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We’ve come a long way since the Romans built their first Swimming Pools!

Roman Bath

No trip to the UK has fully explored Britain’s history unless it has included a visit to the Bath region, home of the famous Roman Baths. Built around 2,000 years ago, they are miraculously preserved for us today. With pools, spas and saunas, the Romans could certainly show us how to really enjoy a lifestyle based on water, warmth, and relaxation. But that long history doesn’t mean nothing changes much. In this “Management Memos” we examine recent changes in the swimming pool market in Australia, and look at the impact it could have on business strategies for pool builders.





 



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A Cross Section of Markets


Over the last eight years, The Red Zebra Business Centre has advised a number of different pool builders and pool shop operators. The mix of clients has covered several states, and regions. The span of changing times, the diverse regional coverage, and the length of time observing the industry, provides a strong basis for drawing conclusions about the industry and its direction. These observations are likely to be controversial, and create discussion. It is hoped that the discussion, if any, will be focussed on positive steps that can be taken to improve the business outcomes of practitioners in the field.


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The Product Life Cycle


productlifecycle_small.jpgWhile every marketing and management student for the last half century has dined out on “the product life cycle”, you could be forgiven for thinking that the well accepted concept doesn’t apply to swimming pools. After all, the Romans were at it two millennia ago. A generalised form of the Product Life Cycle is shown here.


Of course the full theory of the product life cycle is much more complex than that. Significant changes are happening, and it is worth considering the impact of these changes in the longer term - if you have a pool business.


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Free-Form Pools


Generally considered now to be the preserve of the upmarket pool buyer, free-form pools command higher prices than pre-formed pools of a similar size. Despite the higher prices charged for free-form pools, however, it is a common experience that the return for each hour of labour committed to a free-form pool is less than the return for a similar labour input to a pre-formed pool.


Such an outcome is readily predicted in any analysis of the free-form pool market, using standard management tools. The value added by forming the materials used into a swimming pool, is largely bound up in creating the value of a body of water in which people can play.


The incremental value of the tailored environment created by the free-form pool is just that, an incremental value. As in all walks of life, the Law of Diminishing Returns applies, so that each incremental dollar spent on the pool has a lower value than the first dollar that was spent. This means that, although such pools are expensive for the buyer, the costs of the pool construction are not easily reflected in the price. Other competitive attractions (one of which is a pre-formed pool) serve to hold prices lower than a full cost analysis would suggest.


Usually, free-form pool installations include a number of ancillary purchases, and a common experience is that these add-ons “glitz up” the overall gross profit on the job, making the project a worthwhile investment of time and resources for the pool builder. Here the add-ons are often supplied by others, with a margin on this sub-contract ancillary work being claimed by the pool builder.


All this works well, until there is a problem. Then the fundamental weakness of making money that is central to the viability of the business, from a margin on the work of others, is revealed. For instance, when landscaping is sub-contracted, the major portion of the value added by the landscaping is provided by the landscaper. The value added by the pool builder in project managing the landscaper, is small by comparison, but the major risk (regardless of the wording of contracts) is borne by the pool builder.


None of this is new, but is worth repeating here, because the most closely similar substitute spending for a prospective free-form pool purchaser, is to buy a pre-formed pool. As the ravages of competition eat into that market, and prices fall (relatively), the effect carries through to the free-form market.


What we are seeing here is the decline of the free-form pool. Innovation, in the form of the pre-formed pool, is eating into its market position. It is possible to make a lot of money in products that are declining, as many have demonstrated. For instance, a small number of manufacturers are making huge money out of making radio valves - now just a distant memory for many, and not understood at all by most people, having been replaced decades ago by solid state devices.


But making money in a declining market requires two things. A small number of suppliers, and a market that simply will not switch. Some pool buyers will be those who will not switch, but how many are they? Will there be a small enough number of free-form pool builders? Only if a number already there go out of business or out of the market.


This leaves three substantial strategic questions for builders of free-form pools.


First - do you add enough value to each element of the project to give the maximum commercial return on the assets used in the jobs?


Second - do you have the necessary resources and opportunities to reduce unit cost and increase labour productivity over the long term in the face of falling relative prices?


Third - is the market number of people who “simply will not switch” large enough, and wealthy enough to make the market a long term good bet?


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Pre-Formed Pools


Compared with free-form pools, pre-formed pools are relatively new. Here it is possible to see in living memory the evolution of the life cycle of this class of product.


In the classical product life cycle story, innovators create something new, generating an exciting product that has a number of flaws that get corrected as market feedback highlights issues not foreseen by the innovators themselves. Such a process is costly, but as the product is new and there are few competitors, the price is high enough to allow the innovators to recover these early development costs.


Ultimately, the market expands, and more entrants are attracted to the market. The originators of the product continue development, seeking to keep their product differentiated from the other newcomers, while the newcomers avoid the costs of development, and largely copy existing suppliers.


Techniques improve, volume increases, prices fall (or at least they do relatively), and serious competition hots up between the various players - both newcomer and originator alike. The increasing volume attracts more manufacturers and resellers, with increasing pressure building up on prices and profit margins.


The product life cycle diagram shown above depicts the rise in volume of the product as it reaches maturity. Naturally, the increase in volume is linked closely to the reducing (real) price of the product as manufacturing and sales costs are reduced, and competition drives prices down to levels that more people can afford.


This well documented and thoroughly established pattern is now plainly in view in the pre-formed pool market, where a number of new suppliers have entered the field in the last two years, and most retailers are experiencing real problems of maintaining sufficient margin. In other words, the pre-formed pool market in Australia has reached a point where radical change is about to take place.


Given that the free-form pool market was the “father” of the pool industry as we know it now, it provides much of the accumulated wisdom of the industry. The free-form market has been changing very slowly, and most of the changes have been attributable to the rise and rise of the popularity and market share of pre-formed pools. For this reason, there is no history to serve as a guide to the pool industry as it tackles this period of rapid change in pre-formed pools.


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Maintaining Margins


We are all conservative - at least we are when it comes to money. When competition strikes, there are several steps most people take to maintain the “status quo”, the first one usually being denial of any competitive threat.


One major issue is that a strategic “sea-change” is not easily identified for what it is early on. In any event, there are lots of reasons for inertia. Companies, having set up elaborate product development activities, reasonably expensive distribution chains, and capital intensive plant, have a heavy commitment to what now exists. Changing that is very hard, so considerable effort is put into maintaining things as they stand.


For resellers, they have their own business model that is based on achieving known returns from certain product categories, staffing selected to suit the environment that used to be, and an established market position that is not easy or quick to change.


In the short run, sales begin to slip to competitive suppliers, with the first instances not even noticed, or worse, argued to be aberrations from the norm.


Over a slightly longer time frame, retailers recognize the need to compete, and retail margins fall. Manufacturers, insulated from the end user by the reseller, don’t drop prices in line with market trends, so transferring margin from retailer to supplier. Only when a reseller changes source, or dual sources, does the manufacturer respond, and that response is not usually in line with what is happening in the market. This “Rakes Progress” of denial and declining margins is not isolated to the pool industry - the process is common across large sweeps of product categories and markets.


In the long run, margins cannot be maintained in the face of this increasing numerical competition. While cheapskate operators do go broke, there is always a new one appearing to fill the void. Price points are established lower than they used to be. Something new has to be done. What that new thing might be is the province of the “trusted advisor”.


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Regulation


The last two years have been a difficult time for the pool industry, as new regulations have come into force from every side. The cost of compliance is high, and largely hidden.


Just at the time margins are being pressured by a fundamental maturing of the market, state legislatures all over the country have acted (seemingly, but unlikely, in unison) to increase the costs of doing business in this market.


The principal effect of this is to heighten the need to find ways of lowering the unit cost. While part of the benefit of this work is lost by absorption by the increased cost of compliance, overall the benefit is found in continuing to grow the business.


So how can the unit cost be reduced faster than the costs of compliance increases? The answer is found in several strategies that are available, but must be tailored to suit each trader or manufacturer.

 

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What strategies?


There are strategies available, and we have been recommending them to our clients. It’s “different strokes for different folks”, of course, but there are well established strategies demonstrated over the years in a range of different industries. Lack of any similar period in the pool industry, and the consequent lack of any history to educate “conventional wisdom” in the pool industry, makes the required strategies seem radical and fraught with danger.


Well known management teacher and writer, Tom Peeters, uses a quote in his book “The Circle of Innovation” that he attributes to the founder of “Visa”, Dee Hock, “the problem is never how to get new innovative thoughts into your mind, but how to get the old ones out.”


We heard recently that a trade magazine (we have not seen the article described) commented that the pool industry had not done as well as the car industry in putting up prices. If that was a reference to motor car manufacturers, it seems a little off beam.


It was announced about a month ago, that the cost of a “Falcodore” - the two famous twins of “Falcon” and “Commodore” had dropped over the last two years from 34 weeks of average earnings, to 32 weeks. That’s a fall in relative price.


At the same time, GM is reducing its workforce and cutting its product line in Australia, and increasing employee discounts (that is reducing its average price) in USA. The number of manufacturers has reduced significantly in recent times, with the demise of the Rover Group in Britain, Chrysler amalgamating with Daimler Benz, Renault with Nissan, Saab and Daewoo being taken over GM, Jaguar, Land Rover, Volvo and Aston Martin going to Ford Motor Company, and Mitsubishi almost at the point of collapse into Daimler-Chrysler. This is one massive rationalisation of an industry, and despite the huge reduction in the number of manufacturers, the relative price is still falling.


In the pool industry, where there are hundreds of pool builders, there has not yet been the pressure of industry rationalisation to create even a remote possibility of (real) price increases. Market theory demonstrates that it can’t happen in any event.


The message has to be that the new regime of falling real prices is the new norm, and successful operators will adapt to this new reality.



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Is There an Answer?


There certainly is. But it is not the same answer for everyone. Some of our clients are working on three strands of new business models. Others are coming to grips with what the new order will mean to them.


The means are there to create strong and vibrant businesses in all aspects of the pool industry. You can bank on one thing. The steps that form the answer for you won’t be the same things you did last year or the year before.


Just remember Dee Hock:


The problem is never how to get new innovative thoughts into your mind, but how to get the old ones out.


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Ask Questions, or Discuss this Topic


You can contact The Red Zebra Business Centre to discuss any aspect of this article, or ask any relevant question at any time in normal business hours. There is no obligation implied in making such a call. Click Here for contact details.



Max Williams,

Principal Consultant





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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.