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"The USA is a vast country"

In the third part of a Pfeifenbox interview on prices, German freehand star Rainer Barbi looks at transatlantic aspects of the pipe trade. Why are some pipes so much more expensive when they reach the shores of another continent?

(Given the huge price contrasts peculiar to some brands, Barbi's response to a single question on the issue seems intriguing enough to merit an instalment of its own. Those who have not read the first two parts of this interview may wish to start here for an overview of Barbi's opinions on value as the basis for pricing.)

There's often a very significant difference between the price of a European pipe on its home continent and in America. In an age of global trade via the Internet, this seems rather surprising - and ostensibly not a great recipe for success. How do you view transatlantic price mechanisms and influences?

RB: There's one principle: Prices on individual markets depend on the buying power of the respective currency. They reflect exchange rates and also serve as a barometer of speculation regarding expected economic developments.

One of my favourite examples is McDonalds. When we buy a standard burger [anywhere in the world], we see the relationship between currency and buying power. Many vendors of very diverse products have adopted the same system and adjust their prices by country. There's little point in demanding identical prices in countries with strong and weak buying power. The issue is always about testing the maximum revenue possible, combined with optimal cost calculation. Among others, automobile manufacturers function this way. If you re-import a German car from Denmark, you will find that the Danish trader got it cheaper than his German counterpart - but higher taxes result in roughly the same retail price [as in Germany]. I know that this doesn't really pertain to your question, but the example only serves to illustrate the fact that many producers adjust their export prices to market conditions.

When dealing with the US market, we European pipe makers face various problems. For one thing, we have to take exchange rate fluctuation into account - not just momentarily, but viewed over longer periods of time. Right now, we have the problem of the dollar's slump and the resulting 20 percent loss for us. That can endanger a pipe maker's very existence.

On the other hand, we can't ignore the fact that there's a wide pond between the continents, and that means significant shipping costs. As I've already shown, for every euro a producer adds to the price, the customer pays four. And the vendor doesn't simply have transportation fees to pay for - the entire shipping process costs more. Take a parcel of ten pipes worth 2000 euros. I need an hour to prepare the package for shipment, making 35 euros worth of work. I need to take it to Hamburg to the parcel service - that's 80 kilometres at 60 cents each, making another 48 euros. The trip takes one and a half hours, adding another 47.50 euros in work time to the total. Shipping itself costs 120 euros. So, in all, the parcel will cost an additional 250.50 euros. This raises the manufacturer's price per pipe from 200 to 225.50 euros and the retail price to 902 euros. At today's exchange rate that makes 1118 dollars.

The next tough aspect is the cost of distribution. The USA is a vast country, with just about 30 specialist shops capable of handling larger quantities of high-grade pipes. I can't easily establish my own distribution system, as I can in Germany - I could just as easily start a travel agency. While distances between shops in Germany are something like 50 kilometres, they are more like 300 kilometres in the States. That's a problem the importer has to face. It goes without saying that he'll clock up travelling time and expenses and will add these to the price of the product. That's why the markups of US importers are much higher than those in Europe. Whereas 30 to 50 percent suffice over here, importers in the States add 75 to 100 percent.

In American discussions, the cost calculations of some importers are often described as shameless. People even call for boycotts - but sorry, a distributor is no patron for pipe enthusiasts. At the very least, he needs to cover his expenses, especially as he is generally unable to select his goods individually - he buys parcels. That entails the risk of stocking pieces for a long time before they are sold, which translates into a financial loss.

Of course, certain producers also have price policies for the USA that are beyond my logical grasp. For example, there are makers who sell directly to retailers and whose markups can't be explained by high distribution costs. Not that I'm jealous - at last, some makers are getting fair money for their work. But these aren't conventional distribution systems, and such brands are usually only represented scantily in the retail sector.

'Fame bonus' is another problem, following the time-honoured slogan that the market dictates prices. It's a model that works as long as makers stick to low output and there's an undersupply of their products on the market. Then there are other makers who try to profit from the same effect by espousing the philosophy that price generates fascination. There's not much to be said against that, as long as there's a balance between price and quality. But if you join the gold diggers attempting to bleed a single market for maximum profit, I see problems for collectors and makers alike. In the long run, such a strategy can lead to brand elimination. We must never forget that the consumer decides our fate. Only a satisfied customer will be a permanent customer.

Personally, I can't espouse such marketing systems. For one thing, I have developed the principle of area-wide operations. For that, I need my front-end, the specialist retailers. But another point is just as important: I need a price hierarchy that is both market-oriented and sustainable. Sure, there are a few collectors who don't really care about a 500 euro price difference. But the majority of my customers are people who have developed a passion for pipes and whose wallets aren't splitting at the seams. I have to take this into account and attempt to influence my importer's price decisions accordingly. Such conflicts can cost time and nerves, but it's a point where I have to be very consistent.

And then there's the most important aspect: My prices need to take bad times into account. In the past 30 years, I've seen plenty of reputable makers taking maximum advantage of good periods and disappearing from the shelves when the market took a dive. I've always found their business strategies shortsighted, though I can't really condemn them. I simply doubt their chances of success. After all, these carvers need to sell their products and survive with them. As long as conditions are good, they try to sell at top prices in the most affluent markets. Anything that can't be sold there is sent to weaker markets at lower prices. The accompanying, rather wilful rationale could run something like this: The most valuable products go to the States and the less attractive stay in Europe. Such schemes are often supported by an extended grading system - there's really no upper limit for grades. Or you stamp a few funny symbols on your pipes. I mean, grading - it's really manipulable, isn't it?

That brings us to the scope for comparison offered by the Internet. As part of a globalisation trend, the Net supplies a new forum for price/quality comparisons. If there's a difference between prices in a B&M store and on the Internet, that can only be to the customer's advantage, right? At the same time, he can turn the effects of currency fluctuation and differences in spending power to his own benefit. Well, all that is indeed true for affordable, factory-made pipes. If I'm buying an X with the shape number 233, there's good reason to shop around for the best deal on the Web. In this sphere, the emphasis is not on individual selection but on the paying the most reasonable price for a product designed as a combustion chamber for tobacco.

I see less of an advantage when buying artisan pipes. In this segment of the market, we're talking about singularity and individuality. Buying an artisan freehand is closely connected to personal affinity. It's about a burst of passion for a particular object, and from my point of view, it requires time and a personal approach to that object. For me, that means being able to see and feel it, to balance my impressions in the pursuit of the ultimate pipe. And that's something I can only do 'live', by personally confronting myself with the desired product. It's something that can only happen where I can handle, smell and weigh that product. That means that only a B&M retailer is really capable of fulfilling my demands.

In the USA, on the other hand, we're faced with a completely different scale of geographical distance [between smokers and retail stores]. That's probably the main reason for the comparative strength of Internet trade in the States - unlike Europe, where Internet business with high-end pipes is still crawling along. Of course, it's also the reason for the relative importance of the estate market in the States. Buying a high-end pipe on the Web is a bit like a blind purchase - and comparatively free of emotion. Buyers mainly go by grades and by the brands that inspire a degree of confidence. 'Wrong' purchases are thus more or less inevitable, and it's natural for a collector to try and offset an unsatisfactory buy as soon as possible - by putting the product on the estate market. Since this always involves a financial loss, the next round of inevitability commences: In order to minimise such losses in future, a collector will attempt to take advantage of the Internet and the price differences between the USA and Europe. He might even try to buy directly from [European] carvers, and in some cases, he'll be lucky. After all, there are a few people who sell their products on the Web. The point is that they don't always do so voluntarily. What else can one do with pipes that the retailers are unwilling to take?

That means that collectors may be able to buy the pipes rejected by retailers at a seemingly reasonable price. But once they have recognised the shortcomings of these pieces, they'll make fresh losses reselling them via the Net.

There's such a variety of conditions that can lead to price differences between continents. I can't really see any direct effect of prices on one continent for another - apart from the old law stipulating that higher prices will drag lower ones upwards. At some point, you reach the turnaround when the European price of a pipe is higher than the American tag - and the game starts afresh.

However, one thing is not going to happen. In the pipe business, the rather naïve economic doctrine that the market will cause prices to tend towards their lower extreme will not apply. The reason is simple: The dinosaurs of the trade are dying out, and there aren't enough newcomers capable of delivering the same quality. On the other hand, that might change in the next decade. If so, I can envision a new elite developing among the young carvers of America. It's possible that this might even spell the end of the Danish era in pipe making.

(To be continued.)

(January 6, 2004)

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