Case Study

Source Outdoor

Based in Miami, Source Outdoor is a five-year-old importer and wholesaler of patio and deck furniture owned by Gerald Shvartsman. From humble beginnings, in which he tried to sell his first containers of goods himself, Mr. Shvartsman, 35, has expanded his one-man start-up to encompass more than 50 employees and sales in 2012 of $7 million.

Although Mr. Shvartsman ships to hotels and resorts beyond his home state, he does the bulk of his business in South Florida, where he strives to deliver exceptional customer service, more in keeping with a small retail shop than a wholesaler.

THE CHALLENGE Having established five channels of distribution, Mr. Shvartsman found himself worrying that he might have to forgo his most profitable channel — a direct-to-consumers approach that was starting to offend his wholesale clients.

THE BACKGROUND A Toronto native, Mr. Shvartsman learned his first sales lessons at the age of 7, helping his parents sell jewelry at a Sunday flea market. He was smart, but he struggled in school because of an undiagnosed attention deficit disorder.

Passing on college, he went into business with his older brother in a 36,000-square-foot nightclub with 150 employees. Next, the brothers sold mall advertising on food court tabletops and ran a company that erected walls bearing “Coming Soon” announcements for obscure mall shops under renovation.

On the lookout for opportunities, Mr. Shvartsman had an aha! moment when he went to buy deck furniture for the patio of his family’s Miami condo.

“A sectional to seat four or five? Fifteen thousand dollars,” he recalled. “Chaise longues? One thousand dollars apiece. I was flabbergasted. I looked in store after store, but I couldn’t afford to buy what I like.”

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Knowing nothing about the furniture industry, Mr. Shvartsman assumed he could jump in at a lower price and win buyers.

“My mother raised me to think there was no such thing as barriers to entry for me,” he said.

He disregarded the rumblings of the looming recession, as well as the industry’s old-school way of selling to retail stores through representatives. When his first four containers of outdoor furniture arrived from China, Mr. Shvartsman became a one-man sales force. He personally called and visited every furniture retailer in a 60-mile radius.

“I started attacking them,” he said. “In a short time, all had some of my furniture in their store or were selling off my catalog, which at the time was terrible.”

Then he opened several other South Florida distribution channels. He struck deals with local decorators and designers, and also with condos that needed half a dozen sectionals and dozens of chairs for each ground-level pool. Starting with one enterprising online furniture seller, Mr. Shvartsman also began fulfilling orders taken over the Internet by other businesses. Retail stores and online sellers paid him 60 percent off full price. Decorators, designers and condos got his goods for 50 percent off.

But Mr. Shvartsman also sold his furniture another way. As many as six or seven times a year he would fill a truck and unload it at a big Florida home show, selling directly to the public.

Most of these sales were at full price, with markups greater than 300 percent over his own costs — the equivalent of grand slams versus the singles of selling to furniture retailers and the doubles of selling to decorators and condo associations.

Even the home-show items he discounted were generally slow-selling pieces that had been clogging his warehouse and that he was only too happy to move, especially at markups around 100 percent.

But one day in 2010, his third year in business, Mr. Shvartsman answered the phone and found his second-best retail customer on the line with a beef.

“Gerald,” said the Fort Lauderdale furniture store owner. “I understand you’re doing home shows. I know that’s important to you, but we’re your customer. It’s not fair to us. You might be taking our sales.”

Mr. Shvartsman feared such a call might come, and he had already been weighing the pros and cons.

THE OPTIONS:  What should he do?

On the plus side, the direct-to-homeowner sales were by far his most profitable. In 2009, they accounted for $400,000 of his total sales of $1.9 million. The home-show sales also allowed him to unload his mistakes — slow-selling designs and styles — at a profit. As for being in direct competition with his retail clients, he had yet to encounter any of them at the home shows.

On the minus side, he realized he was trying to wear two hats: wholesaler and retailer. He knew there was a risk that retailers would start to criticize him in this everybody-knows-everybody industry.

“It’s not enough that he sells to us,” he imagined their saying, “this Shvartsman also wants to sell in competition with us.”

What should he do, he asked himself. Continue with his most profitable distribution channel? Or swear off the home shows?

Your task: Summarize the key considerations in the case.  Evaluate the potential of each option and then select the option you believe is best for his business to focus on for long-term success.  Why did you choose that option?

Submit as a Word doc in roughly 3 pages double spaced.

Remember case studies require in-depth analysis and detailed explanation of your conclusions. Show off what you learned about Integrated Marketing Communications, Distribution strategies, and Distribution channel.

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