and milk, via a nose/food transfusion. I got into my convenience store 101 mode and came up with a Tokyo to Frankfurt or Slurpee and sausage route.

The Slurpee is only crushed ice with a flavoring of syrup squirted on top, making a drink selling for $1.99. As store manager, I read those labels coming off the delivery truck seeing what is contributing to the stores gross product margin. Those slurpees' came in at an astounding .18 cent cost factor, selling for a 1.99 per cup during a hot day crises, that's what it made the store money. Those lousy Vienna sausages in a tin were sold for a 1.99 and made the store only 18% profit margin or 36 cents on a two dollar purchase.  The Slurpee made the store $1.61 shoving out those drinks that cost the store only 38 cents on the drink.

Let us take 112 Vienna sausages to Frankfurt as well, analyzing what those 112 seats will do?

*That $1,000 seat (sausage tin) will buy a lot of things on this flight.

787 full tank of trip fuel (Trip Fuel amount necessary for the route, payload weight, conditions)

  • Crew cost up to the business class.
  • Ground crew and airport fees.
  • Overhead cost from the flight. (Fixed on each flight)
  • Maintenance allocation of cost for each flight.
  • All Other Incidental costs I am not aware of:
*(The bullet points is what it will buy for the airline as a lost leader seat)

Total revenue pool from ANA's Economy Sausages. 112 * 1,000 tickets = $112,000 Revenue with a Profit margin of 18 % or 91, 820 in cost allocation from Economy.

Business Class ANA: The Slurpee's 46 Revenue seats of $1,800 =$82,000 ttl and a cost 18% = 14,760.

Gross profit Slurpee dollars at 82%= 62,240
Gross profit Vienna Sausage Dollars= 20,160

Total flight Gross Profit Dollars= $82,400 receiving $194,000 in revenue.

ANA 46 seats are the Slurpee's purchased at the convenience store, and the Vienna sausages are just impulsive grocery purchases. Jet Star philosophical business strategy is to fit as much sausages into  its 787-8, and make money in a mono blend seating regimen for profit. Configuration in the variable item to make money as the 787  is the constant (C) in this formulation. Ability for Variable configurations maximize the profit margin in a more robust market for business travelers, than a market just for people moving on vacations or visits to friends around the world. ANA penchant for a "heavy" configuration for its passengers (whales) allows everybody else to hang out on these flights just like in Las Vegas. Casinos can afford tourist because of the "whales" on the floor.

This brings me to a conclusion, All 787's are ordered up for company variables and business strategy depending on the 787 configuration. All 787's provide a foundation that is a constant in this formula even with the headwinds. The question before customers (airlines) is not what can the 787 do for you, since you already know that a constant has been defined, but how many Slurpee's or Vienna Sausages  do you want on your aircraft?

Next time you get a coupon at McDonalds hamburger stand that invites you to buy an extra large drink for $2.49 with a free quarter pound cheese burger. The $2.49 spent buys both and becomes a lost leader until you want fries with that! The "that" part becomes pure profit.

A very rough interpretation of general and basic costs and revenue relationships, but this illustration helps visualize why ANA went with its mix of seating on long haul flights and why Jet Star stayed with "the sausage is -in-the-can", business.