April 2014
Nuheat Case Study
Nuheat’s core business:
• A manufacturer and marketer of an electric floor-warming mat system that warms cold tile and stone floors
• The system is a Canadian invention that was created specifically for the North American market in 1989
• It is used in both new home construction and the renovation markets
• It is a 2 trade installation a) Tile Contractor & b) Electrical Contractor
• Nuheat has offices in Vancouver BC, Chicago IL and Fairfield CT and employs 115 staff
In 2009 an opportunity presented itself for Nuheat to expand with a line of freeze protection products used in outdoors applications. We were offered to buy Fujikura’s North American distributor - Drexan.
The Players:
JR – President and CEO (John Rose now Director on the Board)
KM – VP Sales (Kevin McElroy now President & CEO)
DO – CFO (David Orr)
SC – VP Marketing (Suzie Cho)
PM – VP Operations and IT (Patrick Mann)
Prior to the opportunity we had debated as a group what should a possible acquisition look like to grow our business? The most compelling acquisition was an outdoor product line which led to the Strategic Debate: Is an Outdoor Product our Next?
(We called the debate Qui vs Non…adding a little French flavour as we had just identified Quebec as a key core market)
Qui
Leverage investment in dedicated sales force
Same electrical distributor customers
Cohesive product offering – same end user
Proven customer revenue and margin potential
Emerging category – timing is right
Natural line extension – Electric radiant leader
Does not cannibalize current mix
Non
Competitors already entrenched
Mat concept already taken
Can’t compete with vertically integrated competitors
Risk predatory retaliation tactics (Awaken the Giant)
Indoor focus more natural (80% Kitchen & Bathroom application)
Will cannibalize sales force time – they will not be selling/promoting proven higher margin indoor products
Unlikely to contribute sufficiently to SMG&A targets (buildup, launch, packaging etc.)
Bigger opportunity in commercial – where we are not experts
Risks – a large competitor Easy Heat was facing a major lawsuit
By Department:
Sales
• Technical knowledge learning curve
• Time intensive nature one-off sales
Ops:
• Significant increase in sku’s to manage
• Sharp uptick in sales volume – disruptive
Marketing:
• Product Manager’s time
• A whole new product range to develop a marketing plan around
Finance:
• New customers, A/R vigilance, Managing write down risk, not knowing what you don’t know
Strategic debate carried on:
Once we bought on the inventory and started selling – we started to ask the questions -
How profitable is it really?
What is the impact on core business?
Are there really any Strategic advantages with current customers?
Classic problem – we fell in love with the deal without doing enough due diligence!
The price seemed right (we could fund the acquisition out of cash flow)
We liked the manufacturer
We made the mistake of believing everything that their current distributor told us in the deal i.e. their entire inventory was saleable!
Six months into the acquisition –
Organizational Trauma
· Huge learning curve that we hadn’t thought of including: highly technical sale, logistics – 16 week lead time, needed a local sub supplier to assemble and package kits, rebranding of existing product, the channels of distribution were not as aligned to our channels as we thought, lack of credibility with customers by not having engineers on staff,
· Lack of industry knowledge
· Lower than anticipated margins
· Manufacturer puts through an 10% price increase right after acquisition…reason - strengthening of US $
Then at the one year juncture – what was once an exciting opportunity (the entire executive were on side in the beginning) soon turned into a “ what were we thinking” pending disaster! Out of which came a pivotal debate.
GO or NO GO Debate!
SC – NO GO -thinking that we have a lack of expertise and we will miss opportunity costs with core indoor products if we continue to support freeze protection
DO – NO GO - Needing to provide tension for the drama in the run up (which is his strength)…including declaring that there was too much inventory and no movement of most of it…so I’m going to write it off at the end of the year
PM – NEUTRAL - likes the quality of Fujikura – is neutral for the most part with a wait and see attitude
KM – GO - still optimistic but feeling slighted by the miss information given by the sellers, and not doing enough due diligence (attention to detail is his strength usually, so he was frustrated that he was allured by the opportunity)
JR - GO – Still optimistic but frustrated that we were sold the sellers dream, which wasn’t based in much reality and that I too got caught up in the exciting opportunity.
After much debate we commit to make it work!
The turning point was…at the key Strategy GO or NO GO DEBATE – DO states that he is writing off ½ a million dollars worth of inventory at the end of the year…hearing that KM puts his reputation on the line and commits to selling all the inventory and making freeze protection a valuable part of our product line! It was a bold statement. KM rallies the troops and leads the charge and gets some significant sales early on and then builds on that momentum.
On the positive – we learned a lot about just how adaptable we could be facing a crisis. We cut back SKUs, we set revenue targets with huge incentives for the sales team, and we ventured into the world of Private Label. We pulled together as a team!
In the end we had learned so much that we felt we had all been put through an in-house MBA program. Coming though the other side we were now a better team…ready for the next acquisition!
We established a presence in the market over the next two years and then as the housing economy started to come back we were able to look at it as core to our business and not just an opportunity. It now represents a double-digit percentage of our sales revenue.
Nuheat’s most recent what we do statement is:
“WE HEAT FLOORS AND FREEZE PROTECT HOMES AND BUSINESSES”