Sunday, January 29, 2012

Roll your own. Really?

Something seemed hinky about the cigarette rolling business mentioned in the Bulletin.

You know, the "too good to be true" dictum?

I think it's the math.

The company promises that one can make a "300%" return.

The machine costs 34,000.00. Right off the bat, I have a question. Has this guy bought the business of a RYO Filling Station, or did he buy the machine? Does the "rent" refer only to the customer's use of the machine, or the business owner?

But assuming he bought the machine, and it's just a one time purchase, is this a good deal?

Let's make a couple of more assumptions.

Basically, the story says that he charges for material and time, at about 30.00 per eight minutes. For this, the customer gets 200 cigarettes. Now, if the article was right and people are paying 5.00 a pack in stores, then that's a savings of about 20.00. If you don't count the probably 15 minutes the whole thing is going to take to finish.

So assuming that the machine is running 30 minutes out of every hour, with the other thirty minutes being the preparation and selling part. (Actually, this is if he's busy. Not counting minutes where there are no customers....) Well, I'd love to be busy with a transaction 30 minutes out of every hour, on the hour. Instead of busy sometimes, not busy other times. But...hey, people got to smoke.

Anyway, I'm thinking 4 of these transactions an hour is an upper limit to how many times he can do this. (Of course, if they pre-roll them, they could get around this -- but that would be illegal....)

Which works out to 120.00 per hour. Assuming an 8 hour day, 6 days a week, that would bring in a lot of money. Let's say 5000.00 a week.

Now, assuming that he is paying 50% for cost of goods, he's making 2500.00 in profits. 130,000.00 per year.

So the company itself says you'll do three times the cost of the 34K, so that works out to 102K.

If you make it past the first year, it would seem like a bonanza.

So I googled RYO + Scam and learned the following.

First off, the company itself was served an injunction in 2010, and had to close down. The injunction hasn't been lifted, but is not being enforced. What that means, if I understand the legal issues here, is that any money accrued in the interim will be subject to full taxes if they are ruled against.

Since most of the money saving in this enterprise is by subverting the taxes -- they guys had better be saving up their profits to pay to eventual judgement to the government.

I'm doubting that the government is going to give up their taxes so easily.

Several states have banned these machines already.

Secondly: An already in-operation store mentioned that they sell 3000.00 worth a week in sales, which seems more reasonable. The 5000.00 I came up with assumed a high level of busyness. They also implied that they pay about 1/3rd in cost of goods. One of them mentioned a 3.50 royalty to the company on every cartoon of cigs.

Anyway, the sales are bit lower than I estimated, the costs a bit lower. Overall, they make about 20% less profit than I estimated. Still a pretty good 2K per week of gross profit. (Before business costs; rent, electric, insurance, labor, etc. etc.)

Third: The company itself says that it takes "10 to 20 minutes" to roll 200 cigarettes, not the 8 minutes in the story. In fact, they claim they can only roll 10 cigarettes per minute, tops. So that changes some of the assumptions above.

That means, if the machine is running every minute, they can complete 3 -- 200 count transactions an hour. Which means if they run every minute, they can sell 90.00 per hour.
Going back to my original assumption, that they are running half time if they are super busy, that works out to 45.00 an hour, of which 30.00 are profits.

This is looking less profitable all the time. Still possibly viable. 240.00 per day in gross profits, or 5700.00 a month. Still not bad, assuming low overhead.

These are the estimates of the actual producer of the machines. (They are trying to wiggle off the hook of being a "manufacturer", so apparently they scream they are slow to the regulators, and scream they are fast to potential customers. Assume something in the middle, and it still isn't looking as good.)

Fourth: The profits really come from cheaper pipe tobacco being used in the process. You can use legally taxed cigarette tobacco, but it's much more expensive. However, you apparently can go out right now and buy the same kind of pipe-tobacco cigarettes for under 10.00 a carton, already rolled. So you're actually paying more per cartoon, if that is the kind of tobacco you're using.

Fifth: There are discount cigarette retailers who sell a carton of branded cigs for closer to 45.00, than the full retail 60.00 a carton. (I don't know local costs -- I'm sure a smoker out there can tell us.)

So the savings, even on the pipe-tobacco cigs are now about 15.00 per cartoon, not the "half" that is advertised. This if for legal, brand-name, already rolled cigarettes that you can buy in 1 minute store transaction.

So. A good deal?

There seems to be a big risk that the machine will either be shut down legally, or become much more expensive (with taxes) to operate, as well as a danger that the operator will "owe" big bucks to the government. If he can make it past the first year, it might be O.K.

It seems to me, that even in the best-case scenario, the profits are less than advertised. You always have to assume that you'll be less busy than you think you will be.

But it might be enough to be part of a diversified tobacco shop. If I had one of these machines, I'd probably get all kinds of tobacco paraphernalia, maybe some food and drink, a gambling machine or two, whatever it took to keep the doors open.

I'd probably try to hold back a significant percent of my revenues from the machine for the eventual day of reckoning.

The Taxman Cometh!

P.S. Math isn't my strong suit, so if any of you can point out errors, let me know.)


Duncan McGeary said...

If I had to guess, I'd bet the company is being optimistic about tripling your money.

That is, they mean that you'll gross the 104K IF YOU RUN THE BUSINESS AT BEST CASE SCENARIO.

Cost of goods? Again, probably close to 40% over all.

So actual gross profits would be about 45K.

Pay for the machine, your gross profits are now 11K.

Out of which you have to pay your overhead. Which, rock bottom, are going to be at least 10K per month.

So, you won't make a dime the first year.

Duncan McGeary said...

I mean 10K per year overhead.