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Business Observer Thursday, Nov. 5, 2009 10 years ago

Smaller is Better

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Al Jeffrey and Jim Wilheim had to wrestle with a difficult entrepreneurial crossroad: Had their business, a chain of 15 scuba diving stores from Orlando to Key Largo, gotten too big?
by: Mark Gordon Managing Editor

In 2003, when his beloved scuba diving business was as its zenith, Al Jeffrey had an executive epiphany: “I had become a human memo.”

A scuba diver who turned his passion for the sport into a $5 million-per-year enterprise with 15 stores across Florida, Jeffrey had prided himself on communicating face-to-face with his employees.

But there was that day — in Cape Coral or Stuart, or maybe it was Orlando — where Jeffrey realized the company he ran with his business partner Jim Wilheim, Scuba Quest, had gotten too big. Gone were the days when Jeffrey could spend a week in each shop with a manager, talking about product placement and dive training techniques.

Many business executives and entrepreneurs have faced the growing pains Scuba Quest encountered in 2004 and 2005.

However, not many of them have done what Jeffrey and Wilheim decided to do: The pair made the gut-wrenching decision to significantly scale back the scuba diving empire they had been growing at a rate of about a store a year since 1986.

They closed or sold eight of the 15 stores over a three-year period from the summer of 2005 to early 2008. They also got a rid of a profitable, yet risk-heavy and high-maintenance scuba dive charter venture they had been operating, which included selling a trio of boats.

“As you branch out and get bigger, it just gets harder to manage,” says Jeffrey. “We got to a point where less was better.”

Getting smaller wasn't only about Jeffrey's lament that he no longer had time to do face time. For starters, the scuba diving industry itself was gasping for air in a crowded recreational sports marketplace in the middle of the decade.

And then there were store-specific issues that forced Jeffery into his decision. For example, in the post hurricane-building boom of 2005 and 2006, a shopping plaza in Fort Myers that housed a Scuba Quest was sold to a New York commercial real estate firm.

That firm, says Jeffrey, decided to rebuild the plaza and told Jeffrey his rent would be doubled after a year. “The economics there just weren't in our favor,” says Jeffrey.

Good timing
So the Fort Myers store was one of the first to be cut from the roster of Scuba Quest shops. Others to go were stores in Tampa, Clearwater, West Palm Beach and Stuart. The company kept seven stores in its most profitable locations, which are still spread across Florida. Those stores are in Bradenton, Brandon, Cape Coral, Key Largo, Orlando, Sarasota and Venice.

Nonetheless, the move to shrink, not grow, goes against the core business principle that holds if a business isn't getting bigger, it's dying. Jeffrey realizes that and says the decision to scale back was something he and Wilheim agonized over. Jeffrey had several sleepless nights.

“Our ego took a little ding and we had to swallow some pride,” says Jeffrey. “[But] if we were stubborn about this, it probably would have really hurt us.”

Indeed, in what turned out to be top-notch timing, they cut the business in half right as the recession was heating up. Jeffrey says the partners sold a few stores and outright closed others by holding liquidation sales. “We weren't smarter than anyone else,” says Jeffrey. “We didn't know the recession was going to be what it was.”

The company considered franchising the business, too, before moving ahead with the downsizing plan. Jeffrey says franchising would have been “exchanging one set of headaches for another.”

The financial results of the downsizing, says Jeffrey, as been an increase in the company's profit-per-store numbers. Jeffrey declines to elaborate on the company's revenues or margins, only to say that after being flat company-wide in 2007 and 2008, Scuba Quest is seeing a slight uptick in 2009 sales.

Getting smaller has also allowed the company, which now has about 30 employees, to put more money back into the remaining stores. It has already begun renovating each of the seven shops, including its oldest one, in a shopping plaza at one of the busiest intersections in Sarasota, just south of downtown.

That store is being totally gutted and replaced with new paint, ceilings and carpets, as well as scuba diving extras, such as an air-fill station and a nitrox pump, which provides air with more oxygen.

Other stores that have undergone a similar renovation include the Scuba Quests in Bradenton and Venice, with the Orlando store scheduled for the next makeover. The remodel projects are costing about $10,000 per store, says Jeffrey.

Specialized and seasonal
Improvements such as the oxygen nitrox pump are essential, says Jeffrey, in order to stay competitive in an environment where Scuba Quest is competing against other recreational sports, not necessarily the dive shop down the street. “This business is very specialized and it's very seasonal,” Jeffrey says.

Jeffrey and Wilheim, who met in the early 1980s when they each worked for a sporting goods store in a Bradenton mall, have a more mainstream sports background in their genes: Jeffrey's dad played football at the University of Georgia, while Wilheim's father, Hoyt Wilheim, was a Hall of Fame baseball pitcher who played for teams including the New York Giants and the Baltimore Orioles in the 1950s and 1960s.

In 1986, the younger Jeffrey and Wilheim decided to combine their sports store knowledge with scuba diving. Their first move was to take over a 600-square-foot dive store in Sarasota run by a local fireman, who had done it more as a hobby than a business.

From there, the partners wrote their first business plan, which included opening five stores over the next five years. By 1991, they had accomplished that goal, opening the five stores mostly around the Sarasota-Bradenton area. “Then we were like, now what?” recalls Jeffrey.

The scuba diving industry was gaining popularity in the early 1990s, so the pair decided to aim higher: Ten stores in the next 10 years.

And the plan was to stretch out south, north and east of Sarasota. That mission was successful, too.

In the process of growing, the company opened a central warehouse, just outside of downtown Sarasota, to process gear and equipment. Jeffrey spends most of his Mondays now at the warehouse, organizing and working with other store managers on inventory for the week.

It's the type of task Jeffrey says is key to profitably, but it was also the type of task he couldn't get to when Scuba Quest was as big as 15 stores.

More lessons
While the downsizing of Scuba Quest has allowed the company to become more manageable and profitable, challenges linger.

Jeffrey says there are basically three ways to make money in the scuba diving business: One way is by training divers in certified classes; another way is by taking divers out on trips to locales such as the Cayman Islands or Cozumel; and a third way is by selling gear.

The most profitable is selling gear. For example, Scuba Quest's products include a $3,000 floating dive system and a wireless technology wristwatch that monitors air intake and sells for $960.
But the trick in scuba diving retail, says Jeffrey, is that in order to get people to buy dive gear, they have to be passionate about the sport. As a result, the seven Scuba Quest store managers spend a bulk of their time on recruiting, training and retaining new dive enthusiasts. “If you don't train divers,” says Jeffrey, “you can't survive in this business.”

Even though Scuba Quest sold off its in-house dive operation, which included maintaining three boats — along with a big helping of insurance — the company still runs a dive charter business. Only now it does it by outsourcing other boats and captains.

Unfortunately for Jeffrey, the scuba lessons side of the business is Scuba Quest's costliest and most uncertain venture. He uses the rule of thirds for every dive training class: One-third will never return, one-third will come back once and one-third will get the dive bug.

That leaves a small potential customer base — a challenge made tougher by the recession that has left niche sports hurting almost as much as residential real estate.

The challenges have taught Jeffrey a business truism for good times and bad: When it comes to specialty retail, hold nothing back.

“You have got to give it all,” says Jeffrey. “There has to be value pricing and good customer service.”

REVIEW SUMMARY
Businesses. Scuba Quest
Industry. Sporting goods, retail
Key. Company decided to shrink its store count by half, fortuitously making the move right before the recession.

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