In the world of e-bay sales, the market immediately and almost costlessly moves to the new equilibrium of supply and demand. There is little room or patience for risk management, cost analysis, delays, or mistakes — it is a world simular to perfect information and frictionless movement. This is a virtual world; not a model. On e-bay, there are minimal costs when moving goods but starting a new firm or leveraging information can be very profitable. Rod Smith’s experience has been the ideal story of rags to riches. He started selling race car parts at swap meets. Rod learned what people wanted and studied the market and fan base of NASCAR. This knowledge was leveraged into a profitable e-bay “side” business in 2005. In 2011 it became a $300,000 income with over $1,000,000 in sales. Talk about a great retirement plan, Rod works 6-7 months a year spending the majority of his time in Charlotte, NC where Richard Petty, Childers Racing , Dale Earnhardt, Joe Gibbs and any other major NASCAR race teams are headquartered .
For these NASCAR teams, the goods Rod Smith buys are what we in business might say that “money is left on the table.” This gap is created because of the considerable time, knowledge, and capabilities it takes to create relationships with the NASCAR teams, offer a no-hassle guareentee to e-bay buyers to set his online NASCAR parts store apart from others.
Rod Smith knows what is possible and what actually happens to these 900 + horsepower engines and parts. It created an excellent niche for growth. Rod’s entrepreneurial venture, called the performance warehouse on e-bay, is planning even more aggresive growth for 2013. “I have $200,000 in inventory that needs to be inventoried and listed for sale. That is a lot of capital tied up that should bring a 200% return.”
Dr. Mike Connell said “An entrepreneur can step into this gap and offer a service for a price. The entrepreneur has some special talent or ability (or economy of scale) that allows the entrenpreneur to efficiently produce the good or deliver the service. If the price is low enough and the value created is large enough, there will be a viable market for the entrepreneur. One of the frictions that entrepreneurs can often provide efficiently is the services of a middleman. Recently in the Midwest Entrepreneur’s class we witnessed two such middlemen speak about their business.
John Twomey was a grain dealer/handler in Western Illinois. The farmer could (and some do) deliver their grain to the ultimate user or the barges at river — that is a costly thing to do and an activity at which the farmer has no particuliar comparative advantage. Given this real world cost to obtain or share information, there is an opportunity for an entrepreneur/middleman. Someone like John Twomey can offer the service of collecting the grain and moving it closer to its ultimate use more efficinently than the farmer can because of economies of scale and specialized knowledge. In the real world, John Twomey was a part of the process that caused the market to jump to the new equilibrium price and quantity.
Rod Smith is another Monmouth entrepreneur that successfully bought auto parts and sold them on eBay. NASCAR teams routinely replace all of the parts on their race cars with new parts even when the old parts are still working — often after only one race. These slightly used parts are highly valuable. The NASCAR teams could (and to a limited extent do) resell these parts in the secondary market. Selling used car parts in the secondary market is a costly process that requires specialized knowledge. Rod Smith travels to North Carolina and buys such parts wholesale in bulk. Then he sorts, cleans, advertises, sells and ships these parts to buyers in the US and all over the world. He can provide this service more efficiently than the NASCAR teams. Rod helps the market move goods from lower valued uses to higher valued uses and creates wealth for society and a profit for himself.
These two are good examples of entrepreneurial middlemen that exist in the real world but not in the supply and demand models of microeconomics. Remember that an entrepreneur is an individual that sees an opportunity and takes personal risk to supply a good or service to society. Entrepreneurs and middlemen are the grease that help reduce the friction of the market and move society to a better place.”
Rod used his extensive contacts in racing, positive cash flow, increased his appetite for risk by buying more in bulk and the most expensive parts (entire racing engines) to fuel his growth from just over $100,000 in annual sales in 2009 to $340,000 in annual sales in 2011. The NASCAR racing teams now know Rod personally and that he will buy practically everything they have to sell. They keep a big bin for him at their NC facilities and wait for his monthly visits. He is a regular at all of the major racing team assembly facilities. He plans to achieve $500,000 in net revenues annually in 2012. Rod’s wife is the only other employee along with two interns. His wife does all of the shipping and had to quit her day job to support his business in 2009. Rod attended Monmouth College in the early 70’s but left to work full-time and race on the weekends.
He raced his own car three or four times a week for 25 years and met many people in the racing fraternity before opening his e-bay store.
Last year, Rod bought 20 Richard Petty racing, Dale Earnhardt Racing, Hendrix Sport, and Childress Racing engine blocks (because he is on the super “high trust partnership” with those accounts) and he successfully made a profit selling the items at a 100-300% mark-up often two years after he acquired the parts. The lag is helpful in terms of the marketing catching up with the newest trechnology, but it creates storage issues and a cash drain for Smith. He maintains three warehouses and has a semi “fully-loaded” every two weeks. He now buys from amost all 70 NASCAR teams and even brokers new stuff to the newer teams. Rod has never hired an attorney or used an accountant until this year. He can buy “by the pile” because he knows what he sees. He makes an average of $81,000 a month during his busy season. If asked, he can keep the parts for up to two years (of the line Chevrolet racing engines) before offering it for sale if product development restrictions are necessary. Five local competitors vie for the same items, but he outspends and out-competes most of them.
Smith said “It is fun to see big gains every Sunday”. Why? Evidently the real eBay buyers come out and buy on Sunday.