Nailed It Home Improvement Case PDF

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Nailed it home case which is a case analysis...

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Nailed It Hardware Introduction Dave Wilton and Peter Carayannopoulos were great friends who had talked for many years about becoming financially independent by owning their own business. One day Peter picked up the phone and heard Dave enthusiastically told him that Nailed It Hardware was for sale and that "the price is right". Peter replied, "That's great. We don't have any experience in that kind of business but at least we won't have to prepare a plan and work as hard as if we were starting a new business." Dave and Peter combined all of their personal savings and lines of credit, and on July 30, 2017 they proudly posted a sign that read, “Come on in – the new owners want to help you make your home project a success” on the door of Nailed It Hardware. Dave and Peter were excited about being owners and hoped to eventually be able to give their attention to the business full-time. They dreamed of the business becoming the community hardware store where local do-it-yourselfers and weekend warriors could go not just for all of their hardware needs but also for personal service and good advice. Early in 2018 they had expanded the product offering to increase revenues in order to achieve this objective. However, in August 2019 Dave received a phone call from the accountant informing him that Nailed It’s profitability was not increasing as desired. She advised them that if he and Peter didn’t develop a solution to address this it was unlikely the business would ever earn enough to allow them to become full-time business owners.

Canadian Home Improvement industry The Canadian home improvement industry sold a variety of products for building maintenance and improvement. In 2019 it generated revenue of $27.0 bn. Industry revenues had grown for several years prior to 2019 due to a strong housing construction market and a strong economy and low interest rates that encouraged private spending on home improvements. The industry was expected to continue to grow for the next five years, although at a slower rate. Although demand was sensitive to the amount of housing construction and disposable income, homes would always need repairs. Not surprisingly, key success factors in the industry were geographic proximity to customers, customer loyalty and service quality. The latter two success factors also meant that a wide variety of products and experienced work force were critical for success. The Canadian industry consisted of roughly 1,800 stores of varying size. The industry had a moderate level of concentration; in 2019 the top two companies Home Depot and Lowes accounted for 17.0% and 13.0% of the industry revenues respectively with 400 stories between them. The remainder of the revenues and stores were small and medium businesses that faced increasing competition from big-box stores. Because the products sold were homogeneous this meant greater price-based competition. This resulted in lower contribution margins for smaller stores because they couldn’t raise prices and at the same time paid more for the goods they sold because they were ordering smaller quantities than their larger competitors.

Consumers were either professional contractors or individual consumers. The non-professional consumers made up approximately 99% of the market and could be divided into do-it-yourself (DIY) which created the greatest demand, followed by do-it-for-me1 (DIFM). Baby-boomers which made up the largest consumer group were expected to begin switching from DIY to DIFM, creating an opportunity for revenues from complementary services. In addition, many businesses expanded their offerings to include products such as lawn and garden supplies that would appeal to the DIY consumer. See Exhibit 1 for a segmentation of industry revenue.

Background Information Dave Wilton was a dedicated body builder who worked for a local gym as a personal trainer. He had a wife, two young children and a dog. Peter was a professional arm wrestler who competed for titles and prize money with three kids – no dog. Neither had any business experience but they both believed they had what it took to be entrepreneurs, and they had always dreamed of owning their own business. They were both hard workers and comfortable with taking on calculated risks. They had both been searching for several years for a business opportunity to combine with their existing careers with the dream of the business eventually earning before-tax profits of at least $1 million so that they could retire from their careers and enjoy their families full-time. Nailed It Building Supplies was a family-owned business that had existed in the same location, near a growing middle-income residential area. In its 25 years of operation, it had built up a considerable number of loyal customers. This was part of the appeal to Peter and Dave – they didn’t just want a business that was profitable and growing. They envisioned a business where the employees knew the loyal customers by name and had a reputation for knowledgeable salespeople that offered advice and personal attention to ensure the success of the projects their customers were working on. The previous owners sold the business because they wanted to retire. An examination of the records of the business showed a small drop in net profit in each of the last two years (see Exhibit 2 for financial statements). When questioned about this drop, the owners replied, "we can attribute this to our lack of commitment to the business during these years." Peter and Dave decided to retain all 15 of the existing sales people because they had been with the business for several years and were as much a family as they were a sales team. Peter and Dave could see that they cared about the business’ success as if it was their own and felt this loyalty should be valued. Eleven were full-time, although four of these were individuals that were happy to work part-time hours if the business didn’t need them. There were an additional four part-time employees. The employees in the store often out-numbered the customers (the industry average was about one employee for every $250,000 to $300,000 in revenue), but they had been with the business for at least six years each, had a lot of expertise in home improvement and knew the customers well. The customers consisted of a few builders and renovation professionals but catered primarily to individual customers ranging from people who didn’t know which end of the hammer 1

DIFM customers purchase materials and hire others to complete the projects

to hold to those that would tackle any kind of project. The individual customers all appreciated the knowledge of the employees and the quality of service they received, they knew the employees by name and the employees often greeted them with questions about the last project they worked on which was why they often came to Nailed It instead of bigger companies. Nailed It wasn’t generating enough profit to provide Dave and Peter with the income they would give up if they left their full-time jobs and they didn’t have the time to run the business so they took turns dropping in on the store and would assign a full-time employee each day to “be in charge”. The employees cared a lot about the business and worked hard for its success. They suggested ideas that they had seen at competitor’s stores or were inspired by customers. The pricing objective of Nailed It Hardware was to obtain satisfactory profits. This was to be achieved by setting prices to cover costs plus a "reasonable" profit. However, on numerous occasions profit margins had to be reduced to keep prices at the same level as the competition's. The first six months of operation were busy, despite the fact that there was a large drop in housing starts, a downturn in the construction industry and renovations, and a large increase in interest rates, resulting in increased borrowing costs. The downturn in the local technology industry and the general increase in unemployment added to the already unhealthy economic situation. New home sales were expected to drop as a result of these conditions. However, existing homes would still require maintenance and home owners who couldn’t afford to move often chose to renovate their existing homes. The store had a lot of space, allowing for attractive product display and project examples. There was an unused section of the storage space and a generous outdoor area that could easily be converted to sales space to generate some more revenues. Dave and Peter were eager early in 2018 to accept an employee’s recommendation to add appliances to the existing offering of tools, paint and lumber. They wondered whether appliances was the right choice but didn’t have time to dig deeper when the employee pointed out that industry research showed that appliances were the next most popular segment (see Exhibit 1). The space didn’t allow for a large variety of appliances but Dave and Peter believed a few of the most popular models would be sufficient. Even so, purchasing and carrying the inventory of appliances increased the Other expenses significantly (see Exhibit 2).

Current Situation Immediately upon picking up the income statement from the accountant Peter realized that something had to be done. He and Dave sat in the meeting room and studied the industry reports that they had pulled, discussing their options. “Should we double down and just give the appliances some more time?”, asked Peter, “I don’t think we can pull back our offering given that it’s a key success factor in this business.” “Interesting”, responded Dave, “I was actually going to suggest we reconsider the products we offer because they aren’t exactly flying out the door. Should we be selling something else or should we be offering other services?”

A final alternative, and the one I think both of us find the least attractive," said Dave, "is to sell the business while we can still get our money back." Peter and Dave realized that there was little point to continuing if they couldn’t get the profits to a level where they could achieve their financial independence. They agreed that they were okay to each use their credit lines to spend up to $100,000 if that is what was needed to achieve their dream rather than exiting the business. Could they come up with a strategy that would allow them to achieve their dream of being their own bosses and owning the community’s home improvement store where you entered as a customer but left as a friend?

Exhibit 1 Home Improvement Industry Product and Services Revenue Segmentation $27 bn revenue in 2019

Products Lawn & garden Tools, paint, lumber Appliances & housewares

% Industry revenues 25.00% 55.00% 32.00%

Contribution margin

Demand

40.00% 35.00% 20.00%

spring/summer year round fall/winter

Exhibit 2 Nailed It Hardware Income Statement 2017

2018

2019

Nailed It % of revenue

Industry average % of revenue

68.00%

65.00%

Revenue Sales Cost of Sales Gross Profit

$3,500,000.00 $2,292,500.00

$4,750,000.00 $5,061,400.00 $3,230,000.00 $3,436,311.00

$1,207,500.00

$1,520,000.00 $1,625,089.00

Expenses Rent Wages and Benefits

$100,000.00 $675,000.00

$105,500.00 $700,000.00

$106,280.00 $760,000.00

2.10% 15.02%

2.10% 14.00%

Marketing Other

$40,000.00 $269,750.00

$41,000.00 $427,500.00

$43,400.00 $431,500.00

0.86% 8.53%

3.00% 6.80%

Net Profit (Loss)

$122,750.00

$246,000.00

$283,909.00

5.61%

9.10%

Nailed It product mix Hardware & building supplies

Sales $4,327,497.00

% of Sales

Contribution

Contribution margin

85.50%

$1,492,986.00

34.00%

14.50%

$132,103.00

18.00%

Appliances & housewares $ 733,903.00 $5,061,400.00...