THIS CAN'T BE THE PLACE. THAT was my first thought.
We'd already driven 30-odd miles west from Grand Rapids -- down bumpy back roads, past cornfields still stubbly with last season's cuttings, apparently heading straight for the shores of Lake Michigan itself. Now Dick Keener was pulling his red Oldsmobile into a tiny parking lot in front of a small, drab, shedlike building. The image didn't quite fit. Keener's new company was planning to make high-design, very expensive office chairs, the kind a glitzy New York City interior designer might order for a new corporate conference room. Somehow I expected to see a high-design, very expensive -- yes, even a little glitzy -- installation.
My mistake. I must have spent too much time among the splashy start-ups of Silicon Valley and Route 128, where the first order of business is to rent a building with manicured lawns and smoked-glass doors. In the office-furniture industry, I soon realized, you can work out of a barn, so long as it's within reach of a truck and telephone line. And the less you spend on high-priced land and fancy buildings, the more you can spend where it counts -- on design, tooling, and marketing. This was the place, all right: Keener pointed to the muddy field out back, where the outlines of a 12,500-square-foot factory were staked in the dirt. In just a few months, he said cheerily, a preengineered steel plant would be erected there, and Keener-Blodee Inc. would be ready for production.
Production! Getting there, admittedly, was taking longer than Keener had expected. In June 1986, at age 57, he had taken early retirement, ending a 31-year career with American Seating Co., a large manufacturer based in Grand Rapids. By January of '87 he had grown tired of "Europe and golf," and had begun talking with longtime friend Leif Blodee (pronounced Blo-DAY), a Danish-born architect and furniture designer, about the company they had often imagined starting. Maybe now was the time. Both men's children were grown. Old age was still a decade or more away. They knew -- and were known in -- an industry.
"Eight to 10 million in 8 to 10 years," thought Keener, envisioning a pleasantly symmetrical sales goal. Then sell the company and retire.
Over the next several months, the partners' plans began to take shape.
WHEN AN INSURANCE AGENT OPENS a new office, he's likely to drop by an office-furniture dealer's showroom and pick out desks and chairs himself. When an insurance company opens a new office, it hires an interior designer (or an architectural-design firm) and gives the designer a contract for the whole shebang. The designer, in turn, develops a "spec" -- instructions to the corporate purchasing department about the types of furnishings needed to execute their design. The folks in purchasing then place orders through a network of manufacturers, reps, and dealers who specialize in commercial and institutional furnishings. The "contract furniture" business, as it's known, is the industry in which Keener and Blodee had spent their careers -- and in which they proposed to start their new company.
Not that they intended to take on the giants. Big manufacturers such as Steelcase, Herman Miller, and Haworth -- all of them headquartered in western Michigan -- dominate much of the contract market with endless lines of desks, chairs, and the ubiquitous slotted-panel, "open-plan systems" used to turn unbroken office space into "componentized" cubicles. But there are plenty of niche players in the industry, simple because a designer doesn't impress that special client by specifying, say, yet another Steelcase conference-room chair. Let's get something a little nicer looking, she might think. Let's get something . . . in wood! Warm, natural, elegant in its lines, yet well crafted and highly functional.
Keener and Blodee were counting on just such a train of thought. For them, high-design wood-and-upholstered chairs made a natural product line. Blodee already had some drawings on his worktable, even a couple of hand-built samples. Tooling and equipment costs would be lower than with steel or plastic, and gross margins would be relatively high.
Nor did this particular niche seem over-crowded. A few modest-size U.S. manufacturers -- such as Westin-Nielsen and The Gunlocke Co. (recently acquired by Chicago Pacific) -- were doing pretty well; so was Rudd International, a Washington, D.C.-- based company that imports stylish Scandinavian furniture. But the dropping dollar was already beginning to hurt the imports. Besides, Keener knew from his days at American Seating that designers were always looking for something new and different.
Different, he figured, is exactly what Keener-Blodee would give them. Unlike most domestic manufacturers, the company would work exclusively in laminated wood. Laminates are stronger than comparable thicknesses of solid wood, and thus permit long, lightweight, curved members -- a "European look" effectively captured by Blodee's design. Finely detailed joinery, traditionally associated with European craftsmen, would reinforce the continental image; so too would Keener-Blodee's marketing materials, right down to the accent marks gracing the two founders' names on the company logo. But the prices, turnaround times, and reliability would be all-American.
"Everything's designed to give the idea we have a European heritage," says Dick Keener. "Designers love the European style; they just can't get it. We give them the look, but we're made in the USA."
If he was right about the concept's appeal -- and some early evaluations from designers convinced him he was -- creating the new company would be simply a matter of building these highly crafted chairs economically, then persuading the interior designers of America to specify the products of a new, untested supplier. On, yes -- and raising money. Something close to half a million dollars, Keener thought, would do the trick.
MANUFACTURING. MOST OF Keener-Blodee's products will be made of laminated oak. "Sixty percent of [wooden] office furniture is oak," explains Keener, "and our products have to fit in." But customers will be able both to specify finishes and to order upholstery fabrics from the widely used Maharam catalog and others. Maharam ships the fabric to Keener-Blodee's factory; inventoried parts are assembled and finished; the chairs are shipped. Turnaround time: six to eight weeks.
That process is little different from any other chair manufacturer's, though most companies are not offering partial-selection, "quick ship" programs, with chairs delivered in a couple of weeks. But Keener and Blodee are counting on fine construction as well as European styling to distinguish their products in the marketplace. In their plans for manufacturing, they hope, lies a competitive edge.
Take the "A" chair, for example, a light, stackable chair that will be among the company's first products. The legs are 14-ply laminates, continuously curved. A tapered maple insert holds the crosspieces that support the seat. The crosspieces are morticed into the maple. Then anchored in place both by glue and by tiny wedges, much like those in an ax handle. Just the kind of craftsmanlike detail, Keener says, that designers will love.
But Keener and Blodee aren't budgeting for many highly skilled Old World craftsmen; nor would their production schedule allow for much in the way of hand labor. And until they get bigger, it wouldn't be economical to buy the numerically controlled machine tools that could make all the complex cuts automatically. So Blodee, a tinkerer and inventor with several patents to his name, has rigged up some intricate and effective jigs and fixtures. Using them, he says, even a semiskilled worker can quickly cut a perfectly tapered mortice and a perfectly shaped tenon. He has already developed a machine to make the cuts for the wedges and a custom-made press to drive them in.
"The uniqueness of design and construction gives us a product with integrity that designers will respect," asserts Keener. He also believes competitors would find it a difficult design to knock off: they'd either have to ignore the fine detail or produce an outright copy, which he thinks customers wouldn't buy. "Designers would recognize a knockoff as not the same chair," he scoffs.
If things go according to plan, such integrity will not come at too high a price. The partners have budgeted labor costs at a base rate of between $7 and $8 an hour, and are planning on spending only $135,000 for additional machinery in year one. These numbers, in turn, allow for competitive pricing of products. The "A" chair, for example, will list for between $316 and $460 depending on fabric, roughly comparable to Westin-Nielsen's wooden stacking chair at $270 to $500. Even with the 45% to 55% discounts that are standard in the industry, Keener-Blodee's gross manufacturing margins will average roughly 40%.
MARKETING. TO A NOVICE IN THE business, Keener-Blodee's marketing challenge might seem well-nigh intractable. Too new to interest dealers, too small to set up its own showrooms, the company must somehow catch the eyes of customers who are pressed for time and swamped with product offerings. What makes that task merely hard, rather than impossible, is the fact that designers do indeed watch for new items. "We're not buying a service, where we have to stay with the same people," says one. "We're buying a product, and we want to know what's new, what's exciting visually."
Keener, who had worked in marketing much of his life, put together the marketing plan. Beginning nearly a year ago, he interviewed 40 manufacturer's reps, eventually signing 8. By the end of 1988 he plans to add 3 more, which will give him coverage of virtually the whole country. Why would a rep sign on with a small startup? Credit the founders' long experience -- and reputations -- in the contract-furniture business. "I've known Dick Keener for 22 years, Leif for may 10," says George Forbes, whose rep firm covers the Philadelphia area. "Dick came out with ideas and programs [at American Seating] that made my company very successful, and Leif has designed some great furniture."
The reps will call on designers, "schlepp the chairs out so they can sit on them" (as one put it), and arrange for display at their own or other local showrooms. Once the chairs are in production, they'll also take orders and make sure the products get to the right place at the right time. Since Keener expects the typical order to be anywhere from a dozen to 50 chairs, there's little need for the elaborate warehousing and staging services provided by dealers. But some reps plan to work through local dealers anyway, if only to maintain good business relationships. If volume grows significantly, dealers may eventually play a bigger part in the distribution system.
Keener-Blodee isn't planning any national advertising for the moment; nor will the company be an official exhibitor at this month's Neocon, the industry's mammoth trade show in Chicago. (The partners are taking a hotel suite instead, and will have their reps visit with potential customers and designers in tow.) But they are spending some serious marketing money. Later this month, 3,000 copies of a glossy purple three-ring binder will be imprinted with Keener-Blodee's mauve-and white logo, then filled with elaborate product information, including fabric and finish selections. Next the company will do a two-part staggered mailing to individual designers in every firm recommended by its reps, introducing its first two products. When the reps make their follow-up calls they'll have the new binder in hand, and they'll have sample chairs at their disposal.
The goal: getting the binder on designers' shelves, and the name Keener-Blodee firmly implanted in their minds. The cost for the entire marketing program: $85,000. To Dick Keener, anything less ambitious would have been self-defeating. Keener-Blodee is targeting a high-end customer; cut-rate marketing efforts would have conveyed exactly the wrong message.
FINANCE. WHEN KEENER STARTED looking for money, everyone said he'd have no trouble finding it. Today, he reflects on that oft-heard statement. "It ranks up there with 'The check's in the mail," he sighs.
Keener put up more than $200,000 in cash. Blodee, who was running a tiny job shop making upholstered-foam furniture for American Seating, contributed his company's building and equipment. By August they had a commitment from FMB-First Michigan Bank for $300,000 in capital financing (new building, new equipment) plus a $250,000 line of credit.
But Keener knew he needed at least another $150,000 -- preferably $200,000 -- for development capital. Money to complete the marketing program. Money for molds and fixtures. Money to hire a couple of draftsmen and an office manager. The partners weren't choosy about the form of investment; they just didn't want to give up control. No matter: for months, they got nowhere. Conversations with an investment manager representing the investment group of Marshall Field V looked promising but fell through. Talks with private investors located through the Grand Rapids-based West Michigan Venture Capital Group foundered on the control issue. Eventually, Keener-Blodee got a commitment from a new state-sponsored investment corporation known as Arcadia BIDCO, for Business & Industrial Development Corp. But the terms of the deal struck Keener as too costly: BIDCO would lend them $100,000 over nine years plus another $100,000 in five-year convertible debt. If the company grew according to plan, buying out BIDCO's equity in the fifth year would cost the founders roughly $650,000.
Early this spring, Keener's brother-in-law suggested he put together a package for the Small Business Administration. Keener broached the idea to FMB, which promptly agreed to fold in its own commitment. The new plan: FMB would put up about $203,000 on the new building and equipment, plus a side loan of $162,000 on Blodee's old building and equipment. The SBA would provide about $162,000, the two founders would kick in another $40,000 and four outside investors would add $25,000 apiece. Total: around $650,000 plus the agreed-upon line of credit. All the financing would be straight debt, repayable over 15 to 20 years, and the SBA portion would carry a favorable interest rate.
The SBA's local committee, in Holland, approved the application on March 22, 1988, then sent it on to Washington. The bank has given its approval, and Keener was expecting the final OK as INC. was going to press.
This, says Keener, is all the money they'll need for full-scale operation. "There's a significant safety factor built into all our estimates," he says, "and there are plenty of items we can delay spending money on if sales come in under projection. In fact, we could finish the first full year with sales 35% under plan, lose money, and still be OK on cash flow."
FOR ALL KEENER'S CONFIDENCE, there's no doubt that the delay in finding financing has slowed up the company. "Quite candidly, they've been dragging their feet," said David Olson, who represents Keener-Blodee in Minneapolis. "They're not going to get any specifications until product is available." That was in late March; once the money is in hand, the tasks is to get the marketing program underway, get samples into the rep's hands, and get ready for production -- quickly, yet with each step well coordinated. The reps can't be out selling until that building has begun to go up.
Longer term, the challenges are of a different sort. Any new business faces the possibility that its founders have simply guessed wrong, or that things won't work out the way they hoped. But Keener-Blodee faces three particular hurdles that reflect the risks of its industry:
* A no-growth market. Shipments of wood seating, according to Commerce Department figures, have been flat. Unlike start-ups in growing industries, therefore, Keener-Blodee can succeed only by wresting market share from the competition. On their side: the declining dollar, which makes imports more costly. Working against them: a trend toward consolidation. Competitors such as Gunlocke (recently bought by Chicago-Pacific) and Stow & Davis (now a division of Steelcase) have deep pockets.
* The idiosyncrasies of taste. Since one chair in a given category is pretty much like another, Keener-Blodee's major selling point is styling. Will the designs catch on? Designers shown photos of samples reacted enthusiastically ("Love it!" "Nice form and flow"). But it's an industry whose fads seem to defy description, let alone prediction. "The European look is very popular right now," one expert told INC. Nonsense, said another -- everyone's looking for traditional styling. Place your bets.
* The fickleness of fashion. Designers; never-ending quest for the new gives K-B a window of opportunity. But those who live be novelty can be die by it. Product life cycles in the industry, acknowledges Blodee, run four to five years. He hopes his designs will last longer. If they don't, the company will have to introduce more new products, with corresponding risks.
In this business, even success can have its perils. "We have two nightmares," says Keener with a laugh. "One is that we get no orders at all. The other is that we're swamped with orders and can't handle the volume." Fully staffed, Keener-Blodee's plant will have an annual production capacity of roughly 13,000 pieces. Most manufacturers would just farm out excess pieces; this one may not be able to. When Keener approached a local chair-frame maker to discuss the matter, he was dismissed out of hand. Looking at the samples, the fellow growled, "That's European style. I wouldn't begin to know how to make it."
Ah, well. You get the idea that the two men would rather face Nightmare Number Two than Nightmare Number One. A few years down the road, if the company is as successful as they hope, they even plan to build a wholly new factory -- custom-designed by Leif Blodee. I expressed an interest in the plan, the Blodee proudly got out a little drawing he had made. The building looked stylish; modern; costly.
Maybe even a little glitzy.
* THE COMPANY: Keener-Blodee Inc., Holland, Mich.
* CONCEPT: Make and sell stylish, expensive office chairs, pitching quality of craftsmanship and uniqueness of laminated-wood design
* PROJECTIONS: Fifth-year sales of $6 million with $1-million pretax profit. Profitable from year one
* HURDLES: Stagnant market; pleasing the tastes of architects and interior designers; getting products through the sales and installation chain with no company sales staff
Richard N. Keener, 59, Cofounder and president and CEO
Worked at American Seating Co., 1955-1986, in sales and sales management, then as president and general manager of $58-million operating division . . . B.S., University of Wisconsin, 1950
Leif Blodee, 60, Cofounder and executive vice-president
Owner/operator since 1982 of Leif Industries, small manufacturer of lounge seating systems for American Seating Co. . . . independent designer since 1967 . . . previously product designer at Herman Miller Inc. and elsewhere . . . B.A., Institute of Technology, Aalborg, Denmark, 1951
Keener-Blodee Inc. Operating Statement
calendar year calendar year
1989 (thousands) 1992 (thousands)
SALES $ 1,700 $ 6,000
COST OF GOODS (including overhead)
Labor 440 1,310
Materials 580 2,050
Total cost of sales 1,020 3,360
GROSS PROFIT 680 2,640
Gross profit/sales 40% 44%
Commissions 180 650
Marketing materials 80 120
Travel & entertainment 20 40
Royalties & miscellaneous 60 210
Total selling expenses 340 1,020
GENERAL AND ADMINISTRATIVE
Salaries 160 360
Other fixed costs 40 120
Total G&A 200 480
OPERATING PROFIT 140 1,140
FINANCE COSTS 80 140
NET PRETAX PROFIT 60 1,000
Net pretax profit/sales 3.5% 16.7%
COMPETITIVE ANALYSIS & NOTES
Keener-Blodee Projections Industry
1989 1992 Average
Sales $ 1.7 million $ 6 million $ 22.7 million
Gross profit/sales 40% 44% 25.3%
Pretax profit/sales 3.5% 16.7% 3.3%
Unit sales 7,100 24,300 * NA
Number of manufacturing employees 22 60 * NA
Sales/employee $ 77,273 $ 100,000 * NA
Independent sales reps 11 15 * NA
* Not available