The Turnaround Ace

To Survive, a Manufacturer Reinvents Itself


Editor's note: This is one of a biweekly series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.

Problem: Staying Passive While the Market Falls Off a Cliff

The Red Roof & Renovation Co. in Vermont had been in business for three generations, but it was about to reach the end of the line. The owners, a brother-and-sister team who had inherited the company from their father and grandfather, had enjoyed steady sales and profits until about three years ago when they, like everybody else, got slammed by a precipitous decline in housing and property development. They sat by helplessly as they watched their customer base shrivel to almost nothing. From 2007 to 2009, Red Roof's sales dropped from $25 million to $10 million. By early this year, it was operating at a steep loss.

Red Roof manufactured materials for home and business repair as well as offering sheds, gazebos, and outdoor storage buildings, complete with water-filtration systems for wells. In the environmentally conscious and relatively affluent area of Vermont, these products did very well for the most part. But times change and most small business operators aren't prepared for it. People do well and they assume there will be no need for a Plan B. Rule No. 1 of any business: Always think ahead. Rule No. 2: Never assume. A good business owner must constantly be thinking like a chess player—two, three, four steps ahead. Instead, Red Roof fell several paces behind.

It got to the point where about a third of the company's 47 employees—many of whom had been with the business from the beginning—had to be laid off. Each month the owners—Shelley and Steve—had to white-knuckle it just to make payroll. As usually happens in these situations, the siblings mortgaged their homes, cashed in their retirement funds, and maxed out their credit line at the bank. They kept hoping another contract would come in by the next quarter, but of course it didn't happen. Their business strategy was to simply survive until the economy turned around. Meanwhile, their own roof was caving in—figuratively speaking.

Solution: Reinvent the Business to Stay Ahead of the Times

When you're too close to a problem, it's amazing what you don't see.

Shortly after we began to assess Red Roof, we found out that among the materials the struggling company sold were eco-friendly insulation and solar panels. These materials could be marketed as pollution-free alternatives to traditional heating and cooling systems that customers could use to save money over the long term. This was a message that needed to get out. We started a marketing campaign to target more commercial property owners on how they can save money by switching to the products that were literally collecting dust in Red Roof's warehouse. Since Red Roof was now offering fuel-efficient alternatives, it turned out it could classify itself as a "green" operation. That meant it was entitled to a government grant! Before we applied for the grant, we even changed the name of the company to the "Red Roof Clean Energy & Construction Corp." We put the application through and Red Roof was approved to the tune of $500,000.

We used that money to retrofit the factory for the future, so that it could produce more green housing materials, including insulated glass. We beefed up its solar-panel production, so that it made up more than two-thirds of output.

This created an opportunity to raise badly needed cash. We had Red Roof sell off some of the outmoded equipment that was wasting space on the factory floor. We suggested having a blowout sale on items that weren't selling—to get rid of them and at least bring in some cash. We also recommended some budget advertising—just local stuff like classified ads and flyers. When it comes down to crunch time, you do anything to stay alive. The liquidation helped Red Roof raise close to $100,000—enough at least to pay its back taxes and satisfy its bank manager, who was about to pull its line of credit.

The extra cash, combined with the grant money, kept Red Roof alive long enough to rebuild its profits. Five months later, the company has three new contracts and is on track for a 30 percent improvement in sales. As commercial property and home owners get more incentives to go green with energy and look to save on fuel costs, business will continue to grow. Red Roof's already becoming known in the region as the place to go for energy-efficient materials. It has even hired back many of the old employees, and is laying plans to expand its operations.

Owners Shelley and Steve were ecstatic with the changes, but we reminded them that, as good as things are, it's essential to stay on top of new developments and prepare for the changes that are bound to occur.

Bios_george_cloutier_0722
Cloutier is the founder and CEO of American Management Services, a management firm that specializes in financial turnarounds and profit development for small and midsize businesses.

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