My experience growing a real world, brick and mortar business

[BukNaked36]

Good read that brings up lotsa questions.

With the low barriers to entry, don't you think of starting your own company?

How much of an impact has the China product had on your market?

What percent of your sales currently come from China product?

You've already stated the low barrier to entry, but doesn't the China product make this even worse?

How have China's long lead times affected your turns and business in general?

Do you have any info. on how fast China is burning through their wood supply? Are they in any danger of shortage within the next 3,5,10 years?

How can you maintain 10 turns when it sounds like you are filling orders on very short lead times? Don't you have to have substantial inventory to respond?

Can you tell, I'm interested in the China product? [img]/images/graemlins/smile.gif[/img]
I am in a wood related business. Relationships with mills, and machining equipment used to be important. Chinese wood has changed this. Now anyone can buy completely machined, and packaged wood products and compete as long as they have some volume to work with.

[woodguy]

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With the low barriers to entry, don't you think of starting your own company?

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I have a 50% equity stake in my business unit, so I kinda already have my own. I have thought about doing it myself a few times, but we have tied up some very, very good line for Western Canada, and I am happy.

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How much of an impact has the China product had on your market?

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It is huge for the CORP stores, but not too big for the wholesale units. Chinese started with a lot more promise than it has finished with. Quality control issues like milling tolerences, staining, and most importantly (for my market) the drying of the lumber continue to be quite variable. The market has recognized it as a lower prices, lower quality product and in hardwood flooring this makes up only a small segment of the market. A lot of consumers are willing to pay more for quality when it comes to hardwood flooring.

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What percent of your sales currently come from China product?

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My sales, less than 5%. For CORP stores, they are about 15% of total sales, and about 35% of flooring sales.

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You've already stated the low barrier to entry, but doesn't the China product make this even worse?

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Absolutely.

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How have China's long lead times affected your turns and business in general?

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When I was doing more business with Chinese products it caused some heartache and pain. You just have to do a good job buying and forcasting your sales. We still run into spots where you are out, that's inevitable with import products.

We already bring in flooring from Germany, Finland, lots from Brazil, Portugal and China. All of these products have 6-12 week lead times, you just get good at managing this with experience.

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Do you have any info. on how fast China is burning through their wood supply? Are they in any danger of shortage within the next 3,5,10 years?

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A lot of the lumber comes from the Ural mountains in what was the Soviet Union and now is contained in a few different countries.

There is a mixed forest there that larger than continental Europe. That being said I have no idea of how well they manage their forests, my instinct tells me they don't manage it at all. In North America there are more hardwood trees growing now than there was in 1900, they are just 75-125 years away from harvest age.

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How can you maintain 10 turns when it sounds like you are filling orders on very short lead times? Don't you have to have substantial inventory to respond?

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There are some orders with short lead times, but most of my order file turns around in about 5 weeks on average. Luckily most of my customers supply and install the product so they are booking installs about 1-2 months in advance so I get plenty of notice for about 75% of my order file...maybe more.

We pull containers directly from suppliers 2-4 times a week, as well as pull stock from the Calgary branch once as week on a scheduled truck, and from Vancouver as needed. I have a well organized buyer who is very good at keeping the product flowing.

I also buy in quantites of 20ft containers rather than 40ft since it gives us more flexibility in ordering. It costs about $0.10 more per square foot to move the product, but it keeps my buyer from guessing about which products to put onto a 40ft container to fill it, and instead can fill one 20ft with sold product, then a couple days later fill another 20ft container with mostly sold product....this really helps us from getting into overstock situations.

With my supplier's fill rates being 95%+ and most of sales being from domestic suppliers we can turn the crap out the inventory. 10 turns is impossilbe if you don't have good suppliers as well as large inventories in other locations that are easy to pull from.

My turns are 10, the company as a whole runs at about 7, which is still pretty good.

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I am in a wood related business. Relationships with mills, and machining equipment used to be important. Chinese wood has changed this. Now anyone can buy completely machined, and packaged wood products and compete as long as they have some volume to work with.

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China has decimated a lot of the North American wood products industries, most notably the furniture industry.

They have had a major impact on flooring, but the intricacies of making very good hardwood has kept them somewhat on the edges of my market, and is sold almost exclusively as low end due to quality issues.

If they become very good at making engineered hardwood flooring, (and there are many signs pointing to this) they can have a much bigger impact in the coming years as the markets move from solid wood flooring to engineered flooring.

Regards,
Woodguy

[woodguy]

ElD asked me to expand on this, so here it is:


Helping CORP grow


Pricing Strategy on similar products


CORP was comprised of 5 retail stores and 2 wholesale units with a total of 30M in Revenue the year I joined.

I cannot even begin to take credit for all the growth we have experienced, but I did have a significant role in directing the company towards that growth.

Product Offering and Pricing Strategy

When I arrived at CORP they had one strategy for selling hardwood flooring. Buy well and sell cheaper than the next guy.

This strategy has its place, after all they had run and built a business for 20 years on that philosophy. This strategy however, doesn’t allow a company to access all segments of the market, or always maximize margin. Luckily for me, this strategy allowed CORP to sell enough wood flooring to become a major player in the industry and gave us a position of strength to grow.

As described in the original post, the wholesale units had sold enough volume from a key supplier (“A”) that the partners agreed to pull that product from the retail stores, so we could expand the wholesale market share. This would leave them with a hole in their product offering, so we sourced another good Canadian mill (“B”) to fill that void. Mill B also happened to be cheaper than mill A. The result of this is that the retail stores had lower sell prices across the board.

A few months into using mill B at the retail side, one of the partners tried to talk me into letting them use the mill A product again. I immediately refused and luckily for me, he kept his word and didn’t force the issue. The problem was the mill B’s fill rate wasn’t great so the retail side was experiencing stock shortages. Mill B promised to add a shift to keep up with demand, but we had to do something.

What I came up with was for mill A to produce a limited number of products under a private label for the retail side. This product would take the pressure off the mill B product for fill rates, and also keep mill A happy with more volume. Initially mill A didn’t want to product any private label, but after bypassing the VP of marketing and talking directly with the mill owner, he saw the value in what we were doing, and agreed.

When it came to set pricing for the private label line from mill A, I saw that the partners had taken a lower margin on it to match mill B’s retail sales price. I argued that they should have two price points to not only reflect the cost, but also to appeal to the consumer who equates price with quality.


I then pointed out to the partners the volume of the mill A products we were selling wholesale. The volumes had reached what CORP was selling previously. I then pointed out that not only were we selling as much as CORP did, but the consumers were paying about 20%+ more for mill A than when CORP was selling it.

This may seem like simple stuff, buy try telling a guy who had made millions when he started with nothing that his pricing strategy wasn’t optimal.

The partners showed some faith in me, and we set the retail prices on private label stuff higher than Mill B. Then something happened which surprised us all.

The higher priced stuff was selling about the same volumes as the lower priced stuff.

I thought the lower priced stuff would have about a 75/25 advantage, I was blown away. Often with “luxury” products like hardwood flooring, the consumer wants quality more than price. Often, and with reason, the better products are more expensive.

We then worked on expanding both lines, and they had a great market share increase and margin increase.

It was during this time that the Chinese manufacturers starting putting the North American furniture manufacturers out of business. I follow the spot market on hardwood lumber daily, and you could follow the number of furniture mill closures in the Hardwood News. It was just a matter of time before they started to produce wood flooring in a big way.

We were starting to get called on by importers or agents of Asian mills, but everything we tried was terrible. The biggest problem was the moisture content of the wood. The Chinese produce an 8-12% MC product for their domestic market and it also suffices for most of their export market, but it’s far, far too wet for the Alberta climate. The floors would severely shrink, and you had nothing but problems.

I argued that the Chinese products were going to flood the market so we needed to be on the leading edge, and setting the market. With the costs of our bad experiences with the Chinese products we had already tried, the partners were hesitant. I argued this position for about 6 months and talked with many importers and agents during that time.

One day I got an email from an old contact from Quebec who was now working on an agent for 4 Chinese mills. I explained to him our problem with Chinese products and he came to see me. Between the two of us, we figured we needed to get our lumber custom dried down to 5%-7% and then buy the entire production of flooring from that particular lumber. The moisture problems we had before were due to us (and everyone else) buying the regular production from the mills which were not suitable for our market.

We had to tweak the grades of the flooring a bit, but I thought it was a winner, and convinced the partners to try a few containers. It started selling so fast at CORP we ordered another 6 containers less than a week after the first ones arrived.

So now CORP had 3 main lines of Hardwood flooring and thought they should get rid of mill B. I disagreed.

I argued that we should go with a good, better, best offering of flooring, and actually increase the retail prices of mill B and the private label A lines. This gave them flooring with retail prices from $2.95/sqft to $8.95/sqft, so they had something for every budget and hopefully every style choice at good margin for CORP stores.

Since the margins were up, we took advantage of this by taking a few select Chinese items and selling them for near cost and putting them in the flyers.

Selling and advertising a loss leader isn't new, but having your Chinese product out there are a ridiculously low price is a great deterrent for other wholesalers and retailers. It hasn't stopped the flow of Chinese products into our market, but it has helped keep the number of players low.

CORP was starting to dominate the hardwood flooring market, so we also started to bring in engineered hardwood floors and laminate floors from Germany and Finland to compliment the hardwood lines. These were not my babies, but were offshoots from our successes in hardwood.

The above took about 3-4 years to happen moved CORP and the wholesale division into a dominate position in the market.

Over ½ of all CORP sales now come from hardwood flooring, when I started with the company it was less than 25%.

Other ways I helped

Coming from a door, moulding, and hardwood plywood background I changed the way CORP looked at buying some of those products.

I knew of some small hardwood plywood mills in the Southern US and Mexico which had no representation in Western Canada, so while all the other retails buy through wholesale, CORP buys direct. This is still true, there are not a lot of hardwood plywood mills, and so over 95% of them are represented by wholesalers in any given market. This was just a pure margin gain of about 12pts on this product class.

CORP was buying their doors direct, but I actually convinced them they should buy from wholesale. This sounds counter intuitive, but the interior door market has an immense sku mix and it was just getting bigger. CORP was a player in the interior door market, but was straining under all the inventory they had to carry. I got involved with the negotiations with my old company, and got CORP to the point where they were buying *almost* as well as buying mill direct, but were able to drop the inventory $$$ by about 60%, and offer way more skus.

Once the wholesale units were becoming successful in Alberta, some of our mills were putting pressure on us to set up shop in Vancouver so they could give us theirs lines for all of Western Canada and only have to deal with one customer out here. We buy lots and pay all of our bills on time, so we are pretty popular with the mills.

Since there was more profits from all business units flowing, especially from the wholesale side, we were able to come up with the $$$ to open the Vancouver branch. In 5 short years Vancouver has gone from 0$ to $12M in sales per year.

That’s about it, really.

The work to get Mill A out of CORP stores was long and bloody. Its tough to describe, but it was like the fight of my life. I was told by more than one senior member of CORP that if we pulled mill A away from CORP stores we would lose the line due to a drop in sales, and one of the partners thought this as well. It was a long, tough fight.

My partners are pretty happy that I won that fight though. At the time we pulled it from CORP stores we were buying about $2M a year from mill A, last year we bought $8.5M from them, and are on track to buy about $11M next year.

The success of that one move was the springboard for the rest of the moves and decisions in hardwood flooring that the partners let me take the lead on. Its been quite gratifiying to see all of it come to fruition.

Regards,
Woodguy

[mrw8419]

Great read and I really enjoyed the second part. Its great to see all of the positives that worked, but any stories of trying different product lines, suppliers, employees, etc that didn't turn out as well and why they were not successful.

Also when you made the private line for mill A at CORP, was the product any different than normal mill A wood, or was the "private label" just advertising to differentiate your wholesale offering from the CORP store.

[woodguy]

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any stories of trying different product lines, suppliers, employees, etc that didn't turn out as well and why they were not successful.

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Oh yeah.

I mentioned I punt a crappy salesman in the original post. I also have had some trying times with some of the inside staff. There is nothing worse than when the staff are infighting about who is working harder than whom (I'd say more about the staff, but they might read this [img]/images/graemlins/smile.gif[/img] )

We have tried and failed at a few product lines.

It took 3 tries to find a decent Chinese engineered product. They tend use Meranti wood which is very unstable in low humiidity. Our first 2 tries just came apart in the showroom.

We over committed to Finnish floating floor company. We had sold their product for a few years, but they were on us to increase sales. We committed to about $15K in new displays and $100K in product. Right after that the market on 3-strip floating floors died.

Single strip floors manufactures approved a floating installation on their product. This was new to everyone, and it effectively killed the 3 strip market.

We took a bath on the displays, but eventually blew out the flooring to recoup most of the investment.

There were other times we would try out new mills and get duped. We'd buy 3000sqft of a product to try it out, have success so order 20,000sqft, only to have the 20K be no where near in quality as the "sample" batch.

There are others, but yes, we are no where near perfect. We are lucky that since there is a retail side to the business, its a lot easier to blow out inventory when its not making you money.

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o when you made the private line for mill A at CORP, was the product any different than normal mill A wood, or was the "private label" just advertising to differentiate your wholesale offering from the CORP store.

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Originally it was the same stuff, different box. Over time it evolved to come from a different mill that the owner of mill A also owned, so now they are truly different, but not at the start.

We would also make some spot buys from other mills and include it under the private label program.


Regards,
Woodguy

[BPA234]

Wood:

This is a great thread and I am very impressed. I have spent my life in the flooring business (brag/beat?) and understand the issues that you describe. Tremendous success!

But, any horror moments, self-doubts, tests of faith?

[woodguy]

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I have spent my life in the flooring business (brag/beat?)

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Both.

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But, any horror moments, self-doubts, tests of faith?

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Pretty much the first year. [img]/images/graemlins/smile.gif[/img]

CORP was selling mill A for about 5% over what I needed to wholesale it for. The retailers wouldn't get on board with it at these levels.

I ask the partners for an increase on their price for mill A and get rejected until I can show some signifigant sales increase....but I can't increase sales until I get their retail prices up.....AAARRRGG

My previous employer has tried to hire me back a couple times, and once I almost contemplated it because of troubles with getting the partners to see the vision of where the company could go. No problems like that now.

Often in the first year I wouldn't be able to sleep becaue all I could think about was work. When I did get to sleep I would often bolt awake at about 3:00am with a minor panic attack and not be able to get back asleep.

Although I stopped the bleeding of red ink fairly early, it took damn near two years to get a nice profit going. I actually took a pay cut on salary when I took on this partnership (in exchange for 50% equity stake at a severe discount), so until the profits flowed continuously I was actually making less $$$ than before.

I lived in Alberta in the 80's when an oil booming economy went bust overnight due to government interference. I try to manage my business and personal finance so that neither will go belly up if the intrepid Liberal Party of Canada get power again and kill the industry with their outrageous stupidity again....

Regards,
Woodguy

[Evan]

Woodguy, great thread. I don't have anything to add but I can tell you've put a lot of time into writing this up and it's definitely appreciated.

[KKbluff]

EXCELLENT READ!!

Seriously, this has been very, very good.

I just want to ask you where most of your knowledge about how to improve your company came from.
Obviously a good portion came from working in your field and noticing future oppurtunitys and current blunders. Outside of all that did you have any other resources that helped become such a successful manager and 'business grower' ?

I'm in my first year of mgmt right now and am in a similiar situation (although not wholesale and I don't have any equity in the company outside of my bonuses & stock). I do put in a good 60-70 hrs a week and occasionally wake up in the middle of the night due to a dream about work.

PM me if you want, I am really interested in your progression as a manager and how you developed it.

Thanks!