The right time for upgrades

COURTESY OF BAYVIEW FARM & GARDEN

The old saying goes, “if it isn’t broke, don’t fix it.” Others say that if you’re not growing, you’re dying. When it comes to equipment investments at a garden center, either philosophy can prove beneficial, depending on the situation.

Most high-level decisions involved in operating a retail business hinge on risk vs. reward, but investments in new equipment and remodeled retail buildings can be less clear-cut. Big purchases and the long-term debt that often comes with them can be daunting if one isn’t certain that the increased revenues will make the purchase worth it.

Horticulture consultant Sid Raisch, president of Advantage Development System, says garden centers differ from other industries, such as hotel and restaurant hospitality, in which owners and managers are known to regularly set aside money for the replacement of outdated equipment and facilities.

“They live by the notion that facilities require refurbishment or replacement on a 7-year cycle to stay functional, relevant to the consumer, and competitive in their marketplace,” Raisch says. “The government allows tax benefits for this, called depreciation. It is rare in our business for money to be set aside for such improvements.”

Aging facilities, provided they are still functional and safe for customers and staff to occupy, can remain profitable when maintained, Raisch adds. However, setting oneself apart from competitors by revamping a retail facility can be a good strategy when planning investments, he says.

“Competitive differentiation can be an important factor,” Raisch says. “If an investment increases competitiveness and creates a point of differentiation, it could be considered a marketing investment as well as a capital improvement. As an example, I have had several clients who have financed digital signs and budgeted the payments out of their marketing expenses.”

When rebuilding is essential

At Bayview Farm & Garden in Langley, Wash., owner Maureen Murphy was faced with an outdated building of her own that was no longer working for her as a retail space. The decision to remodel was an easy one. Murphy is currently overseeing construction of a new 4,600-square-foot building that will replace her old greenhouses. The new building is expected to be complete by early March.

The new building will be located next to the Bayview barn, which houses the store’s farm and seed department. Murphy says new capabilities, increased shop-ability and better incorporation of technology are main reasons for the construction.

“The main garden shop was [a group of] greenhouses, and they long ago quit serving our needs. It was really expensive to heat them, it was really hard to merchandise things out of that context,” Murphy says. “It’s pretty hard to merchandise, especially higher-end things, so that structure was really holding us back. Now I’m going to have this beautiful, modern store with in-floor heat and skylights. I’ll be able to have a nice, big houseplant section, we’ll have a lot more room for our various departments; gift, wild bird, etc. It just allows us to increase revenue in a big way.”

Murphy is confident her new building — financed through a bank loan — will boost returns for her business, but not every owner enjoys the same confidence, Raisch says.

“Rather than complacency, I believe the most typical reason owners fail to invest in improving facilities is fear,” Raisch says. “Many are afraid that they won’t be able to get a return, to get financing, to sell the business at a higher price and the list goes on. Instead they should gain an attitude and well-founded opinion that they must invest to stay relevant, competitive and functional.”

Finances played a big part in Murphy’s move toward a more modern retail space. The construction could have happened sooner if the economic climate had allowed for it, she says.

“It’s something that I’ve been planning and have needed to do for many years. If the economy had stayed steady, we would have done this in 2009,” Murphy says. “The biggest challenge, of course, is the financial aspect. I have a bank that’s willing to take a risk on me and I’m really grateful for them to loan me the money. It’s scary because I’m counting on the fact that this new building is going to up our game in a big way. I’m sure we will be able to pay our new mortgage, so worrying about money is always the big thing in life.”

Recouping the money spent on investment

When taking on new debt, Raisch says the burden is on the owner to have a plan to make that money back. One way is to have a specific need in mind that the improvement will fill, while determining if sales can cover the cost.

“Some projects protect the assets of the business — like a new roof,” Raisch says. “Some improve the marketability — like paved customer paths in an outdoor sales area. Some provide for operational improvement, such as a computer POS system. Start with a list of potential investments. Prioritize based on the relative importance and ability of the business to fund the improvement.”

Raisch says the same concept can be applied to smaller-scale investments in new equipment, such as lighting, irrigation systems, terminals and shopping carts, as well as larger-scale building improvements. One major difference is that some equipment investments can have a faster return than new facilities.

“A shopping cart, let’s just say it costs $400,” Raisch says. “Those can pay for themselves in one day of use, because if the customer has to shop without a cart, they only buy what they can carry. If they have a cart where they otherwise didn’t, they’re probably going to spend the average of what other customers spend. If you take the average transaction times seven, eight or maybe 10 customers using that cart on a peak day … it’s going to produce enough margin dollars to pay for the cart just on that one day of use.

“Whether it’s buying carts or improving some other part of the operation, we try to go to what I call the low-hanging fruit first and do the things that have the fastest, best payback so that next year … they can use that to make another improvement that maybe doesn’t have quite as quick a payback or as dramatic an improvement to it,” Raisch added.

When planning new equipment purchases, Murphy says she has found that investing in quality in the short term is preferable to spending money on replacements down the road.

“There’s certain wagons we like that work for us that are durable and cost more,” Murphy says. “I’ve learned that I don’t like it when my equipment breaks after three or four years. I have some wagons that have been here easily for 15 years. So, I spend a little more money up front if I have it. We are always trying to walk that line.”

No matter what improvements are needed and how they are financed, a long-term view tends to benefit any investment decision. Murphy’s goal is to set her business up for continued success so it can eventually be handed off to the next generation, namely her children, who already help her manage Bayview Farm & Garden.

“My goal is to get this facility set up to where it can function with the future retail customer,” Murphy says. “[I want to] get the security in place, get the sensing, the cameras, the parking lot, get the facility all functional and also getting the personnel in place. [I’m ] getting those key positions identified and figuring out the needs of the company in terms of personnel so that I can step back, perhaps retire someday and let my kids take over and everything can be in place for them to operate.”