Convergence

One of the things new FP users seem to learn pretty quickly is that buying online from a foreign retailer is not so different to buying from a local online retailer, and once that door has been opened, it enables them to scour pen shops from around the world in search of the best deal. For the last few years, lots of US enthusiasts found that the Pilot Falcon – a common grail pen for beginners – was available for less than US$100 from discount Japanese exporters like Engeika, compared to a list price of $160 at home. This was an irresistible deal – as demonstrated by the many proud posts on reddit and Instagram – and it created a culture of importation and arbitrage. From 2015, however, the import price on the Falcon has jumped up to $150, eliminating the appeal of importation, and leaving some people scratching their heads about why Pilot would want to do this.

My belief is that the arbitrage window – the ability to save a serious amount of money by importing pens – is now starting to close, and the FP market is beginning to move into a state where global prices start to converge. In today’s post, we’ll discuss why prices differ between markets, the role of arbitrage, and why I expect to see convergence.

To start with, it’s important to keep in mind that pen manufacturers aim to maximise revenue, and that there’s a trade-off between the retail price (MSRP) and the volume of sales. In some markets, the manufacturer (or their local distributor) will aim to price low, sell a lot of pens, and maximise revenue through volume; for other products or markets, selling fewer pens at a higher price will be the best way to generate the most revenue. The decision comes down to a few factors, but most important are the firm’s cost structure (large fixed costs are better suited to a high-volume approach) and the price sensitivity of buyers (if they are pretty price conscious, a high-price approach isn’t going to work very well).

The pricing policy – often a decision made by the distributor – will vary by country/region, because each distributor will have a different cost structure and because the customers in each region will have a different sensitivity to price (which is determined by incomes, competing products, etc). A pricing policy that varies by region is perfectly feasible when customers can’t easily access retailers in other regions, but the internet has made access a lot easier and the whole approach has started to break down. Arbitrage has certainly not been limited to the Falcon: a solid amount of reddit’s traffic comes from users who have imported Pilot, Platinum, and Sailor pens, a smorgasbord of different models. As the US dollar strengthens against the Euro, I expect to see a similar phenomenon emerge as users realise that European retailers – even the premium retailers – offer an arbitrage opportunity for high-end German and Italian pens.

This is a huge problem for brands because it undermines their entire distribution strategy: having different prices in each market allows each brand to maximise their revenue from each market, and therefore to make more than they would from a universal price. Unfortunately for them, regional pricing can’t last when consumers are able to buy from the cheapest market in the world, regardless of their local region’s price. It’s also an internal problem, as a brand’s high-price distributors complain about losing business to low-price distributors, and the low-pricers seek to preserve the status quo.

Brands can respond to this in a few ways, such as creating special models or trying to prevent arbitrage. The first approach – producing special colours or features for high-price markets, to entice customers into buying locally – is unlikely to do more than slightly stem the flow of imports. If Pilot had offered the Falcon in special colours for the US market, it probably would have attracted some importers but the majority would not have found an extra $50 of value in it (particularly when the nibs are the most appealing feature of a Japanese pen).

Trying to prevent arbitrage is probably the worst response, albeit a common and natural one. As long as there’s enough difference in price to make exports worthwhile, entrepreneurs will enter the market, buying at the retail price and exporting for a small profit; a savvy retailer might even given them a bulk discount. I say this is the worst response because it doesn’t do anything to solve the problem, it just shifts the outrage inside the company (now the low-price distributors are the unhappy party) and now an outsider is keeping some of the profits.

The only long-term solution is for prices around the world to converge – not necessarily to the exact same price everything in the world, but close enough that the returns to arbitrage are very small and not worth pursuing. Brands will aim to have prices converge at the point where they can maximise revenue; for some, this might be around the existing price in their home market or their biggest market; in other cases, it might be an entirely new price point – higher than before in some markets, lower in others – but broadly the same throughout the world.

We might already be seeing this: Pilot seem to be pushing up the price of the Falcon and Vanishing Point in the Japanese market, potentially to reduce arbitrage by US buyers. I would not be surprised if we soon see other Pilot models popular in the US – particularly the Custom 74 and 92 – start to become more expensive in the Japanese market, nor that Platinum and Sailor start to think about how they will respond.

Of course, price is not the only reason to import from another market: not all distributors carry the entire range of models or nib sizes. Sometimes this is because there’s limited demand for the product but in other cases, it might be because a distributor doesn’t want the expense of keeping another entire product line: marketing, promotions, shrinkage, servicing, repairs, and training isn’t cheap (particularly if you have a large range of nibs). If sales aren’t going to cover those costs, it’s not likely a distributor will carry a particular line.

This decision is understandable but it also poses a problem for brands: what is the value of regional distribution if consumers end up buying from retailers and distributors outside their region? I think this will lead distributors – particularly those who are independent entities, not owned by the brand – to accept more product lines, to protect their business from being eroded by other distributors working for the same brand. In other words, it’s not just price that will converge globally but also products.

Interestingly, late last year, Goulet Pens announced that they had started carrying the Pilot Custom 912, a premium Pilot pen that has been a popular import for years, and this month disclosed that some non-standard 912 nib sizes (BB, Waverly, coarse) might follow in the future. I’m not sure if I’d say this is the beginning of converge but it certainly fits with the direction I expect the market to take.

I can’t say how quickly we might see global markets converge: it could happen suddenly, it could be a very gradual process, but I think that it is an inevitable outcome. This post has focussed on the drivers of convergence and the implications for the market as a whole; the next post will focus on the distributors, whose businesses (and independence) would be undeniably diminished in a converged world. Stay tuned!