Wednesday, 15 May 2013

Rod Value - Where the Money Goes

Salmon rods are extremely expensive items and their cost becomes a major issue when related to their limited use - perhaps as little as just one week per year, the focus of this blog.  On the other hand they have a long service life: with due care twenty years is easily achievable.  As a result the per week cost of the capital invested in the rod is insignificant when set against other outlays such as travel and accommodation.  But the purchase of the rod is the biggest single investment we make in our pursuit of salmon, so it merits careful consideration.

This article is not about making the choice between specific rods or the virtues of one brand against another.  Those are deeply personal decisions: each decision is unique to you and the weighting that you give to the influencing factors.  Nor is it a detailed description of how rods are made: I've included a couple of links to cover that area.  The purpose of this post is to clear some of the smoke and dust raised by the debate, argument and emotion on the subject of the price of salmon rods in order to ease your path to your decision.

Let's begin by looking at the economic and industrial factors that drive the cost and price of a salmon rod:
  • The first thing to grasp is that the market for double handed salmon fly rods is miniscule in industrial terms.  Market research suggests that the total market for premium rods - defined as retailing at £450 and above - in the UK and Ireland amounts to no more than 1,000 units per year. There are 5-6 major players in the UK premium market (e.g. Hardys & Greys, Sage, Loop etc) and 10 or more smaller companies, which all compete fiercely for market share.  The market for rods in the £250-450 range is larger but I do not have specific data (I apologise for this, but copies of the full market report cost £1500).  But in any event, for all the companies involved, the costs of design, development, marketing, sales and supply chain stocking bear disproportionately upon a tiny turnover.  To put this in context, Hardys & Greys sold 80,000 rods last year, so at best their UK sales of salmon fly rods amount to no more than 1% of their output.
  • The small size of the market means that it is uneconomic to automate, so salmon fly rod building is a bespoke operation.  You can see this in the Loomis film: bear in mind this is one of the bigger US manufacturers.  You will also see the high value of the capital facilities in relation to the limited output of rods.  The pursuit of economies of scale has led to the concentration of manufacturing capacity in the USA (to meet the big domestic and Canadian market demand) and especially South Korea.  The latter is nothing to do with low wages and everything to do with scale; concentration of capital, skills and expertise; and the vertical integration of processes and products.  South Korea is not a low wage economy: Kia and Hyundai find it cheaper to make their cars inside the EU; Samsung smart phones are certainly not made on low skills, low productivity and consequently low wages; and all 3 companies operate at the highest quality levels as evidenced by their extended warranties.  As a result, several European rod 'manufacturers' might be better described as designers/developers/product managers/integrators/marketeers.  For example, Guideline of Sweden outsources rod manufacture to both the USA and the Far East.  Conversely, the highly skilled bespoke nature of rod building has allowed several smaller UK producers to both survive and thrive: Harrisons (whose linked website carries a nice explanation of manufacture) and B&W come to mind.
  • The third element is the carbon fibre and the bonding resin.  At the top of the range you are dealing with extraordinary technologies.  The finest carbon thread is around 6-10 micrometres (hundred thousandth of a millimetre) about 1/15th of the thickness of human hair.  Seeing it is a challenge, let alone fabricating it into cloth form.  Fishing rods are made from somewhat heavier materials but they are still very expensive: the span per square metre runs from around £60 to thousands of pounds.  The world-leading 3M Powerlux (TM) resin is engineered at the molecular level (millionth of a millimetre) and is correspondingly expensive.  3M licence the use of Powerlux to a very limited range of companies who use it in their premium rods around the £950 price point.  A high quality rod priced around £500 will embody 3-6 different types of carbon that are laid directionally to achieve specific design purposes of flexibility, rigidity, strength, uniform behaviour under load and the widest performance envelope.  The bonding is probably the resin used in the previous generation of top-line rods.  You get what you pay for: there's no free lunch in carbon fibre and resin:  cheaper inescapably means more compromises.  This does not necessarily mean bad, but the compromises usually manifest themselves in a narrower envelope, for example in a smaller choice of line profiles or cast types in which the rod will give its best performance and user satisfaction.
Having endured the lecture in industrial economics, let's now look at what this means in practice by chopping up a 4 piece salmon rod.

The diagram is intended to be indicative rather than absolutely precise.  It is reasonably consistent across the price range.  The manufacturers do not disclose their commercial information, nor will I disclose my sources.  Mostly I have engaged in research, analysis and deduction.  The sectioned rod does, however, illustrate some very important points:
  • Only half of the value is in the realm of the 'manufacturer', and most of that involves input costs.
  • The VAT man takes almost all of the top section.
  • The retailer has a whole section to himself.  But his margin is not the same as his profit, because he has to carry a lot of costs - premises, staff, stock and overheads - before he even sells the first rod.  Furthermore, the salmon rod business is largely seasonal: he sells most salmon rods in 7 months but carries the staff, costs and stock all year round.
  • About 50% of the manufacturing cost and 25% of the overall price is in the blank, which is the bit that determines the rod and its performance.  The margin here is the blank maker's or rod sub-contractor's, depending on the business model.  It is a sobering realisation that a cheap rod may be based on a £40 blank and you don't get a lot of sophisticated carbon and resin for that sum.  You get what you pay for in this business.
  • I based the fittings on a modest selection.  If you wish you can spend £200 on a set of titanium rings and a further £100 on a reel seat decorated with rare wood and some fancy engraving.  There's a strong market in luxury: the demand for Hardy's Sintrix Artisan at £1,600 currently exceeds their capacity.
  • The reality of the manufacturer's margin is very difficult to assess.  There are also the issues of the sunk costs such as prototype development that apply specifically to the salmon element of the product range (e.g. write off 10-15 bespoke prototypes at £2,500 each and you have to sell an extra 250 rods to cover the cost); and others that are spread across all products.
  • But make no mistake, after crawling through company financial information files in the UK and USA I can assure you that nobody is getting rich making salmon rods.  The mathematics speak for themselves.  Take the example of Hardys and Greys, who made 80,000 rods last year.  I don't have visibility of their internal operating accounts (who does?) but overall they lost an average of £5.20 per rod.  If you weight that average by rod price then at best the Sintrix is breaking even, or at worst losing £100 per unit.
It is this economic logic that led me to recommend in last month's 'Springtime' post that you should look at the £350-500 price range, new or used, to get the best combination of value and performance.  The start-up, sunk and premium technology costs were carried  by the early movers in the premium market.  Their wealth works in your favour.

You'll be relieved to know that in my next post I'll get back to some fishing!

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