Novices at hard bargaining for hard goods, the partners arranged to travel in pairs as they searched for the right supplier, lest one tyro alone be tempted to give away too much. They contacted General Electric, Amana Refrigeration, and other domestic manufacturers but could stir no interest. So they tried Samsung Electronics and similar offshorers, and "within five minutes," Bennett recalls, "we were talking to someone in charge." Eventually, Sanyo E & E Corp., in San Diego, the U.S. affiliate of Japan's giant Sanyo Electric, agreed to produce the unit. In March '88 Bennett began negotiating terms. "They have 70% of the compact refrigerator business in this country," says Bennett in affirmation of the ultimate relationship with Sanyo. "They're a recognized leader, and that helps us, because who the heck is MicroFridge Inc.?"
MicroFridge would pay $170,000 for special tooling and molds, and put up $100 for each unit in advance of manufacture, which would take about four months from order to delivery. Units would be landed FOB San Diego, 3,000 miles from MicroFridge's corporate home in Sharon, Mass., in two parts, which would be drop-shipped across the country. When they got to their destination, the purchaser was to hitch them together with eight screws.
Neither those screws nor any other part of the 87-pound, 43 ½ inch-high unit is fabricated in the United States. The microwave component is assembled in Singapore and the refrigerator-cum-freezer in Tijuana. Manufacturing-wise, all that the 7 employees (including management) who constitute the entire pay structure of MicroFridge can do is admire the cost-effectiveness of cheap labor. (Hourly pay in Tijuana starts at about 80¢.) According to plan, at the end of 1991, MicroFridge will be employing 15 people at most, yet will have shipped some $30 million worth of the unit. "That's the beauty of subcontracting," Bennett beams.
MicroFridge was paying $270 for each unit at the end of 1989. But the five-year contract grants Sanyo the right to readjust the price in response to changes in costs of labor, currency, and material. The exposure doesn't worry Bennett. "If the yen-to-dollar goes in the wrong direction, we can get penalized," he admits, "but this business is competitive and has a history of stable pricing. And ours isn't so difficult a product that they can't keep moving it into countries with better labor costs." In March 1989 an exclusive agreement was signed. Sanyo cannot sell it to anyone else in the world.
"For someone to knock us off now," Bennett claims, "not only would they have to provide the circuitry, they'd have to build a separate freezer box from scratch like the one Sanyo already has." Therefore, he calculates, MicroFridge will be unopposed in the marketplace for perhaps two years, maybe longer. "If we turn ourselves into a $35-million-a-year company, someone will go after us," he grants. But by then, MicroFridge will have cemented a brand-name advantage.
The initial price the partners established for direct sales was $369, and when a dude ranch owner in Wyoming sent in cold cash after having seen notice of the machine in a trade magazine, they exulted, "This product is a no-brainer!" But, admits a now-wiser Bennett, "We definitely mispriced it early." And often. Shortly thereafter, retail was raised to $389, and a few weeks later, in September, to gain more operating margin it was boosted to $429. A yet higher price -- $499 -- was being tested at year's end. "Sooner or later we'll hit a ceiling," he pledges. "But we don't know where that is."
Then there was the question of how to move the merchandise, whatever the price. The choice was between big-margin, highly profitable sales on a direct basis without large volume, and selling at lower margins to distributors, making less money but getting the volume. Bennett opted for the latter, rather than face the costly prospect of building his own direct sales force, credit department, and warehousing and service operations. "We don't want to carry inventories, and we don't want to carry inns in Vermont," he ruled. Nor did he want his own people having to be the ones going around handing out $10 discounts for units that arrived dinged or dented. Let the distributors contend with that. Net profit would be lower, but, if revenue climbed, in the end who would care? "When you're positioning a company for a public offering or a buyout," Bennett argues, "revenue is the significant number."
Also among the presumed benefits of tying into distributors (whom MicroFridge charges from $309 to $323 per unit, depending on how many they order) is the rapid cash flow their prompt payment throws off. Appliance distributors make profits on rapid inventory turns and getting the money in fast, and then take advantage of manufacturers' discounts. "One percent net 10 tempts them," Bennett learned, "but 2% net 10 is guaranteed." The lowest credit rating of any distributor MicroFridge has considered is AAA-2 -- reliable payment within 30 days. Eventually, the plan goes, MicroFridge receivables will consist only of those from its distributors.
