Having just received machine #1132, I got to thinking that these things are far from a mass market item. Lets assume that LM has sold 1200 GS3's. With msrp at $6500, assuming 40 points for the reseller, LM nets about $3900/machine. Total revenues would amount to about $4.7 million. Who knows what input costs are, but with the initial design cost, plus ongoing development, plus fixed and variable costs associated with manufacturing, would it be out of line to guesstimate a net profit of around $1000 per machine? With 1200 machines providing a total net profit of $1.2 million, before interest, taxes and depreciation, it hardly seems worth all the trouble, in view of the business risks involved. It must be a labor of love. No wonder they don't want to give stuff away when improvements are introduced.

Ken

Interesting analysis.

I wonder about the 40 points. It depends on who owns the US distributor, LM USA. If it's owned by LM, part of the margin goes to support that operation. If not, or if it's only partly owned, then more margin is needed for LM USA's distributor cut (or for the partner's cut.) Either way, LM's take home is probably less than 60% of list.

You can imagine how having a non-owned overseas distributor complicates export pricing. Typically, the distributor attempts to take a large piece, say 35%, and the dealer needs another 35%-40%. This is probably why the retail price of a GS/3 was $7,500 when Franke was the US distributor. I suspect nobody in the chain made enough money for that arrangement to be worthwhile.

Typically, manufacturing companies look at gross profit (revenue less cost of goods) to judge desirability of a particular product line. That's because it's not always possible to tease out the product-related overhead and fixed costs. That would be particularly true of a company like LM, which sells a broad line of similar machines to the same or similar customers.

My guess is that if they're seeing 45% or more gross profit, then the product is making a positive contribution to the business. The threshold could be as low as 40%. If they run a really lean operation, it could go lower than that.

When this machine was first proposed, LM was still supplying Starbucks with espresso machines, and commercial superautomatics had yet to make the huge dent in chain cafes that they make now. The GS/3 was conceived for the N. American market, and LMs were being distributed here by ESI, which shared more or less the same ownership as the factory in Florence. I'm not sure if the Seattle LM factory was still up and running at that point.

I don't know if the GS/3 was originally intended to be very profitable. It was LM's intention to market it directly in N. America through ESI, which would have allowed them to get all of the profit out of it without having to share it with dealers.

Of course all that became unfeasible when (in light of Starbucks going superauto and dropping LM machines), ESI and N. American distribution was sold to Franke, and Franke proved to be unable to market the GS/3 successfully with their approach of increasing the price substantially and selling through dealers.

The principles in LM, now once again own the N. American distribution, through LM USA. My guess is that had they known the circuitous route that this machine would take, and the hassles that would accompany it, that they would in retrospect have decided never to develop it.

But this is all water under the bridge. Most of the conceivable development costs have long since been expended. Even if they further modify the machine beyond what they have already done, even if they come out with a newer model, it is unlikely that it will cost them very much more going further. So at this point they are left with actual production and marketing costs. Even if they were 2 million dollars or euros in the hole at this point, manufacturing the machines and selling them at current retail is certainly profitable. If they keep it up long enough, even if they have lost money so far, they will at worst regain some of their loss, and at best, start turning a profit.

So, whatever they may have made or lost so far, the hard work is behind them and what they are doing now is almost certainly profitable, and will be continued until it ceases to be so.

ken

Interesting points. My machine came directly from LM Italy to the end seller, so one less middle man to take a cut. I wonder if prices will drop now that Franke is no longer involved? A reduction to $4500 could be enough to broaden the appeal of the machine to a wider market and significantly increase sales. But you're right - the picture of the market that LM had when they developed this machine might not have been realized, but since those R&D costs are water under the bridge it seems unlikely they will knock the GS3 on the head.

I would think that once they hit the 10,000+ machine mark everything will have balanced out - if they keep the general design concept running long enough the development costs will have been long forgotten. A good example of this would be the basic design of the La Cimbali Jr - the basic styling goes back to the early 1970's.

wildbwilson wrote:I would think that once they hit the 10,000+ machine mark everything will have balanced out - if they keep the general design concept running long enough the development costs will have been long forgotten. A good example of this would be the basic design of the La Cimbali Jr - the basic styling goes back to the early 1970's.

At this rate of sales, that event (production of machine 10,001) ought to occur by around 2040.

ken

It would be interesting to see a plot of units sold across productoin years. What would your guess be - is the sales volume same, up, down over this time? If prices were reduced it would seem that sales volumes would increase.

FlyingShot wrote:It would be interesting to see a plot of units sold across productoin years. What would your guess be - is the sales volume same, up, down over this time? If prices were reduced it would seem that sales volumes would increase.

I don't know, but --

There was an initial flurry of interest when the machine was released, then it flattened out, then there was another bunch of units sold in the "fire sale" after LM USA was formed from the ashes of Franke's N. American distribution. Then, with the release of the paddle machine, there was yet another flurry of interest.

But at its price point, combined with its intended use as a home machine, I can't imagine that it is going to be all that hot of a seller going forward. Much cheaper consumer level double boiler machines are readily available at about 30-40% of the price of a GS/3.

Other small commercial machines like the Cimbali Jr. would never have reached a high level of market saturation had it not been for the fact that they were primarily aimed at the commercial/cafe/catering/restaurant market, not at the home market. I don't see the GS/3 filling this niche myself.

ken

I think you're right. There is also the likelihood of new machines with new designs, such as the about to be released Cimbali Junior update. Competition just rolls on.

I suspect there is little no demand elasticity to a six thousand dollar luxury coffee machine and that La Marzocco won't see any material rise in sales from dropping the price to four grand.

A better strategy might be to raise the price to seven or eight grand. Again, no dropoff in sales (possibly even a net increase in unit sales) and a big rise in revenue.