Serviceland, Still in Red, Bets on Franchising : Hope High at Computer-Repair Firm
With the computer age upon us, George Harmon figures he can be the Ray Kroc of computer repairs.
Kroc made a fortune in the fast-food business with McDonald’s franchises. Harmon is founder and chairman of Serviceland Inc., a slyly named Westlake Village company that hopes to capture a big share of the burgeoning $800-million personal-computer repair market by franchising repair shops.
So far, it is still hoping. Founded with $1 million in venture capital less than three years ago and sustained by another $1 million last year, Serviceland has been in the red ever since. But Harmon says the company hopes to show a profit this year and has 15 stores so far, making it the nation’s largest chain of independent personal-computer repair stores. On May 3 it won state permission to sell franchises in California and 35 other states.
Serviceland also has the advantage of sounding like Computerland, the big chain of computer stores, and of having more stores than anyone else, with such customers as Hughes Aircraft and UCLA signed up for service contracts.
The competition in the industry is stiff. Personal computer manufacturers are getting more involved in maintenance and repair these days, and another franchise company, Computer Repair Corp. of Los Gatos, is doing the same thing Serviceland does. It has four stores in Northern California and a fifth is about to open in New Jersey.
“The personal computer maintenance market is becoming pretty intense,” said Rick Brusuelas, a senior research analyst at Input, a market research firm in Mountain View, Calif. On the other hand, the market is growing fast. Brusuelas said spending on personal computer repairs is expected to reach $2.2 billion by 1990, and despite the widely reported personal-computer sales slump, lots of them are still being sold.
Dataquest, a San Jose market research firm, says 8 million were sold in 1984 alone, and it projects sales of 10.6 million this year. Peter Teige, a Dataquest analyst, estimates that there are 16.75 million personal computers in use in this country.
Harmon, 62, is betting that all those personal computers will generate substantial demand for personal computer repairs, and he is no newcomer to the business. He is a former IBM executive who in 1968 founded Comma Corp., which he says was the first third-party computer repair company. Harmon is well known in the industry, and well traveled: With IBM, he relocated 13 times in 16 years, he says.
Since 1978, Harmon has been a computer-industry consultant, and he says he got the idea for Serviceland few years ago when he was hired by five small computer-repair companies to help them figure out how much their businesses were worth.
Harmon was struck by their profits. Pretax margins ranged from 39% to better than 60% in a business where, Harmon said, “to top 18% or 20%, you’re either taking advantage of your customers or your employees.”
But they weren’t taking advantage, he said. The things they had in common, Harmon decided, were that they serviced a narrow line of products in a narrow geographic area, and the owner of each company was still very much involved in running the business.
So in October, 1982, with funding from Rothschild Ventures Inc. of New York and STI Venture Fund of Los Altos, Calif., plus some of his own money, Harmon started Serviceland. Rothschild now owns more than half the company while STI has less than 10%, Harmon said.
Privately held, the company will not disclose losses, but Harmon says revenue should exceed $3 million this year, compared to $1.3 million in 1984.
At first, Serviceland shunned franchises, on the ground that quality could not be controlled. But Harmon also says he wanted to avoid building up a big company with high overhead. And he wanted to exploit the characteristics of the five companies he studied, all of which were small.
Serviceland also hopes to service a narrow range of products in a narrow area by giving each franchisee an exclusive service territory, and by repairing only IBM, Apple, and IBM-compatible machines. Serviceland does about 85% of its business with other businesses now, rather than consumers, and it plans to push service contracts at lower prices than those sold by IBM.
Franchises, Harmon said, should also bring the company a higher profit margin than operating stores itself would, and he hopes to have 15 more franchise stores open this year, with an additional 25 to 100 annually after that. He projects between 400 and 500 locations in five years.
Fee Going Up
It will take some cash for franchisees to get into the business. Franchises sell for $18,500 plus 7% of gross and 3% for advertising. Next year, Harmon said, the franchise fee will be $25,000 but the percentage charges will remain the same.
But that’s just what it will take to buy the franchise. Overall, Harmon says, at least $125,000 will probably be necessary to get off to a good start.
Computer Repair Corp. franchises also sell for $25,000, with the same percentages of gross for the parent company and for advertising. Paul Currin, president of privately held Computer Repair, said he hopes to have 200 franchises nationwide by 1989. He insists that the market is far from being overcrowded.
“There’s room for a bunch of companies,” he said.