By Tom Shay
You have been in business for several years and have been fortunate to experience steady growth in your business. It wasn’t luck that caused this growth, as you carefully researched the brands you chose to carry. You visited the mass merchants to take notes of the brands and models they stocked. You also visited the independents in the area to note the same about their businesses. Notes were also made about their service department. Overall, you knew who sold every make and model in the area, as well as who repaired which brands. Of course, you know which shops will service equipment they did not sell, as well as servicing brands they do not sell.
Speaking of the area, you also were very diligent in determining where your business was located. Instead of using a certain number of miles as a radius from your business as a marker, you considered driving time and which businesses, if any, that a potential customer would have to pass to get to your business.
And you were sure to include important factors such as your pricing strategy, hours of business, and level of customer service as parts of the equation. It is a careful blending of driving time, brands carried, services offered, and these other factors that have gone into making your business successful.
As you realize the sizable return on investment you are earning through your business, you begin to consider expanding your business – and the possibilities for business expansion are many. However, before we look at the possibilities, there is a very important first step that has to be taken.
That first step is to determine IF you can afford the effort to expand your business. Growth of a business, regardless of how it occurs, costs money that has to be paid in advance. Sure, this statement seems to be contrary to logic. You sell more merchandise, which should mean you have more money to pay for the additional inventory you will need as your sales increase.
Unfortunately, that inventory to produce additional sales must first be on the shelf. If your vendors are offering net 30 days, this means you have to sell that inventory before you pay for it if you are going to stay ahead of the increased inventory costs. Doing this repeatedly would mean your inventory turn rate would be in excess of 12 times a year. Most likely, your inventory turn is around twice a year. Our question to you is, “how can you expect to increase how fast you sell inventory and replenish it that quickly?”
Even if you could answer that question to your satisfaction, we have yet to discuss the additional costs you will have of sales staff, your technicians, extra fixtures and equipment, and the dollars you will spend to advertise in an effort to increase your sales.
This is the time, before you make a decision of how you are going to increase your sales, that you should be creating a budget and cashflow plan. These are two very important tools that every dealer should have regardless of any plans you have for your business.
If you are going to read further and consider our ideas for expanding your business, we will strongly suggest you make no decision without having created a budget and cashflow plan. They will tell you if you can afford to grow your business, and how much growth you can afford.
Don’t be surprised if this plan shows you have to borrow money to make this all work. And, do not be fearful of a loan for your business. As an example, if you borrow money from a bank at 8% and your return on investment is 20%, why wouldn’t you borrow money to grow your business?
Once you have created the budget and cashflow, as well as determined whether or not you will need a loan for the growth, you can begin to decide how you want to grow your business. This may seem like an odd sequence, but your situation is much like your deciding you want a new car or truck. There is no need to start looking at which new vehicle you want until you know just how much you can afford to spend.
You have several options for business expansion. You can look at a bigger advertising campaign, an additional location, additional lines of power equipment, additional products from your current lines, and new products that relate to your current customers.
Each of these requires varying amounts of time and money, while, depending on your location, carrying different levels of risk. Let’s look at each.
The bigger advertising campaign would be a choice when you believe you are not getting your share of the market. With an individual dealer, you could do research to determine how much of the market each dealer has, with the exception of the mass merchants such as Lowe’s, Home Depot and Menard’s. While you may determine the geographical boundaries of your business, you may experience some potential customers whose boundaries overlap yours, meaning they are buying their equipment from a dealer who you do not consider competition because of the distance.
Expansion by increasing market share is a viable option. We know of one of the major manufacturers in the industry whose entire sales goal is based on measuring their market share. While they do not like experiencing a sales decrease, they accept the decrease if the rest of the industry is also experiencing a decrease; what matters is they’re not losing market share.
The second option we offered was an additional location. We can look to the mass merchants for an example of this. Many of them look at the boundaries of their current location. They may do so by mileage or by driving time to their location. From those extremities, they select another location such that the extremity of the second location touches that of the first location. Think of each store being the center of a bullseye. The outer edge of one bullseye touches the outer edge of another. They have as many bullseyes as they can afford, as well as to cover the overall territory they want to serve.
In more recent years, we have seen mass merchants who have the extremity of one location overlap that of another location. Envision this strategy as compared to the first. You would see many bullseyes overlapping each other giving this business a stronger foothold on the territory.
A third option for growth is additional lines of power equipment. Perhaps you have carried a single line of chain saws, string trimmers, blowers, etc. You follow the same strategy with mowers. While the manufacturers you currently carry may be pleased with the arrangement, you may find as we did, that by adding an additional line or two, you are attracting more potential customers because you are offering more choices.
You see this every day in things as simple as something to drink; soft drinks, beer, coffee, and even water. People want choices when making a selection.
Another area for growth is additional products from your current lines. It could occur in the business that caters to commercial customers and would consider adding products from the same manufacturers for homeowners. It could be the dealer who sells the products of a multi-line manufacturer but has initially chosen to not sell some of the products they offer. The expansion would be with these other items the manufacturer produces. To your existing customer this makes you a more complete dealer.
Our last offering for business expansion would be new products that relate to your current customers. We experienced a unique version of this last week as we visited a dealer who, in addition to power equipment, sold bicycles. When we first saw the name of the business, “Chain Reaction” on the building, we thought they were a dealer of chain saws. The additional signs by mower manufacturers suggested they were more of a full line power equipment dealer.
With each of these last two strategies, we see the evidence of learning from a study in the banking industry. When a customer opens an account with a bank, it frequently starts with a checking account. There is a 90-percent chance the customer will eventually close the account and move to another bank.
However, if the bank can sell that customer five of their products – checking account, saving account, safe deposit box, car loan, mortgage, line of credit and any of their other products – there is a 90-percent chance they will not leave that bank.
Business expansion is not an easy task, and it is a gamble. For it to pay dividends, you must do your homework and let the answers you get be your guide.
Tom Shay of Profits Plus Solutions, Inc., is the fourth generation of his family to have owned a power equipment dealership. In addition to this column, he has written 12 books on business management, a book on vendor/dealer relations, and a college textbook on small business financials and business planning. He frequently speaks at trade shows and conferences for manufacturers and wholesalers. For more information, visit www.profitsplus.org.