Saturday, February 5, 2011

Caveat emptor ("Let the buyer beware")

Marble Quarry - Carrara, Italy

This post was originated after receiving a question on the Quora website. I thought I should share it here. The original question proposed to me on the site is stated below.

"How is the pricing on stone (ie: marble & granite) determined? I don't mean an individual's markup...I mean how is the value of a particular stone figured?"

When I first read the question I smiled since it is an intelligent question and brought to mind one of my pet peeves. There are some in the stone industry that choose to practice misinformation when identifying/naming different stone types. When an Architect or Designer specifies a stone without specifying the quarry or country of origin and it is only available from one supplier then the other bidders only have one source to buy from. Quite simply, when there is no competition the end user usually pays more. I am not referring here to an individual that has discovered a new quarry opening or new stone source and has exclusive rights to that stone by virtue of some type of marketing agreement. Or, a "value engineering" proposal where the end user is presented with similar but lower priced alternatives to the originally specified stone. The misinformation comes about when an inexpensive stone is proposed under a fake name and then charging an exhorbitant price to the buyer. This is not rampant in the industry but to guard against this practice specifiers should always find out the country and quarry of origin of the stone they decide to specify. Okay, I digress, back to the question.

In answering this question I will come from the direction of my experiences as a buyer of stone materials direct from the source (no middlemen) in various countries around the world where the cost/price/value is mostly intrinsic as well as a buyer of stone materials from local stone Suppliers/Brokers/Distributors where the cost/price/value components are based on intrinsic as well as subjective values. The following points are a brief explanation to give you insight into the pricing and value considerations for stone materials within the context of the Quora framework. I did not take into consideration any indirect costs such as administrative overhead, selling & distribution overhead, etc.

Block yard - Espirito Santo, Brazil

1. Quarrying - production of commercially marketable stone blocks

These costs are primarily labor and equipment costs involved with the extraction of stone blocks to be sold to block yards and fabricators of slabs and dimensional stone. The costs of quarrying different varieties of stone vary greatly. Some of these factors are listed below.

a. Technology - new and improving methods of extraction are making it more economical than in years past. However, some countries are using older methods and until new equipment is brought into their country they will not be able to fully exploit their resources. This was the case in China and Brazil until they invested heavily in the latest Italian equipment. Prior to the access to more advanced methods it was more difficult to consistently produce top quality blocks(size/shape), increasing material waste and cost to produce.

b. Geographical location - the terrain (mountain range, desert) and distance to customers. Transportation costs will be higher the further away and more difficult it is to reach the customer.

c. Labor costs
The labor rates and subsequent labor costs for producing the stone materials from quarrying to fabrication in developing countries are less costly than in developed countries (i.e. , Asia in comparison to North America and Europe).

Granite quarry - Finland

2. Infrastructure - roads and bridges/access to quarry sites (ease or difficulty of access to source).

For quarried blocks to be transported to ports for shipping to block yards or fabricators in other countries it is important that good roads be constructed to enable reasonable size trucks to pass. Depending on the country of origin some stone quarries are more difficult to access than others due to poor road conditions (sturdy pavement vs dirt/mud ) or during harsh weather conditions (snow/rain/floods) At certain times of the year access to quarries is restricted.

Transport of block from quarry to stone yard

Stone block being prepared for slabbing on wire saw
3. Fabrication costs

Principally labor costs for polishing, cutting, edge finishing, difficult patterns, etc. Also, material cost contingencies due to block waste and slab waste from inefficient slab sizes in relation to size of finished goods required, difficult or complicated patterns, etc. Technology also has it's place in decreasing labor costs since new computerized and robotic cutting equipment requires less manpower for greater production of finished stone. The labor rates and subsequent labor costs for producing the stone materials in developing countries are less costly than in developed countries (i.e. , Asia in comparison to North America and Europe).

Sawn stone slabs on trolley awaiting placement on polishing line

4. Transportation costs - outbound and inbound trucking, shipping of containers

Blocks need to be trucked to fabrication facilities and then the fabricated materials need to be trucked to port. Container ships take the fabricated stone to destination ports and then the containers are trucked to the buyer for further fabrication or trucking to final destination.

Loading bundled stone slabs in shipping container for overseas shipment

5. Customs duties and taxes (VAT) - within destination country and from source countries

When stone materials are trucked or shipped between countries there are duties and taxes levied which increases costs and must be considered when estimating final pricing.

6. Currency rates - currency rates in source country vs destination country currency rates.

When the currency from the source country is declining or has declined in value vs the currency of the buyer's country that source then becomes less costly.

7. Uniqueness of stone - no competitive sources

Through either exhaustive research and extensive travel or ingenious design by the efforts of passionate individuals, prices are high for certain stone materials due to their uniqueness of color, veining pattern, new fabrication methods producing unique shapes, designs and finishes.

8. Scarcity of stone - exclusivity - no competitive sources

The exclusivity of access to buying direct from the source (Distribution or Sales Agreement)as opposed to a well known commodity (the ability to obtain the same material from other sources where competition leads to lower pricing). The perception of scarcity increases perceived value.

9. Proliferation of sources

Excess supply, well known commodity, heavy competition and ease of procurement all lead to lower prices.

10. Warranties / Guarantees

Home Depot's 15 year stain warranty, Sensa Granite's 15 year warranty, Caesarstone's Lifetime Warranty for quartz products, etc. These are value propositions which may differentiate them from the competition and justify a higher price.

11. Branding/Marketing message

Buy American, Made in Italy, Sustainability commitment, LEED points for stone from supply source within 500 miles of project. Mostly these messages differentiate/justify the higher price of their product in relation to competitors.

As stated above, these cost/price/value considerations are from my own buying experiences with direct sources of blocks, slabs and fabricated dimensional stone throughout six continents for mostly large commercial projects. Others may have differing views based on their own personal experience.

Please share your personal experiences with stone here in the comments section.

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