[Acrylic-bob]

OK, Once more into the breach...

I am a brewery. I produce beer which I hope to sell at a substantial profit over what it costs me to brew (overheads, raw materials, tax, etc.) let us suppose for arguments sake that it costs me 20p per pint to brew. That is my break even cost -no mark up for profit.

let us further suppose that I have decided that my profit margin will be a standard 2/3, so that is 20p cost plus 2x20p profit which gives a price to my customer of 60p per pint. (it is actually 1/3 materials plus 1/3 overheads plus 1/3 profit but I am trying to simplify)

To continue; I have several customers, one is the tenant of a pub which my company owns and another is a chain of supermarkets. The tenant needs to make a profit too, so he will add as much as he thinks his market will bear, but I may place a limit on what he can charge so that his prices do not differ too wildly from those of any other tenant I may have and so skew the market in his favour - I have to be fair to all my tenants. Let us suppose then that I allow a further mark up of 20p to cover the tenants profits and overheads. This brings the cost of the pint to the drinker to 80p.

My other customer, the Supermarket chain, is different. He is able, because of his size and the number of outlets at his disposal, to buy my product in very large quantities. Where my tenant can sell maybe three or four 22gallon kegs per week. the supermarket can sell 200 thousand gallons per week. He also prefers his product to be packed in disposable containers and he is prepared to assist in the cost of installing the packing machinery. He has one stipulation however; the price must be as low as possible. Typically he would like to pay just 1p per pint over my cost price. He will then pass this saving on entire to his customer - 61p per pint. and use the product to entice customers in to buy his other products.

Quick calculations are necessary, I must consider who is the more important customer.
the tenant nets me £281.00 per week the supermarket nets me £2,000 per week. Add to the calculation that the tenant is also a fairly high maintainence customer, I have to bail him out regularly with advertising and promotions, with fixtures and fittings and even business loans to keep him going. The situation was different when I only had tenants and off licenses to supply, then the market was fairly fixed but since the government decided that anyone can have an alcohol licence and the supermarket has come along my shareholders eyes are glittering. I am sure that they would even consider 0.5p per pint over cost if the supermarket insisted. The free house across the road from my tenant is a pain in the bum really. It sources my product from a subsiduary of the supermarket. Since the supermarket is paying a low price it can afford to pass on some of the saving to the free house, who unfortunately has a habit of passing some of this saving on to the drinker thus undercutting my tenant's prices. But never mind, the more the supermarket buys the more profit I make, and the more profit I make the happier my shareholders are.

If you are still following me, that is basically it. In reality it is much more complex than my simple explanation might give you to believe but, in essence that is how the system works. The tennant in the tied house could never hope to sell enough product to be able to compete with the Free House on price, much less the Supermarket.