Has Bungbox Blundered?

As you may have heard, Bungbox inks blew up in 2015, taking our community by storm and overwhelming the business. The amount of bottles being bought was totally unprecedented and, after just a few months of this, the company had to suspend their international sales to catch their breath. Now they have announced that these wonderful inks will be back next month — but they will be 50% more expensive than they used to be. Today, we’ll have a look at why I think this might be a mistake. 

If you don’t know about Bungbox, they are a small Japanese retailer in Hamamatsu, a small city on Honshu, that sells pens, inks and other bits and pieces. They also sell some products custom-made for the store, including a range of inks produced by Sailor and branded as Bungbox inks. After years of obscurity outside Japan, these exploded in the community early in 2015 — fuelled in large part by a reddit-based group buy organised by Mike Rosen. Several more group buys followed, demand surged in a seriously big way, and ultimately the inks were even added to the range at Vanness Pens

All of this wiped out the Bungbox stock time and again, and the retailer had to suspend international shipping around May. In October, the inks will be back but the price has increased from ¥2160 to ¥3140 (approximately US$18 to $27*). That’s a pretty massive increase and coincided with a shift from the tall, elegant and easy-to-fill Bungbox bottles to Sailor’s squat bottles. 

In competitive terms, it means the ink are more than twice the cost of Sailor’s standard inks in Japan. In the US (and not including the import prices), the inks have moved from competing around the same price as Montblanc ($19) or Pelikan ($24) to the premium prices of Caran d’Ache ($32), Graf von Faber-Castell ($30), and Iroshizuku ($28-35). That’s a pretty big jump and, while I’m a big fan of the inks, I’m not sure if I’d put them in the same premium category as the others. Particularly not with the standard Sailor bottles. (NB: I have no information about whether Vanness will be increasing price in line with Bungbox.

Anyone who has taken an introductory microeconomics course will be able to explain what is happening here: when you have an increase in demand for a product and your production costs per unit stay the same (or increase), the product price has to rise. If you have people wanting to buy more than you available, you need to ration that in some way. Increasing price does the rationing for you and avoids a permanent shortage, which can lead to a lot of frustrated customers. 

It seems this is the approach Bungbox has taken but it’s left me feeling a little uneasy. Not because I doubt the theory — in fact, I teach this to my first-year students — or because I dislike paying higher prices for my beloved Sapphire, but because I think the retailer may have misread the market.

Almost everyone who does a business degree is required to do an introductory economics course, usually covering the basics of micro and macro, and there are pros and cons to this. The big pro is that students have a basic grasp of how a market operates, the con is that they miss a lot of the nuance that they might otherwise pick up in the intermediate and advanced classes.

That nuance matters when it comes to applying the model to reality, because there are differences between the short term and the long term and because adjusting the business isn’t as easy as it seems in theory. We’ll explore each of these in turn, and see how missing the nuance can lead to decisions that are less than ideal. 

The first issue is whether the change in demand is temporary or permanent. A permanent increase in demand can occur when the market increases or people change their preferences (both of which have occurred in the case of Bungbox). But if we have a fad — a mean-reverting deviation, where demand spikes but eventually returns back to the long-run average — then that demand spike might only be temporary. It’s not always obvious whether a demand shock is temporary or permanent, but it has implications for how a business should respond. 

There are differences because costs can be asymmetric: it’s not as easy to scale down as it is to scale up. It can be quite easy for a business to hire a new staff member — it can take minutes to write up a basic contract and have the employer and employee sign it — but, in most jurisdictions, it’s much harder to remove a staff member who is no longer needed (they are made redundant). Local laws may require giving an employee a period of notice and a payout linked to how long they have served with the company. Similarly, buying new equipment or machinery is generally a lot less costly than disposing of surplus plant, and early termination of leases or other contracts often come with penalties. 

So while our basic theory might say that it makes sense to increase price and production, cost asymmetry means this only makes sense when the demand change is permanent. If the demand change is temporary, increasing production will be beneficial at first — but once the fad is over and demand returns to its initial state, then the business will find itself in a position of overcapacity. It will have committed to contracts that are now superfluous, and so their costs will be higher, sales will be lower, and the business less profitable than if production had not been scaled up.

The fact that Bungbox outsources production to Sailor doesn’t necessarily change any of this. Sailor are increasing production and incurring these costs on Bungbox’s behalf, and they know there’s a chance demand will suddenly dry up again. If they’re committing themselves to higher costs on behalf of a customer, they are taking on a risk — and businesses generally don’t like doing that. They will do so if the price is right (as with banks and other financial firms) but most manufacturers will seek to push that risk back on the customer, by asking them to guarantee minimum volumes or pay a substantial penalty to exit the contract. 

A guarantee for minimum volume gives Sailor certainly that they won’t hire some staff and purchase new equipment, only for them to be rendered unnecessary in a few months’ time — and have to cop the expense of making those employees redundant and selling the equipment at a loss. Alternatively, the exit penalty covers all of those expenses on Sailor’s behalf and probably has a healthy margin to compensate them for the lost opportunity.

If Bungbox have entered into such a contract with Sailor and the demand spike proves to be temporary, they will have to choose between some undesirable options: keep price up, sit on a growing mountain of ink, and sell it off gradually; drop price and flood the market; or exit the deal and pay a huge penalty. It’s not a decision that any of us would want to make, either for ourselves or the businesses we patronise.

This outcome is unavoidable because increasing production doesn’t solve the problem of a market that’s not clearing: it just inverts the problem. We move from a state of undercapacity, where consumers are bearing the costs, to state of overcapacity where the retailer is bearing the cost. As balance hasn’t been achieved, the essential problem remains. 

So the question for us to consider is whether the demand increase is temporary or permanent. My opinion is that there are elements of both present but it is primarily a temporary demand shock. 

Although the inks were available for years before they became popular, I see this year as being analogous to the birth of a new brand: many, many people became aware of the brand, the product range, how to import from Japan, and became comfortable with doing so. And, as with the launch of most brands or new products, you’re going to see an initial surge in sales. Lots of people will want to sample the brand, or will find colours that they’ve not previously been able to access, and a whole lot of pent-up demand gets released.

It’s the same phenomenon that we see when J. Herbin release their new 1670 ink or when Twsbi release a new pen. There’s a sudden surge in sales as the internet goes mental, but nobody really expects that level of demand to be sustained permanently. Once all of that pent-up demand has been satisfied, sales fall back to their normal levels — the level at which regular users of the ink replace their bottles and new users sample the colours. 

For some products, that normal level of demand simply isn’t enough to sustain the product and so it is released as a special or limited edition. This is what we see with Pelikan’s Ink of the Year, Lamy’s annual release, and Montblanc’s various LEs. These inks might be popular during the initial boom but there aren’t enough regular buyers to keep the product profitable and permanently available. (An upcoming post will go into more depth on limited edition pens — stay tuned.)

With this in mind, I’m a bit skeptical that the current surge in Bungbox demand is the same amount of interest that we’ll see in a year. It won’t fully fall away either, back to the level of sales they had when they were virtually unknown outside of Japan: the inks have excellent characteristics, some of the colours are genuinely unique, and so the Bungbox range will have some permanent appeal to a lot of FP users (myself included). But I don’t think it will be anywhere near the amount of appeal they experienced in 2015 — and that’s before we think about the effects of the higher price, which reduces the volume of sales in its own right.  

That’s why I think the price hike and production increase are a mistake, and one that might end up being a costly one for Bungbox. That’s not to say I dislike the company or think that they are foolish for making this decision. I can understand what they were going through and how difficult it is to make good decisions when you have no idea what is going on. 

From their perspective, they had run a small stationery shop for a number of years when suddenly they had hundreds of Americans, Europeans, Brits, Australians, etc. all clamouring for a product that they’d basically only sold locally. And not just clamouring, but wiping out their stock time and again. To the point where they’re working day and night: receiving orders, picking items, packing them up and printing shipping labels, and feeling completely overwhelmed by the demand. On top of that, they’re running short on staff, on ink, on bottles, on labels, and trying to keep everything together while also trying to figure out how to manage it all. And that demand isn’t a temporary thing but goes on, day after day, for months and months. 

I’m not sure any of us could make a reliable assessment about whether this boom in sales is going to end tomorrow or be a permanent shift. And I’m not sure any of us could necessarily make a better decision than what Bungbox have. These decisions about production and pricing still have to be made, it’s not possible to sit back and wait for good information to come through. Sometimes there’s just no time to think through all of the consequences and implications of a decision, and you just have to go with your gut. I think every manager finds themselves in situations like this and wishes they had better information or more time in the day — but often the best they can do is to hone their instincts and hope it works out. 

So I think they’ve made the wrong call but I hope this doesn’t seem like I’m attacking them for it, because I’m not. I’m just hopeful that the decision doesn’t turn out to be as negative as it could be, and they are able to build a healthy and sustainable business providing these excellent inks to everyone who likes them, and that we can learn from their experience.

(*USD1=JPY117.991. Rate sourced from xe.com on 1/9/15.)