On bad deals

An article titled Don't talk to Corp Dev has recently showed up in my feed and the HN discussion around it reminded me of this anecdote.

To clarify: this story is based on something that happened in real life, as told to me by someone who witnessed it first-hand. Time has blurred some of the details and I have changed others. So feel free to dismiss the details, but please keep the main point in mind.

Once upon a time there was a small wine producer we'll call Dave. He kept a small shop and was doing well by himself, selling his wine at $15 a bottle. One day a big supermarket chain contacts him -- the chain needs a new wine supplier, and they heard good things about Dave. They have just one condition: they will take care of distribution and advertising, but Dave has to provide them with one month of free wine in return.

Dave is ecstatic: the supermarket chain can spread his brand across the entire country and turn his small operation into a national contender. Sure, giving up one month of profit is not ideal, but the supermarket representative convinces Dave that he'll recover his lost income in no time. Hands are shaken, contracts are signed, and Dave provides them with one free pallet of wine to start the week.

Week two arrives, and the supermarket chain requests two pallets of wine. "Looks like my wine is selling well", Dave thinks, and increases his production targets for the week. But this is not enough: when Dave is asked for five pallets of wine the next week he is forced to hire a new assistant and buy new machinery to keep up. Predictably, week four closes with an even larger order of ten pallets. The loss of 18 pallets of wine is a tough pill to swallow, but at least the month is over and from now on he will get paid.

A new month begins and Dave receives his weekly order: he is asked to deliver a grand total of one pallet of wine. "This must be a mistake", Dave thinks, and calls the supermarket representative. "Last week I gave you ten pallets of wine. So why are you only asking for one today?". "That's easy", says the representative, "up until last week we were selling your wine for a dollar a bottle. This week we will put the price back at $15 and therefore we are not expecting it to sell as well as before".

Facing a large loss of inventory and having invested both in employees and machinery that are no longer needed, Dave goes broke. The supermarket chain finds a new naive wine supplier, and the cycle starts again.

A wise man once taught me that it's not a good idea to enter into negotiations with someone much bigger than you. This is arguably the reason why South American countries formed Mercosur instead of joining theFTAA agreement with North America, but it's also true for simpler activities like office politics.

For the record, I would have totally fallen for this. The first time I heard this story I didn't even consider that someone could do something like this on purpose. Then I started reading news about startups and learned that it happens relatively often.

Consider yourself warned.