Hot tub dealers look at buying versus renting for expansion
Whether you need to add space to an existing store, move a store to a better location or add a store to a new market, one of the toughest decisions is if you’re going to lease or own. You may not think purchasing is within your reach, but these three retailers found ways to take on the risk.
Joe Mahoney: Capital Hot Tubs Adding a new location in a key market area
Joe Mahoney, owner of Capital Hot Tubs, just opened his third location in the Washington, D.C., metro area April 7. The nation’s capital is a unique place to sell hot tubs: Space is at a premium for commercial properties and in customers’ backyards. When Mahoney started looking for a new location to buy, his wish list had two items: the right area and affordability.
“We needed to find someplace close to where our customers are,” Mahoney says. “And because of GPS, you don’t have to be on the main street. It’s nice to be on the main street, but I can’t afford to be here. Commercial real estate is classified as A B C D; I think it’s reasonable to be in a B or C location because people will find you. But it depends on your market. There are places where, for the same money, [I] could get something on a main road or have five times as big a space. It depends on your budget and what you can do.”
Capital Hot Tubs previously had a third location that it closed during the recession. “Our lease was up, and we wanted to cut down on our overhead,” Mahoney says. As the economy improved, he knew the business risked falling behind. “My wife, Patty, and I, it scared us to death during the recession,” he says. “We had to work really hard; we had to cut back on a lot of stuff. We were gun shy. But the last several years we’ve been trying to stay the same, and we’ve had good growth — but I’m worried about someone coming in, being a better competitor and taking market share from us.”
The company purchased its main location in 2001 in Clarksburg, Maryland; rents its Fairfax, Virginia, store; and has purchased the third location in Rockville, Maryland. Mahoney says buying the first store was one of the best decisions they’ve made.
“I was really glad we were able to purchase a building, and I know not everybody can, but I never thought that we could,” Mahoney says. “In hindsight, we rented one of our buildings for more than 20 years. I could’ve bought that building in the amount of rent that I paid. In the new building, we’ll be paying ourselves rent, and our other building is almost paid for.”
Having that first building as an asset has given them a better relationship with the bank and other lenders, but he says the expansion isn’t just for the health of the bottom line — it also keeps employees inspired.
“Your employees want to be part of something big,” Mahoney says. “People want to feel they’re making a difference when they’re working. If they’re a part of something that’s growing and getting better, they’re happier. When you’re growing and profitable, you can renovate, buy new trucks and update the office,” things his employees have enjoyed and benefitted from.
Mahoney says most business owners don’t like to get rid of things until they are worn-out, but that “our customers are not like that. [They] buy stuff because it’s stylish, and they want to do business with people who are doing well. That’s part of the reason for our expansion.”
Mark Henderson: Pool World Moving an existing store for better visibility
Mark Henderson just finished moving his Coeur d’Alene, Idaho, location of Pool World into a new building, which opened March 9. He spent a year looking for the best location that was affordable and got good traffic. “An accountant once told me that often, small-business owners make more money on the real estate they own than they do in the business they run,” he says.
The Coeur d’Alene store was the last location Henderson didn’t own or have an ownership stake. Pool World has had a location in Coeur d’Alene for 13 years, and that spot had a lot of pluses: It was in the parking lot of a Home Depot and on a major highway. “But hard to access and hard to see because of zoning requiring a certain number of trees,” Henderson says. “You could be driving up the highway and, if you weren’t watching for the turnoffs, you could drive past the store.”
Though it could have expanded where it was, putting that store in the 6,000- to 7,000-square-foot range like its other locations, Henderson wanted better visibility. So he bought land and built a new store, which is across from a Lowes, only about 60 feet from the street and easy to see.
Henderson says the decision to expand and/or to buy is 50 percent numbers and 50 percent leap of faith.
In 2010 during the recession, an opportunity came up to buy the building that housed its central Spokane store and remodel it. “The debt service was less than the lease payment we had at the time,” he explains. “It isn’t that easy [of a decision] in every case, unfortunately.”
The company’s main location in the Spokane Valley opened in 1976. The other locations were opened almost 30 years ago, in 1987 and 1989, in north and central Spokane, respectively. “We were in a period of economic expansion at the tail end of the Reagan administration,” Henderson says. “And of course in 2004 we opened the Coeur d’Alene location. We were coming out of the recession of 2001-02, so it was also a good time to expand. And we hope we’re in a good economic expansion now as well.”
Henderson believes in owning his own buildings because of the control it allows in terms of cost and aesthetics. “In a recession, we were able to control the expense if need be,” he says, adding that some of its employees are also owners of these buildings.
He encourages other retailers who want to expand to consider the same. “They should believe in themselves and in their ability to expand and give people good service,” Henderson says. “The customers will come and follow them.”
Shawn Maynard: Bullfrog Spas of Northern Utah Expanding flagship store to make room for more swim spas
Shawn Maynard has taken a cautious approach to adding locations, using tent sales to test the market, and leasing in the area before buying.
Maynard has three locations mostly dictated by the geography of his region in Utah. With the Great Salt Lake on one side and the Wasatch Mountains on the other, “We have huge boundaries,” he says. “There’s maybe a 10- to 20-foot-wide strip of population by 200 miles.”
He owns his Ogden flagship store, where all service, deliveries and administration is conducted. There are satellite stores in Layton (he rents) to the south and Logan (he owns) to the north.
Maynard takes baby steps before he starts a new location and before he decides to own a building. He opened the Layton location in 2008 the day the stock market crashed — but he’d been doing tent sales in that area for awhile. “I got to the point where I’m like, ‘Wow, these tents are selling almost enough spas to support a store,’ ” he says. “We did a little 1,100-square-foot store in a strip mall. It probably took two years before it was self-sufficient.”
Eventually the Layton store became profitable, and the numbers looked better and better. “It was clear it needed to be a bigger, full-blown super-store showroom with spas and eventually swim spas,” Maynard says.
Though he moved into a bigger location, he still leases the space for that store. “It bugs the hell out of me,” Maynard says. “Every couple of years when it’s time to renew the lease, I spend a couple of months really thinking, ‘Is it time to move and build a new building?’ Maybe that time will come.”
With each expansion and property purchase, Maynard makes sure he’s not putting the rest of the company at risk. “That’s great if you can forecast that this location is going to work for you forever,” he says. “Sometimes that part of town evolves, and now it’s not great anymore. You want to move, but you own the building — so you’re stuck. There’s that ball-and-chain negative that comes with it. If it fails, it could impact the solvency of your company.”
With any new location, even a lease, he creates a new entity to help shield the rest of the business as a precaution. “It turned out awesome for me,” he says, “but had that location not worked out and I needed to close, it wouldn’t have impacted the health of the rest of the company.”
He built the Logan store big from the start; he’s expanded/moved the Layton location three times and expanded the flagship store in Ogden six times, including this year. The Ogden store is a 40,000-square-foot, 120-year-old warehouse called the Cannery that Maynard converted into retail space. Part of it houses his hot tub store, and the rest he leases to tenants.
If Maynard loses a tenant, he remodels to create more showroom, but only if he’s moving enough spas and other products. “The biggest expansion for me was the decision to go full blown into the swim spa market,” he says. “Not a lot of showrooms can display a swim spa. And if you want to own the swim spa market, you can’t just have catalogues — and you can’t just have one swim spa. You need to have two, three or four in your showroom.”