Case Study: A Hot-Tub Maker Hits Hard Times
Most days, Bob Hallam loves to steal a glance at the array of mementos in the lobby of Dimension One Spas. The business awards and childhood photos of his management team on display in the lobby constantly remind him of the success the Vista, California, hot-tub maker has had over its 32-year life. But one morning last November, Hallam had other things on his mind as he strode through the lobby. The news was bad. The housing market was in full collapse. Dealers were struggling to secure financing for their spa purchases, and few consumers seemed interested in shelling out $15,000 for what suddenly seemed like the most discretionary of items. For only the second time in its history, the company's annual sales were shrinking.
Hallam called a companywide meeting to confront the crisis head on. "There's been a fundamental shift in the industry," he began. The company's sales were plummeting, he said. If Dimension One ever hoped to grow again, it would need to quickly move in a whole new direction.
But hot tubs were all that Hallam knew. He and his wife, Linda, launched the business in 1977 as a single retail shop in La Mesa, California, and within a few years expanded to a five-location chain. Soon, Dimension One began manufacturing its own hot tubs, or spas, as they are known in the industry, and developed a reputation for their features and design. As the company grew, Hallam sold most of his retail stores to concentrate on manufacturing. He also moved into international markets, and today, Dimension One tubs are sold in 35 countries. International sales are 35 percent of the company's business. In 2007, annual sales hit a peak of $57 million.
That was before the economy unraveled. Because sales were tumbling -- they are expected to drop to just $28 million by the end of this year -- Hallam knew he had to act. Doing nothing would condemn his company to mediocrity or worse. Hallam thought briefly about selling the business. In fact, a buyer had approached him a year earlier. At the time, Hallam considered the offer too low and turned it down. Still, he could try to restoke the deal or seek other bids. Another option was to slash head count, continue focusing on hot tubs, and rehire when and if the market rebounded.
Hallam wondered, though, if he could do better than just survive. What if the company could reinvent itself from the inside out and start producing plastic products for other industries? After all, Hallam liked to think of his company as a kind of idea lab in the world of plastics and thermoforming, the process of heating plastic in order to mold it. And because the factory was now operating only four days a week, Hallam figured it could be put to use making something else during all that downtime.
It wasn't the first time Hallam had thought about moving into new lines of business. Two years earlier, Hallam began worrying when he realized many of his dealers were devoting more and more floor space to low-end spa products made by competitors. To counter such rivals, Dimension One had begun manufacturing a new line of colorful, portable, and lower-cost plug-in tubs under the brand Spa Berry. Hallam also brought together a few of the company's more creative staff members to brainstorm business opportunities outside the hot-tub market. The group became known as 007, for the seven possibilities it came up with, including urinals and horse trailers. Hallam gave the green light to a soft bathtub that would help cushion a fall, and he invested $500,000 in the project.
When the economy tanked last fall, Hallam realized the 007 project wasn't enough. What the company really needed was radical change. "He told us if we wanted to be a big company again, hot tubs alone won't get us there," James Hedgecock, the company's 32-year-old director of business development, recalls Hallam saying at the November meeting. "We would have to get some other things going."
That conviction deepened as the fall turned into the bleakest winter on company record. "We sold nothing in November and December," Hallam says. "Literally nothing." Hallam closed the factory for four weeks. He cut his pay 50 percent and his top executives' pay 5 percent. A series of layoffs brought Dimension One's employee count to 175 from a high of 400 a few years earlier. "It's tough to swallow," says Hallam, "because they're all like family." Hallam realized he had to make a move.
The Decision After the New Year, Hallam directed Hedgecock and Mark Jolley, an engineer whom Hallam refers to as "the big-idea guy," to get in gear. The pair handed off most of their work to others to focus on finding new product ideas. They didn't have too far to look. Janett Pankauski, vice president of manufacturing, had just been contacted by an entrepreneur she had met at a seminar two years earlier. He thought Dimension One could make parts for his electric vehicle company.
With that promising lead in hand, the pair looked around to see what else Dimension One might be able to do. The focus turned to plastic composites, which are sturdier than traditional fiber composites. Hedgecock and Jolley identified two particularly strong potential markets -- ballistics for the military and wind turbines for energy production -- and asked one of their material suppliers for introductions. The supplier suggested Hedgecock and Jolley make a pitch to the military to produce bulletproof vests and blankets, as well as modular helicopter landing pads.
Then, in April, Hedgecock and Jolley attended an energy conference in Chicago, at which they discovered a need for sturdier wind turbine parts. The duo figured Dimension One could make composite parts that would be stronger and last longer than traditional composite parts.
After Hedgecock and Jolley identified their markets, they got to work persuading a large military contractor and several wind power companies to let Dimension One build some prototype parts. At about the same time, Dimension One began producing prototype door panels for the electric vehicle company.
But as the months dragged on with no firm orders, Hedgecock and Jolley decided to look closer to home. Maybe their best bet was to land a deal in an industry that they understood better. Both are surfers, and Jolley, who once supplied foam to surfboard companies, has a long list of contacts.
One of these contacts, Surftech, sells standup paddleboards, which are like surfboards that riders stand on, using a paddle to balance and move through the water. In June, Jolley began discussions with Surftech to build what Dimension One says will be more durable boards. The two sides have signed a deal for Dimension One to produce a few thousand boards. Hallam has so far invested $10,000 in a new mold and is expecting to spend at least another $30,000 to get the first boards out the door. Assuming no setbacks, the boards will roll out of Dimension One's factory in the next few months. Boardmaking tends to be a low-margin business. Still, "what we learn here, we'll be able to transition into all other industries," Jolley says. "The possibilities could be endless."
Hallam knows not all the new initiatives will take off. But if just one hits big, he figures he can begin to rebuild his company. In fact, he wants to get 50 percent or more of revenue from business other than hot tubs within five years. That's ambitious, but Hallam says it is doable. "It's the tipping-point approach," he says. "Go down the road little by little until something shows promise, and then dump in the money."
The Experts Weigh In
DON'T NEGLECT YOUR CORE PRODUCT
This has been beyond a perfect storm for the spa industry. Many manufacturers are just hoping that the economy gets better, but hope is not a business plan. Dimension One is wise to diversify, but it needs to be very thoughtful about how it does it. It's risky in an industry where the dealer network is so relationship-based to say that you want more than half your revenue in the future to come from other things. Instead, Dimension One should be stressing that at the end of the day, new lines of business will make it a stronger company, which will make it a better spa brand.
SpaRetailer, Scottsdale, Arizona
FIND HIGH-MARGIN PRODUCTS
The idea of a small team acting like a start-up is the way to go. The one thing that is causing me some angst is that they are starting with a low-margin project. They should be leveraging their big strengths and going after high-margin work. It's OK to target a bunch of industries, but once they find one where they can make a nice margin, they should shut down the rest. The owner should also invest in reinventing the selling process. Identify a few dealers that aren't in a total panic and go out and educate them on the best ways to sell customers. Then use them as models to train the rest.
Eureka! Ranch, Cincinnati
BEWARE OF OVEREXTENDING
My company recently launched a new division to go after a totally new market, so I'm familiar with what Dimension One is going through. The challenge of a small company diversifying is that you probably don't have the money to add people. The risk is that employees will now do two projects not very well instead of just focusing on doing one project well. And, the truth is, there's still plenty of room for growth in the spa industry. No matter how you spin it, you're not going to get better at your core by splitting the labor you have.
Leisure Concepts, Spokane, Washington