Having a product diversification strategy is an important form of business development. Small businesses can diversify their product range by modifying existing products and/or adding new products to their current range. This results in unique opportunities to grow the business by increasing sales with existing customers and experiencing the benefits of entering new markets.
Floor Trends recently spoke with Casey Dillabaugh, owner, Dillabaugh’s Flooring America; Dave Griggs, owner, Dave Griggs Flooring America; Randy Mostad, owner, Carpet One Floor & Home of Billings, Mont.; and Kim Scott, owner, Dove Interiors, to hear their perspectives on diversifying the product portfolios in their flooring businesses.
How do you go about diversifying your products/portfolio?
Dillabaugh: We have to take a look at our current business structure. Generally speaking, we’re approached with new opportunities or new ideas. Not always, but generally speaking, that’s the case. We take a look at it and say, “How does this fit with our current business model and is there a good business reason for us to do this?”
We are in quite a few different areas. We have our own cabinetry division, we got into kitchen and bath in approximately 2007 and we have our own granite fabrication company, which we acquired about that same time as kitchen and bath but they’re both kind of different stories. We got into kitchen and bath simply because we thought there was a demand from our current client base for us to get into cabinetry.
However, the granite side was a little bit different. With granite, we had a pre-existing granite advocator in town that fell upon hard times and had approached us about partnering with them. As times got harder, we actually ended up acquiring 100% of that business. But both of them fell within our business model and made sense for us to get involved with because they go hand-in-hand.
I guess it boils down to having a good business reason in order to do it. If there’s profit in it and if we have a client base that would actually benefit from it—that’s generally what makes a decision easier for us.
Mostad: For the longest time I resisted diversification. My mission was to focus on one thing and be the best at it. Over time I found we were doing a lot of work for other people and not being compensated for it.
For instance, when selecting floor coverings we begin with the kitchen cabinet style and color, then select wall colors, countertops and cabinet hardware. With this information we are able to help our customers in selecting floor covering style and color. This is done to give our customer an enjoyable, stress-free design experience.
We would then hand off our selections to other businesses that specialize in cabinetry, paint, etc. Many times the businesses we passed the information to wouldn’t offer the same level of service our customer had come to expect from us. To ensure our customer the most enjoyable experience, we expanded our product/service offerings.
When we decided to diversify, we researched the K&B business, called fellow CCA Global dealers and asked for advice, vendor contacts, etc. We researched potential pitfalls, investment expectations and space requirements. We then interviewed the vendors to identify the companies whose businesses most aligned with ours. We made our selections based on the cabinet company’s quality, service and, most importantly, business philosophy.
Griggs: We are always on the lookout for new products that are related to our core flooring business. For example, we have a ProShop selling virtually everything needed to install all of our products to installation contractors. We sell those products to installers and wholesale to other stores in a 45-mile radius, give or take. We recycle carpet cushion and purchase that material from installers, which attracts the installation trade to our ProShop for their supplies.
We also have an online store selling our installation supplies and cleaners. We’ve expanded our market through the multiple ways we reach out to customers.
Scott: We just listen to our customers. They tell us what they are interested in and looking to purchase immediately or in the very near future.
Are you bringing in different product lines or product segments?
Dillabaugh: Generally speaking we don’t look at changing suppliers or bringing in something different unless there’s a good reason for it—whether that be market demand or market saturation or just a relationship that has gone sour.
Flooring America has recently explored getting into the paint business as well as the closet organization business. I take a step back and ask if there’s a good business reason for us to get involved with either of these and at present, I can’t give a solid yes so because of that we haven’t decided to take on either at this time. It really boils down to if we can make money with it and can our clients or would our clients appreciate us being able to satisfy those needs.
Mostad: Our first step in diversifying from floor covering was window treatments, which occurred years ago. Three years ago we entered into the kitchen and bath arena, offering an excellent line of cabinetry that has limited distribution and a wide array of styles and price points. Our K&B model has proven to be successful, with business nearly doubling every year. Eventually we added vendors and this winter we added a second location.
We continue to look at ways we can add value to our customers and take the products and services we offer to new segments of the market. Through consolidation of warehouse space we found ourselves with a few thousand square feet of available real estate next to our Floor Trader store. We made some changes in the space, creating a new showroom for a furniture store. Shortly thereafter we noticed our furniture customer was more interested in buying area rugs with their furniture than with flooring so we moved our rug racks to the furniture store, which was an instant success. Area rugs are a very important part of our furniture business.
Griggs: Again, we’re always on the lookout for expanding our offerings. We will soon have our Rubbermaid Closet display set up and are one of the pilot Flooring America stores to sell the new Tribute Paint line. I’m exploring bath cabinets but not kitchen cabinets.
Scott: We opened as a flooring store and within six months, we brought in window treatments.
How did diversifying your products change and/or affect your business model?
Dillabaugh: It has expanded the services we provide to our clients. So we’ve become a one-stop shop. If you want to renovate your kitchen, we can do that for you. You don’t have to go out there and hire a remodeling company. Now, yes, that has soured some of our relationships with local remodelers because they feel as though we’re taking their clients while they were buying flooring from us. Now they’re not going to do that, and I can certainly understand that.
However, when you look at the opportunity cost for us and the few remodelers we were working with, each year they would maybe bring us $30,000 in flooring business. Well, now we’re getting a $30,000 cabinet job and so it makes sense for us to have it come from us and also be able to offer it to our clients.
Our business mix is pretty diversified in itself—we have 40% retail, 30% in new construction, 25% commercial and 5% is insurance replacement. And so for the retail client who comes in and sees we have cabinetry or granite countertops or window coverings, they realize they can do everything with us and not have to visit another place. Our clients seem to really appreciate that. It’s also opened up new doors and new accounts to us that otherwise we wouldn’t have been able to land. The new opportunities we’re given from being diversified are a good enough reason in and of themselves.
Mostad: Diversifying product categories has the potential to increase sales and profits incrementally. If a business is conservative in the investment, wise in hiring and generous in support, the new categories pay off.
That being said, if focus is diverted from the primary business, sales are simply substituted with no significant benefit. A diligent management strategy that maintains focus on all elements of the business with processes and procedures that ensure excellent service are paramount.
Griggs: I must say the diversification of our core business helped immensely in surviving the recession. Every bit of additional business counts, especially when those expanded lines allow for potentially higher margins.
What are some of the challenges and/or opportunities of diversifying?
Dillabaugh: One challenge is the cost of entry. You can’t just get into cabinets one day and say, “Hey, we’re in cabinets now, come see us.” You have to have experts in the appropriate programs and in the appropriate design who have done this before.
The main challenges are getting into granite—the machinery needed to get into that can cost quite a bit and again, you need the experts. So those are really the biggest challenges: dedicating time and resources to diversifying our business but knowing in the long run, it’s going to work out for us. If you’re a business owner and don’t have that entrepreneurial attitude of wanting to get better and are okay with carpet and vinyl, your growth will stagnate. In fact, during the recession, those are the people we saw who had to close their doors.
It’s not just about diversifying your products, but diversifying your business model. We do a fair amount of commercial work and if you’re not doing commercial work, you’re really limiting yourself when adding to your growth opportunities. Some of the opportunities we’ve been given have been very beneficial to us.
Mostad: I had a college professor who taught me the “6 Ps of success” and those are as follows: “Proper Planning Prevents Piss-Poor Performance.” Proper planning includes building a strong relationship with the bank, searching out successful people in the categories and businesses for advice, researching potential pitfalls and seeking creative solutions. Proper preparation is seeking the wise council of mentors and hiring the right people to grow the new category. The greatest pitfalls are arrogance and ego. To think a business can be expanded and grown profitably without great people guarantees mediocrity.
Griggs: I believe one of the challenges is to not venture into something out of your team’s comfort zone. That’s why I try to expand into closely related products. For example, we sell laminate and granite countertops. That was really an offshoot of the number of clients looking for backsplash tile to finish their new countertops. That was an easy reach for everyone while expanding our market opportunities.
Another example is we sell all sorts of fasteners and staples in our ProShop. So when the opportunity came along to sell air-operated staplers and nailers we jumped right in that market and also sell all sorts of related products like air hoses, adapters, etc. to our installer and contractor clients.
Scott: As far as challenges go, it took some time to discover we had to differentiate between the products by developing departments. The sales team could not be a master of all and we had to appoint teams to specialize in each area. We also had to make sure the showroom was set up perfectly. Every customer walking in the door knew we sold flooring so we had to position the window treatment front and center to make sure our customers could not walk out of our store without knowing we also specialized in window treatments.
And, of course, with the theory of “go big or go home” it can become a significant capital investment. In terms of opportunities, we felt this would differentiate us from our competitors. With the decision to start with Hunter Douglas products we unknowingly elevated our customer base, giving us an opportunity to increase margins in our flooring department as well.
In hindsight, is there anything you would have liked to have done differently?
Mostad: I can’t say we would do many things differently. When we come to a bump in the road we tend to reevaluate, adjust and push forward. However, when entering into the K&B market, space requirements are not as large as one would think. Our first K&B department was built on a 2,500 square foot footprint. Our second store is only 600 square feet. While inviting displays are important, the success of the department has more to do with proper planning and quality people than with large showrooms.
Griggs: I am sometimes concerned we are a bit conservative in our outlook when it comes to expanding our product lines but am also far more comfortable with our approach.
Anything else you’d like to add?
Dillabaugh: If you do decide to diversify, you’ve got to have the right people in place to do it. As an owner, you can’t expect to fabricate granite yourself. You’ve got to have people that can do that for you—same goes for the cabinetry division. You’ve got to hire people that are smarter than you and let them run with it.
You also have to be willing to take bumps and bruises along the way and know for the first five years of a new product line you may be bringing on, you may not be profitable with it and that was the case with our cabinetry division. Now, a lot of that was tied into the economy and the recession, but it can take a while to pull a profit.
So if you’re not profitable by year three or four, don’t forget to see the forest through the trees because there was a reason you initially decided to do this, and it takes time for business to grow. Be patient, but also don’t lose sight of your initial goal of diversifying into that particular realm.
Mostad: Whether a sporting team or business, “you can’t manage what you don’t measure.” So measure everything, then break down that information and scrutinize it. In management, my favorite quote is “people don’t do what you expect; they do what you inspect.” Ronald Reagan said it as, “trust but verify.” We can put all the systems and processes in place but if we don’t follow up and manage them, they’re useless.
Griggs: I believe there are all sorts of opportunities to expand a store’s market. For example, the Main Street Commercial market is a great opportunity for everyone and yet many stores are afraid to go after that market. From my perspective, it is selling and installing the same products—that are probably already on your floor—to a slightly different customer.
We have had great success in Main Street. Again, our sales and installation teams are comfortable with the products and installation systems. The big difference is that most installation times are different but the client is willing to pay for that extra service when it’s necessary. This is just one additional example of what I’d call a related product or client base to our everyday business, yet it provides another opportunity to expand our market.
Scott: We truly learned from the bottom up. We started so long ago that we were able to grow with the technology in the industry, which helped us become very specialized in this area.