Stay Small or Join Forces With a Large Retailer?

TEC Worldwide is an international organization of more than 7,000 business owners, company presidents and chief executives. TEC members meet in small peer groups to share their business experiences and help one another solve problems. The following questions and answers are based on discussions at recent TEC meetings in Southern California.

Question: We're a small family business that makes high-end decorative rock for home improvement and landscaping. We have two stores that sell to general contractors and the public and have plans to open a third.

We were approached last month by a major retailer who wants to distribute our products. By opening new stores, I can stay small and grow at a manageable rate. On the other hand, if I go with the retailer, it could take my business to a whole new level. How do I know which direction to take?

Answer: A lot of businesses would love to have your problem. Nevertheless, it does represent a dilemma. Should you stay the course, go with your proven model and achieve slow, steady growth? Or should you roll the dice in hopes of achieving a five- or tenfold return?

There are two sets of issues to consider here--personal and business, according to Bob Conley, a principal in Pasadena-based Conley Commercial Real Estate.

"The personal side involves your goals and aspirations as a business owner, as well as your assessment of your management strengths and abilities," Conley said. "Do you prefer to run a small family-type business, or do you want to pursue high growth and all the challenges that come with it? Are you content with your managerial niche or do you aspire to a path of continual growth and development as a business leader?

"The slow-growth approach offers more stability and a greater degree of control over your working hours and your lifestyle," he said. "The second offers more risk, but also the potential for much greater financial reward."

The business side of the equation deals with the implications of jumping (or not jumping, as the case may be) into bed with the giant retailer. In this area, said Michael Stoddard, managing director for Trade Source International in Pasadena, there are a host of operational, financial and structural issues to consider.

Do you have access to the raw materials to keep up with the demand? Do you have the capital to fuel rapid growth? If so, do you have the talent in-house to manage exponential growth? If not, what would it cost to go out and get it?

Conversely, if you decide against partnering with the giant retailer, what impact would it have on your business? Would they offer the business to one of your competitors? How would that affect your ability to compete in the marketplace?

Finally, have you analyzed the margins and profitability projections compared with opening a third store? Large retailers may throw a lot of volume your way, but they have a way of continually squeezing pricing and margins. Plus, you also face the danger of becoming overly dependent on that segment of the business.

Given this plethora of issues, it's not surprising that local business owners have divergent opinions.

In this situation, Ann Marie Michael, president of Integrated Data Systems in Calabasas, favors sticking with what you know best.

"Running retail stores seems to be your core business," Michael said. "You know the market, and you have the model and the experience to successfully grow in this manner. Also, this model doesn't require nearly as much of a stretch for your staff.

"Sourcing your product through a huge distributor requires a whole different set of skills and expertise," she said. "That doesn't mean you can't go out and acquire those skills. But unless you have a real desire to manage a much larger company, you're better off sticking with your current growth plan."

Donald Huffsmith, a partner in Glendale-based accounting firm Lee, Sperling & Hisamune, believes you can have your cake and eat it too.

"I would stay on track with your plan to open a third store, while testing the waters with the big retailer," Huffsmith said. "Start by wholesaling some of your product to the retailer, and see how the relationship works out. If the early returns look good, you might consider 're-branding' a second product line. That way you can continue to sell your branded product out of your store while the retailer offers your product under a different name."

A third option would be to split your company into two.

"This would require setting up separate operational entities, although they could share certain central office functions," Stoddard said. "That way, if the partnership goes into the tank, it won't kill your core business. If it takes off like you expect, you have several options. If you find that you prefer a high-growth environment, you can train a family member to run the stores while you focus on the distribution segment of the business. If you don't enjoy the fast pace, you can hire someone from the outside who can manage rapid growth or sell that portion of the business to a strategic buyer."

Ultimately, it comes down to what you want to do with the business. Partnering with the retailer could allow you to leverage your way up to the next level and become a real player in the market. But at what risk and at what cost? That's a question that only you and your family can decide.

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If there is a business issue you would like addressed in this column, contact TEC at (800) 274-2367, Ext. 3177. To learn more about TEC, visit http://www.teconline.com.

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