In his first year of operations of a newly acquired small business, Mike Robertson faced a substantial loss due to the creeping parity between the U.S. and Canadian dollars, and the changes in the price of his input raw material.
Although he had anticipated not breaking even in the first year, the $300,000 loss was a surprise. Mr. Robertson started thinking about his strategy for the next year. He was acutely aware of the seasonal nature of his business and the fact that there were little to no barriers to entry for competitors. His business background led him to look into hedging options for his receivables and also for locking in the price of the raw material.
He had to make a decision fairly soon, as time was not on his side: his major customers usually ordered well in advance of the season.
After working for two decades in the hospitality industry, in 2009, Mr. Robertson bought Avalon Wreath Co. Inc. It was a 40-year-old producer of balsam Christmas wreaths for the wholesale, fundraising and direct mail segments in both Canada and the United States. Based in eastern Canada, the company operated three plants in the region, where it employed in excess of 250 people during the seasonal peak. The major customer base included very large grocery chains down to small garden centres, with the majority of the customers based in the northeastern United States.
To avoid increasing input costs from higher prices for metal wire used to make wreaths, Mr. Robertson last year pre-ordered the entire season's stock from a Canadian company. Unfortunately, the metal prices then saw a significant decline of almost 20 per cent, resulting in a higher-than-competitive input price for his product. The second shock to his bottom line was the increasing value of the Canadian dollar, which cut into his already low margins.
The recent economic situation and its impact on new orders for the current year was also of concern.
As Mr. Robertson evaluated various options, the easiest thing to do was to raise prices to reflect an at-par U.S. dollar. However, he was concerned about customer reaction given the competitive nature of the business and the economic climate. He explored the hedging option but found out it was not financially feasible. His discussions with the metal-wire company to have flexibility in his purchases also failed to go far, since he was a small customer.
It was critical for the survival of his business that Mr. Robertson develop a plan allowing his fledging business to push back the red ink and start making some money.
He decided on a three-pronged strategy. First, to increase prices slightly to accommodate an at-par U.S. dollar. Second, to focus his attention on moving away from low-margin wreath products and into high-margin items where the barriers to entry were also higher. Third, to hire a salesperson to aggressively pursue marketing opportunities within Canada.
The strategy seems to be working. Mr. Robertson has received orders from returning customers for both his existing products and the new high-margin products. The Canadian sales push has also resulted in some significant leads.
The jury is still out, but he's optimistic given the results so far.
Special to The Globe and Mail
Nauman Farooqi is an associate professor and chair of the Research Ethics Board in the Ron Joyce Centre for Business Studies of Mount Allison University.
This one in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Your Business website.