Question

Bob Longs of Longs Jewelers returned to his store in the springof 20x5 angry and depressed. “We just lost our lease; I don’t seehow we can make it now.” It had been seven years since Bob and hiswife, Bonnie, moved their business to Spartanburg, South Carolina.They had struggled, and sometimes excelled. But primarily, throughsheer determination, they just survived in the jewelry business tothis point. The loss of their lease and prime location could be thefinal blow that would destroy their business. Bob needed to decide,and quickly, either to fold the tent or give it one more shot.

York Operations

Longs Jewelers originally started in 1978 as Able Jewelry andMusic—a pawnshop in York, South Carolina, purchased by Bob’sparents from other family members. Bob helped his mom in thebusiness after his graduation from the University of South Carolinawith a major in business in 1989. Wanting to gain more businessexperience, Bob earned his MBA from Regent University in 1993 and,with Bonnie, assumed ownership of the store on July 1, 1993.

Bob and Bonnie met at the University of South Carolina. Shegraduated in three years with a major in foreign politics and aminor in Spanish. After college she was also able to get aPara-legal degree in business and real estate law and bankruptcy.Her legal training made it easy for her to find work with a lawfirm while Bob completed his MBA.

Even though the store was a well-recognized landmark in York, itinitially had trouble earning a reasonable profit. After aboutthree years, Bob saw the 80-20 rule in action. The pawnshopgenerated 80% of the headaches and 20% of the revenue. Bob wantedthe store to be more upscale; he eliminated the electronics andmusical equipment inventory associated with the pawnshop andchanged the name of the store to Longs Jewelers. Over the next fouryears, sales and profits grew.

Bob and Bonnie lived in Spartanburg where Bonnie grew up, about30 miles west of York on I-85. Through their associations andchurch activities, they established a loyal clientele in theirhometown who would travel to York to shop at Longs Jewelers. Manyof these customers often encouraged Bob and Bonnie to open a storein Spartanburg.

In York, however, Bob had the only jewelry store that catered toa middle-class market. Unlike in Spartanburg, where there wereseveral similar jewelry stores already established, he did not haveto worry about competition. The store’s roots were in York with along history and a devoted following. Even though the drive to worksometimes seemed long, the York site was doing well.

This situation changed about ten years ago. Video poker was thenew craze, and numerous people in the York seemed addicted to it.While illegal in South Carolina, it was legal in North Carolina.Many York citizens frequently drove north a mere 10 miles to thenext state to spend their discretionary income on these games. Bobsaw a change in his customer spending habits as they bought lessjewelry, and some even said they or their spouse used the moneyinstead to gamble and “hit it big.”

At the same time, York’s Main Street was going the way of manysmall towns without a strong economic base. Downtown businesseswere shutting their doors as shoppers drove to new malls orsuperstores like Wal-Mart. The only stores that seemed to beopening on Main Street were loan companies, which offered highinterest rate loans to consumers and businesses. Within two years,this combination of events took Bob’s operation from beingprofitable to barely surviving.

Relocating to Spartanburg

Bob and Bonnie had to decide if it was worthwhile to continuetheir jewelry business. They had two young children and roots inSpartanburg. With Bob’s MBA and business experience, thepossibility of a job at a company in Spartanburg was attractive.Bonnie could stay home and raise the kids, and they would be freeof the pressure of ownership and the worry over cash flow.

It was evident that Longs Jewelers in York would not survive.Persuaded by friends and motivated by his entrepreneurial spirit,Bob developed a business plan and sought financial assistance tomove his operation to Spartanburg. To his surprise, local bankswere not as supportive as Bob thought they would be. LongsJewelers’ current financial condition did not help to qualify for aloan; it seemed too risky. The financial institutions deniedfunding.

Bob liked the idea of being his own boss, enjoyed the jewelrybusiness, and felt he had some expertise in the area. So he keptlooking for financial assistance. Eventually, he returned to hisold bank in York. Even though he was leaving town, based on therelationship he had established with the bank and with theirassistance, he qualified for a Small Business Administration loanof $60,000. Bob and Bonnie sold their house in Spartanburg and usedthe equity to add another $20,000 to start over in Spartanburg.Upon the sale of their house in Spartanburg, Bob and Bonnie andtheir two children, Hannah and Jonathan, moved from a3,200-square-foot home into a 1,200-square-foot apartment.

Spartanburg Operations

Bob secured a lease for almost 3,000 square feet in a primelocation in west Spartanburg on a busy main street across from alarge shopping center. This section of Spartanburg was experiencingsustained consumer consumption since it had easy access to I-85,and new upper-income home developments were opening on a regularbasis. The rent for the store was $3,000 per month. The stripshopping center included some other fine stores, including anupscale women’s fashion store and a quality shoe store.

Unexpectedly, Bob learned that the landlord charged him anadditional $40,000 to “up fit” the store before the first sale waseven made. In some of the other lease contracts they considered,“up fitting” was already provided, and he wrongly assumed thoselease stipulations were included in this current lease. Bob learnedthe importance of “buyer beware.” He regretted not gettingprofessional guidance before signing the lease, but he was tryingto save money and time. On top of that, Bob later learned that hisshare of the property tax for the facility was also charged to himat the end of the year as an additional expense versus being partof the monthly rent. Already cash poor, Bob used his remaining$40,000 in funds to acquire inventory.

With limited working capital, a discretionary income typeproduct with low turnover, and a seasonal business, Bob continuallyhad cash flow problems. Jewelry was expensive, and the store neededsignificant inventory to display in showcases in order to attractcustomers. He bought lots of silver, which was relativelyinexpensive, to supplement gold and diamonds.

Bob maintained a credit purchasing relationship with many of hissuppliers, but when sales did not achieve anticipated levels, Bobquickly found himself past due on many accounts. It was not longbefore some of these suppliers wanted cash up front for purchases.Conditions seemed to go from bad to worse as debt mounted. In thefirst year, the business lost over $108,000.

Bonnie and Bob both needed to work in the store because at leasttwo people had to be around to prevent theft. With theirresponsibilities as parents, family activities, commitments atchurch, working six days a week at the store was demanding andthere was little down time. They even had to give up attending orwatching the games of their beloved University of South Carolinafootball team—an activity that in the past often gave themmuch-needed relaxation from the stress of running your ownbusiness.

Fortunately, the clientele from Spartanburg remained loyal andfrequented the store even more now that the business was moreconveniently located in Spartanburg. Store hours were 10:00 a.m. to5:30 p.m., Monday through Saturday. Bob believed that the customershe was trying to reach, primarily non-working women who enjoyedshopping and socializing would shop during the day. These womengenerally entertained, wanted quality family time, and had otherobligations in the evening. Also, this was more of a destinationlocation as opposed to a mall location where there would be morewalk by traffic in the evening.

Bob and Bonnie practiced a high moral and ethical standard andunderstood the importance of trust and honesty. They were fair invaluing stones for both buying and selling purposes, which wasoften a concern by less knowledgeable customers. They were alsofriendly and got to know their customers on a first-name basis.Customer service was highly regarded in all of their businessdealings. As it turned out, many customers bought jewelryexclusively from Longs Jewelers. With over 15 years of experience,plus his educational training, Bob felt he knew the jewelrybusiness and how to make it successful.

Additionally, Bonnie, who was completely self-taught in thejewelry business, had a knack for picking the right products. Shehad always had an interest in colors and texture and was good atdetermining what looked good on fashion conscious women. As ateenager, Bonnie was paid commercial art work for the Governor ofNew Jersey. Since their market was primarily women in a middle- toupper-middle income bracket, it was important for Bonnie torecognize trends and styles when purchasing inventory. She believedin her products and her enthusiasm translated into sales tosatisfied customers. Bonnie also learned to make jewelry. Shebought older jewelry from estate sales and other secondary sourcesat a discounted price and used the materials to make new and moreappealing jewelry items. Customers adored these unique items.

Even though competition from other jewelry stores in theimmediate vicinity was fierce, Longs Jewelers effectively used goodmarketing strategy with ads in popular publications, radio, storespecials, and especially word of mouth primarily catered tomiddle-income earners. They became active in the community andsupported charitable events, which helped to give the businesscredibility. Also their products were more fashion forward andseemed to have a unique appeal to their customers. Their targetcustomers were women who looked for something better than arun-of-the-mill Kmart or Wal-Mart type of product, but not theexorbitantly priced products found at the really upscale jewelrystores. Of course, many of the other individually-owned stores weretrying to capture the same market.

As with many owner-run businesses, Bob and Bonnie focused onlittle, but significant, services. They did engraving, cleaning,and elaborate gift-wrapping at no extra charge. Their bestpromotion was word of mouth and personal friendly service.

Still with all the positive factors that Bob and Bonnie hadgoing for them, maintaining the financial viability of the businesswas still a struggle in a very competitive market. There were anynumber of factors that seemed to impact their potential for successincluding the seasonal nature of sales, high carrying cost ofinventory, high overhead costs, low sales volume, and evensometimes surprisingly low margins on items sold.

At times Bob had trouble making the monthly lease payment on thestore. This last year he was four months behind. Like manybusinesses, the jewelry business was seasonal. The majority ofsales were made during the Christmas season with other peaks inFebruary, May, and June. Months like July and August were extremelyslow. In the past, Bob caught up on the rent payments in Decemberwhen he had a better cash flow.

Over the years, Bob and Bonnie had no choice but to rely oncredit card debt, which had amounted to over $50,000. Once theywere unable to make even the minimum payment, their credit scorestumbled—and they no longer qualified for any personal loans orother credit cards. Nevertheless, they worked hard to repaysuppliers and establish a better relationship with those companiesto hopefully get more favorable terms for future purchases.

Even with their best efforts, the Spartanburg store did not liveup to their expectations. It had been seven years. What did Bob andBonnie have to show for their effort? They had already worked nineyears in York with limited success and now another seven years inSpartanburg. There were good days, but then there were also dayswhen Bob wished just to sell a watch battery. With a $3,000-plusmonthly rent, it was easy for Bob to determine that he needed over$200 in sales (assuming a 100% markup) every day just to pay therent. Sometimes Bob felt he was working for his landlord.

However, Bob and Bonnie both gained much joy selling a qualityproduct, like an engagement ring to a satisfied customer, knowingthey played a role in a special event. Bob and Bonnie enjoyedworking the store together and had complementary skills and astrong marriage even though they were together almost 24-7.

Bob surveyed what he had. His $100,000 of inventory could neatlyfit into a couple of shoeboxes! There was the large safe,showcases, fixtures and some office furniture. Of course, therealso was the $250,000 debt. He felt fortunate that some of the debtwas still interest-free and that his average cost of debt wasaround 11%. He had worked very hard to reduce the level of debtover the past few years. While the total company debt haddecreased, his interest expenses increased as his credit ratingwent down and his perceived riskiness by creditors went up.

If he left the store he asked himself: how was he going to makegood on this debt? Because of their high ethical values andintegrity, Bob and Bonnie felt badly that they had created such abad debt situation, and they felt morally obligated to make good onall of the outstanding debt. Suppliers and others had placed faithin them and given the store favorable credit terms and assumed theywould fulfill these obligations.

Future Operations

If Bob wanted to begin again, could he, especially now that hislease was terminated by his landlord? Seven years ago, he had ahouse with some equity that he sold to raise capital for thebusiness. Now, he did not even have that. It was doubtful that hecould arrange for debt financing, given his history. If he broughtin a partner, that partner would probably want 51% ownership ormore of the business, and he would lose control. Furthermore, couldhe even find a suitable location for his store close to where hehad become established?

He was aware of another location that had recently becomeavailable. It was just three blocks away, but it was only 1,250square feet, 40% of the size of his current store. Bob surmisedthat the monthly lease rate would be about half of his currentrate. What kind of other lease terms would he face with a newlandlord? Bob did not want to be surprised again with hiddencharges in another lease agreement. Also, could he afford the costof a move, especially transporting the large and very heavysafe?

There was also the issue of employees. Because of the need toalways have at least two employees on site, Bob had often hiredextra help at various times during the year. Currently, twoadditional employees had come to depend on Bob and the job fortheir source of income. They too, would have to seek otheremployment. And there were his loyal customers. Many had stuck withhim since his early days back in York. He had spent yearsdeveloping this relationship and market. Did he want to give upthis valuable but intangible resource?

If he folded the business, what would he do? For 20 years he hadbeen in the jewelry business. Working for another company injewelry, like a competitor, seemed like such a step down. He wantedto stay in Spartanburg, and he had plenty of connections. But afterbeing an entrepreneur, could he work for someone else? What wouldBonnie do? Their children were now 12 and 16. How would they reactto this situation? They had already been through a lot.

Bob pulled out his last three years of financial data to try todetermine if they even had resources or the financial viabilityavailable to make the store viable at a new location. From Bob’sunderstanding of the jewelry business, successful operations have agross margin of around 50 percent and a profit margin of at leastfive to ten percent.

Maybe it was time to consider another direction. He had an MBAand years of retail experience, surely he could find a job in theSpartanburg area in the $50,000 to $60,000 range. Plus Bonnie, withher talents and skills in the jewelry business, could easily find apart-time or maybe full time job and earn up to $30,000. Also, withsome catching up on the latest laws in the legal field, she couldprobably get a much higher paying job as a Para-legal with a lawfirm in the area. The thought of using her legal bankruptcytraining on their own store was not amusing. But was it or shouldit be just about the money? They really enjoyed the jewelrybusiness and the relationships established with their clientele.Their faith had remained strong, but this was going to be a test,or was it an opportunity?

Required (Please show your work):

1. What risk factors should Bob bemost concerned about regarding his decision?

2. Identify possible ethical orvalues-based issues that could impact any decision.

3. What should Bob and Bonniedo?