During the MBA program we were asked to write an account of a failed business. I took two - because they were small. The following text has not been published except as part of a Lotus Notes discussion thread. Nevertheless, you may find it interesting. The names have been changed for obvious reasons.
The first business was Blueberry Hardware.
Blueberry Hardware (1954) Ltd. was a second generation hardware store in a village which is now part of a coastal town in British Columbia. The owner had bought the store from his father in 1954, when his father retired and moved to the city. The store sold general hardware, fishing tackle, decorating supplies, floor coverings, furniture and appliances and anything else that sort of fit and that customers wanted. There wasn't a huge inventory of any one thing (it was a bit of a standing joke. The owner often said, "I just sold the last one. They're on order, I'll put your name on one when they come in." It usually was there the following week.).
The success formula was simple: Stock what you can; promptly and cheerfully get in anything the customer wants that you don't stock; provide free delivery; and (the critical one) don't spend money on anything you don't have to. The owner lived in the back of the store, his wife tended the counter when he was out delivering things with their only vehicle, the store pickup truck. Stores were closed in town on Mondays. Most Sunday evenings the owner would take the five hour trip to the city and stay with his father. Monday he would tour the wholesalers of Vancouver, filling his truck with merchandise for the store. He'd catch a late ferry and drive home with his dramatically overloaded truck. A simple business, but one that raised and educated a family, paid for the business and building, and built value for the owner's retirement. Well, retirement time came and the owner sold out to a new owner who now had Blueberry Hardware (19something) Ltd. The new owner seemed nice enough, but operated as if the business consisted of selling hardware to customers. He and his family didn't live behind the store. His wife did not help out behind the counter, so he either had to hire help or stay at the store. This meant that deliveries of heavy appliances were done, for a charge, by a local cartage company. It meant that only major things got delivered. No longer could the owner dash off for a few minutes to deliver some small item that a customer needed in a crisis. Nor could he rush over and help some housebound customer by performing a minor emergency repair. There was never any money in such repairs since he only charged for whatever parts the repair took, but he wasn't in the repair business, He only did it to "help out" a customer in an emergency, anyway. I digress.
I'm supposed to be talking about the new owner and the new owner didn't do any of those things. He was chained to his store... when he was there. If you wanted that last gallon of paint to finish the job before your mother-in-law arrived on the midnight bus it was best if you had thought of it before closing time. One of the other things the new owner didn't do was get sales of major appliances. If he ran just another store and wasn't there to help you, you might as well order your new fridge from Sears. It was cheaper and the cartage company was the same anyway. They didn't deliver it according to your schedule and they wouldn't help you out by taking away the old fridge like the old hardware store owner. But there I go talking about the old owner again. (I guess nostalgia runs away with you when you turn fifty!) The business didn't last long under the care of the new owner. Two or three years. Business expenses were higher. Freight and wages had been non-existent with the previous ownership. Personal expenses were higher. The new owner paid for a car and a house. The apartment behind the store was rented out, but it didn't come close to returning what the house cost. (Do you know how many nails you have to sell to buy a house?)
Service was poorer. Lag on small orders was longer.He had to wait until wholesalers had minimum orders to bring in items for customers. He didn't offer any added value to customers that would stop them from shopping around for major purchases. There was no risk that he would be in their homes helping them or delivering something and see the stove they had purchased from the competition. I think that if you asked him he would say that the time of the small hardware store was past. That people had more access to transportation. That they were willing to drive a few miles to find a bargain. That it was impossible to compete with chain stores and their economies of scale. I doubt if he would say that all business is a matter of keeping your costs low where you can and offering something to customers that they are willing to spend enough for that you can make a profit.
If you cannot keep your costs lower than your competitors, then you have to compensate by adding value for your customers. The new owner squeezed the business from both ends of the cost/value continuum. The business fell through when the ends passed each other. The building was sold to a stereo dealer. The next business improved the value to customers, but drove the costs past where there were enough customers to cover increased expenses that came with increasing inventory selection. Delta Auto Wrecking, was started in a cleared patch in the forest.
It was a cash business in all respects. Customers paid cash for parts and the owner only spent cash. If he didn't have it, he didn't spend it. His family lived in a small, old trailer at the edge of the clearing which he filled with cars one by one, for cash. He built a workshop with a flat, tar paper roof, for cash. Over the next few years he built a shell on top of the shop and had it finished off to live in, all for cash. He sold the old trailer. A few times he had saved up enough cash for a well, but each time the holes drilled were dry, so he hauled water.
It is always hard for anyone but the owner and, maybe, a forensic accountant to tell how much a cash business really makes, but this one did fine on paper, as well. The owner sold it when his family reached a certain age and he moved on to repeat his success formula elsewhere, starting with a bit more capital this time. The new owner bought the business on credit. He doubled the size of the clearing that the old owner had expanded slowly as he had cars to fill it. The new owner faced with this new clearing, filled it with wrecks he had shipped from Vancouver Island. He bought the cars with borrowed money. Nowhe could offer 'broader and newer' selection, even though with the teletype he had access to parts from all over western Canada. If someone was looking for a part and you could find it and bring it in for them they were not likely to make long distance telephone calls themselves.
Well, with all this money tied up in cars and pretty much thesame level of gross sales and with a loan to pay it wasn't long before more capital was needed. So that was borrowed. And water was a pain to haul so it probably seemed like a good idea to use some of the borrowed money to drill a well. But, wells are expensive to drill and even more so if your toddler drops an axle down it and the driller has to grind his way through that and... The new owner went back to logging. I don't know what happened to the loans and how the business transferred to subsequent owners, but I stopped in twenty years later while in town visiting, looking for a hubcap for my five year old car. A large, greasy bearded fellow said, "Oh, wouldn't have anything that new, but I could have it brought in on the bus."
If the town survives, I would expect to see somebody similar running a prosperous business out of his/her wallet in that location for many, many years. It breaks down to - don't make large investments in inventory that is not going to increase your revenue and don't spend your business' money on things the business can do without. You can couch it in terms of liquidity and solvency and inventory turns and ratios and all that, but the numbers are invented for the reality, not the other way around.
Copyright Paul W. Alton 2006 through 2016 All Rights Reserved
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