What Residential Systems Dealers are Doing to Cut Costs and Stimulate Sales in a Down Economy

There isn't a company in our industry that has not been affected in some way by the economic downturn of the last two years. Though some regions of the country have been more adversely affected than others, no one has been spared the task of re-evaluating their business plan and making the necessary adjustments, some drastic, some minor, to insure their survival. This kind of extended down cycle tends to expose a company's weakest links, and compel owners to find the leaks, and fix them, fast.
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There isn't a company in our industry that has not been affected in some way by the economic downturn of the last two years. Though some regions of the country have been more adversely affected than others, no one has been spared the task of re-evaluating their business plan and making the necessary adjustments, some drastic, some minor, to insure their survival. This kind of extended down cycle tends to expose a company's weakest links, and compel owners to find the leaks, and fix them, fast.

For most residential systems dealers, the thorniest problems exist on the operational side of the business. Sloppy inventory control, inefficient internal communications systems and incomplete project management procedures can suck the dollars and life blood from a company whose sales revenues are in decline. Many dealers who have always done well selling large-scale systems have struggled this year when the high-end of the market went soft. Lacking expertise in market strategy and sales management, they have been unable to shift gears to attract smaller scale projects and builder-driven sales. After so many fat years, many custom shops forgot how to mobilize a marketing effort and use direct mail and customer events to stimulate much needed new business.

The good news is that tight times often produce smarter, more profitable solutions to chronic business problems. Companies that manage this period well, pruning costs wisely will emerge from the downturn leaner, smarter and ready for growth. How are custom and hybrid custom/retail dealers coping with this sluggish economy? To find out, I called several dealers last week and asked them two questions:

1) What are you doing to contain costs?
2) What are you doing to stimulate new business?

The answers I received were heartening. Though there is still a lot of cost cutting happening, there is also new energy for stimulating new business. Dealers are clearly working harder, and though many are still down or flat, I heard enthusiasm for new projects and a genuine hopefulness for the future. More than a few dealers I spoke with are scouting new locations to take advantage of low commercial real estate prices. Others are spending more on infrastructure, marketing materials and hiring new talent. At least one dealer in each market reported robust sales, with projects lined up months in advance (though this was not the norm).

As George Liu, of Tampa-based Audio Visions South said, "For months when we were down (the first time in several years), I though it was just me, and started to feel depressed. When I had a chance to talk with other dealers in my area who are also down, I realized how much of the problem was based on local market conditions. It made me feel like I was not alone, and gave me the strength to fully commit to working on my company to prepare us for better times."

So what are custom dealers doing to cut costs and streamline operations? Inventory is Cash. Nearly everyone I spoke with is paying much closer attention to what and how much they buy. Mark Gussler of Future Sound in Burlingame, California, reported looking at their line selection in a much more focused way, cutting out all peripheral and unnecessary products. Robert Cesarini of Sound Concepts in Rochester, New York, says they are trying not to pick up any new lines. To this end, they opted not to attend CEDIA EXPO this year, to save travel expense and help avoid the temptation.

Negotiate Everything with Vendors. David Wexler of the Little Guys in Glenwood, Illinois, added, "We are being much more cautious in everything we buy, not taking the first offer from vendors, but negotiating for better terms and sometimes pricing. We've been forced to narrow our focus, trying to buy controllers and in-walls from the fewest possible vendors, in essence, trying to be much more important to fewer vendors. As always, we believe the key to our success lies in building great relationships with our manufacturers. Sometimes this involves being brutally honest, but people appreciate it, and the long term results become truly win-win."

Just-in-Time. Charlie Bock of Stereo Barn in Wyomissing, Pennsylvania, concurred, "We are making every effort to order 'just-in-time' for big projects, which means we align ourselves with those vendors like Equity who we know we can count on to have the right inventory when we need it. We also make a habit of running a report that shows our top selling 100 SKUs to remind us that, day in, day out, 70 percent of our business comes from 30 items. This kind of reality check stops us from buying slower moving items which we think we need, but then don't sell for months. We can concentrate on our top three AV receivers and top three speakers. The difference in cash tied up in on-hand inventory is significant."

Staff Review. Next to inventory, employees represent the next largest dollar investment for every custom owner. Though everyone I interviewed with agreed that great people are like gold when business is booming, many companies make the mistake of adding people to solve problems instead of working out more efficient operating procedures. Said Liu, "This year we haven't really eliminated jobs, per se, but we have made an effort to limit overtime, and are less tolerant of anyone who is not performing."

Gussler added, "We aren't hiring any peripheral people, and have more employees trained for multiple jobs. For example, someone who was originally hired to work in the warehouse to support retail sales has now been trained to program remotes and support custom projects when retail is slow. If we're not busy on a certain day, we send installers home."

Wexler said that they are about to move to a four-day, 10-hour-a-day workweek for installers, having calculated the percentage of time his people spend driving to and from a work site. In good times and bad, Wexler stressed however, his company is like a family. Their people are their lifeblood. When things are slow, everyone suffers. When times are great, everyone celebrates. They recently had cause to live through a natural disaster when near tornado force winds ripped through their area in the middle of a Scratch and Dent Tent Sale.

"The tornado sirens went off, and we told everyone to drop everything and head inside the store," Wexler recalled. "Meanwhile, 60-70 mile an hour winds shook and lifted the 60 by 30-foot tent until it collapsed. The damage was enormous, and though we filed an insurance claim, we still lost significant money (though we did get rid of our entire unwanted inventory!). Bottom line, we pulled through together as a team, everyone pitched in, and here we are to tell the story."

With sales up, Stereo Barn has added office personnel and new computers and software as a means to streamline operations for the future. Charlie Bock also invested in training outside custom sales people by enrolling them in PARA's six-week teleseminar, 'Get Clients Now!' to great results. Said Bock, "Several weeks into the seminar, I started to notice a dramatic upturn in the number of proposals being generated and a new excitement and energy in my people for making calls and appointments to generate new business. It was like having someone take over the sales management function for my outside sales staff."

Cost-Cutting Initiatives and System Controls. During the fat years, it was easy to overlook details of cost control and operating system snafus when sales were brisk and everyone was dashing around trying to complete jobs. Tighter times require a different mind set, and a much closer attention to every expenditure. As Liu commented, "This year has forced me to better understand my role as an owner and manager, keeping a much tighter rein on cash flow, buying, and accounting, and spending more time with both installers and sales people. We have become much more stringent with change order procedures and project planning. With the higher end of our sales off a bit, we are doing more business with contractors and builders which has forced us to become more efficient in everything we do."

What are dealers doing to promote new business? In an economic downturn, every business must spend some months tightening controls and trimming the fat, taking immediate actions to slow the rate that cash goes out until more starts coming in. Everyone knows, however, that you can't really move forward when all of your energy is spent cutting back. As technology writer Gary Hamel says, "Retrenchment can buy you time, but it can't buy you a future. Opportunities become the antidote to fear, but you have to go out and find them."

After nearly a year of retrenchment, there comes a point when it is only smart to take at least 25 percent of the energy and resources spent on cutting back, and aim them toward finding and creating new business. So what are dealers doing to increase sales? Bock's Stereo Barn continues to do a lot with direct mail. "In particular, we use the PARADirect/Fidelity catalogue, which for the money, does more to make us look professional and substantial, to both our customers and our staff, than anything else we do," he said.

Recently, on a warehouse clean out binge, Bock and his staff stumbled upon an old vendor display that they had never taken out of the box. "It was a metal TV tree that had arms and holders for six TVs," he said. "At the time, we had our plasmas spread all over the store, and it never looked like we had as many different models on display as we did. We used the tree to mount six plasma sets, put it in the front of the showroom, and immediately saw a huge reaction from our customers who remarked, 'Wow, you guys have a huge selection.' Just another reminder that sometimes even a small change in merchandising can create big results."

Robert Cesarini of Sound Concepts said, "On a daily basis, I now comb our customer list for new business, spending time making notes on current customers (what they bought, what music they like, what they may be looking for in the future, etc.) and using past notes to jog my memory as I send personal cards and calls old customers to entice them into the show room."

Several dealers are stepping up their presence on radio, most using classical, jazz and public broadcasting stations. David Wexler says they make an extra effort to get to know the radio personalities who then give them extra plugs and mentions beyond their scheduled ad flights. He and his wife, Evie, host a weekly one-hour radio call in program, "The Little Guys Hour," answering questions on home theater, custom, audio and video which helps reinforce their credibility in the local market. They have also installed a full surround sound home theater system in a local Children's Hospital, a project that has created a lot of good will and exposure, generating PR in several local newspapers, with doctors and nurses stopping by the show room. But most importantly, "On Hospital Night, we feel gratified every time we see the look on the kids' faces when, for even one hour, they can escape the reality of their illness," Wexler said. "This is truly its own reward."

The Little Guys have also had very good luck partnering with key vendors for customer evenings.

Bruce Hirsch noted that Future Sound AudioVideo has approached the downturn in an aggressive manner, building out a town home rental unit abutting their store into a complete three-story life style presentation for custom systems and services. "It was a big investment, but one that is already paying off," he said. They firmly believe there are big opportunities for expansion in this down market as they continue to try on new options.

Gussler added, "The custom part of our business continues to move forward, showing signs of hope with larger average jobs than a year ago." Wexler is also noticing a new openness to buy from customers who may be delaying buying decisions, but they are not saying 'no,' just 'not yet.'

What is the upshot here? Most dealers seem to sense that the economy is turning, slowly, but surely, toward a more robust fourth quarter. Only time will tell, but it would seem likely that those dealers who have invested the time, ingenuity, and resources towards improving their operations will benefit and carry the industry forward in the not too distant future months and years. As Bock commented, "Even though we are up in sales, I'll be happy to break even this year, knowing that the money I spent on upgrading our infrastructure and training our people leaves us poised to take greater advantage of the economic upturn, when it arrives."

Deborah Smith is executive director of PARA.

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