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The Flawed Nature of the Custom Industry

Im a manufacturer in the A/V business, selling for both custom installation and retail operations. Ive noticed over the years that CI companies just cant seem to stay on track. One year theyre up, another down, whereas my retail customers show more predictable growth. Is this a sign that the CI business is fundamentally flawed?
Name and address withheld

Yes. The custom installation business, as it currently stands, is fundamentally flawed. And your question is a big one that will take me several columns to provide a proper response. That series begins this month.

Lets start with a better understanding of the problem. First off, its hard to characterize an industrys health by looking at its profitability picture. For example, just because an industry has cyclical profitability doesnt mean its fundamentally flawed. Youd be hard pressed to call the domestic airline industry, for example, fundamentally flawed. Yet profitability exhibits wild swings year to year.

Airline profitability is largely dictated by the price of fuel. Airlines with operational inefficiencies are unable to profit during times of strong competitive downward pressure on ticket prices coupled with rising fuel prices. And yet some airlinesparticularly newer low-cost carriers (and those who buy fuel futures)are able to weather the fuel price fluctuations. Ask Jet Blue if the airline industry is fundamentally flawed, and theyll tell you that Delta and United are fundamentally flawed, not the industry.

If you can look at your dealer base, and categorize a group of CI dealers who run their businesses in a similar fashion, and show year-to-year fundamental growth in sales and earnings, then its safe to say its not the industry thats flawed, but only those companies who are managed poorly.

Heres another analysis. Look at the satellite radio industry today. The two major players have yet to make a profit. And yet theres wild speculation about their growth potential and ultimate value. Heres a case where an industryalbeit a capital-intensive industrycan exist without making a profit during its start-up phase and yet still be a fundamentally sound business model. So its safe to say that an industry in the beginning of its life can be unprofitable, yet fundamentally on track. Is that the case with the CI business?

Its fair to say that the CI industry is still in its beginning stages. Most CI dealers joined the fray in the past five years, so we may be seeing the pains of a start-up industry. Look at your retail dealers; I bet most of them have 15, even 20 years in the business. How profitable were they in year five of their operations? Its very likely their businesses looked a lot like the current CI business does today.

In the early years of the automotive industry, there were thousands of car manufacturers. Thousands. Through attrition and mergers we now have two domestic manufacturers. Obviously, not all car makers were profitable. Does this make the industry fundamentally flawed? Of course not. Today we have thousands of CI businesses. One school of thought says that through attrition and mergers, well see fewer, but larger, CI companies operating in the not-too-distant future. Perhaps.

Now lets look at an industry that was profitable for a period of time, and then virtually disappeared overnight: Internet cafes. What happened? The cost of arranging residential dial-up service plummeted, erasing the value of Internet cafes. What looked good, to the nearsighted, had no longevity. Thats a case of a short-term profitable industry.

So just looking at an industrys profitability is not enough information to tell if it has strength. Its more important to look at the marketing, managerial, and operational challenges that an industry faces, and make a determination if it is viable, and what strategies are required to show consistent profitability.