For several years I lived in a remote mountain region in California. The nearest gas station was one mile from my home; it charged 25% more per gallon than stations in the nearest city (which was a good 45 minute drive). The next closest gas stations were 10 miles away and 15 miles away, respectively. These lonely outposts near the Interstate still charged 15% above city prices
Many mountain residents refused to buy gas locally. They said: “This greedy station owner thinks he has us over a barrel. I won’t let him take advantage of me. I buy my gas in the city.” But I decided early on to support my local service provider in case I ever needed him. Every fourth fill-up, I made a point of buying gas at the nearest station. As a result, when I needed assistance, the station owner’s tow truck showed up promptly, and I was not overcharged for repairs.
If I had not been a regular customer, you can easily imagine what would have gone through that station owner’s mind when I called for help. “Well, well, well… That so-and-so Webb has been living up here on the mountain for years, but he’s never gave me a dime’s worth of business. Now that he’s in trouble, he suddenly realizes that he needs me. How did he think I was supposed to survive all this time, if he and others like him never patronize my station for routine purchases? Fine, I’ll send my truck…in about six hours. And I’m going to make this jerk pay through the nose for towing, parts and labor.”
An equivalent scenario sometimes plays out in the amusements industry. A respected distributor recently recounted the following conversation to me:
Distributor: Say, Mr. Local Operator, why don’t you buy games from me? I offer a competitive price. But the only time you call me is when you need a part at five o’clock on a Friday.
Operator: I don’t buy equipment from you because you also operate. Why should I support someone who competes with me?
Distributor: Wait a minute. Do you know how I got into operating? Operators who couldn’t make their payments handed me their route keys and walked away.
Operator: I don’t care. You should stop operating.
Distributor: Fine. Want to buy my route?
Operator: No. I operate in bars; your route has only two bar accounts.
Distributor: Now you’re saying I don’t compete with you? Then what’s the problem?
Operator: That out-of-state distributor saves me $50 bucks a game.
Distributor: And he charges you $200 more per machine for shipping. I don’t get it.
Suppose the distributor persuades this local operator to become a regular customer. A year later, the following conversation occurs.
Distributor: Hey, Mr. Operator, the president of ABC Manufacturing said you told him that you hate my top salesman. Did you really tell him that? You always tell me that you like my sales guys.
Operator: Yes, I told him that. I wanted to see if I could buy direct.
Operator: Let’s just say you won’t be getting as many orders from me this year.
Distributor: But you’re going to keep relying on me to service games that you buy direct from that manufacturer? I don’t understand how either one of you guys thinks I’m supposed to survive if you keep cutting me out of the supply chain.
Understandably frustrated, this distributor shook his head and wondered aloud if distribution should launch its own version of Club Lucky, doing business as a buyer’s consortium – with all that such a move implies. Of course, distributors have flirted with this strategy before, and it has never worked.
But then, that’s what they said about operator buying consortiums before Club Lucky.