Famed evolutionist Charles Darwin would have loved custom integration firm Five Smooth Stones in Jacksonville, Fla. … even if the company name is based on a Biblical reference. Why? Because the company is a shining example of how a business model can adapt, evolve and eventually thrive based on the changing market conditions.
Indeed, the Great Recession was a learning experience for every custom integrator. Those who were stretched too thin or slow to change are now gone; those who adapted are still here.
John Prince, president of Five Smooth Stones, has not only drastically changed his market focus, he may have found the Holy Grail formula to handling the burgeoning DIY market, which so many in the custom electronics industry seek, using small-footprint retail stores combined with a solid builder business. The end result is a company with steady and diverse revenue growth that appears very fit for custom industry survival.
Highs and Lows of Building Boom
The company started in 2002 as Atlantic Home Technologies focusing on structured wiring, security and audio/video for new home construction.
“We were solely in business to serve the new home construction market in Florida,” admits Prince.
Atlantic Home Technologies built a 7,000-square-foot showroom that was a place of envy. Inside the facility, Prince spent $250,000 to construct a fully automated 2,500-square-foot “show home” with a dedicated theater, master suite, pool table, family room and full kitchen. The entire facility was built specifically to cater to new home construction and builders.
With all his eggs in one basket — the builder market — things were good for a while, with about 95 percent of revenues coming from production homes that routinely had up to $4,000 in prewiring. From 2002 to 2009, the company skyrocketed riding the new home construction wave in Florida. Then, we all know what happened to the building industry.
“After seven years of great growth, we hit a wall. We had to dramatically cut back, hunker down, batten down the hatches and ride out the storm. We had to make some very difficult decisions to survive. We got a lot smaller and watched every dollar,” recalls Prince.
“At that point we had to re-evaluate version 2.0 of our company. We had a big design studio with a custom home inside of it. It was located in a destination place in a technology center/industrial park. We didn’t have any retail customers because we didn’t care about those customers, because we thought the building industry would never end.”
Not Renewing Lease on Big Showroom
“I knew we needed to have a retail location vs. being in an industrial park. We had done thousands of prewires in homes that did not have trim-outs for speakers, so we thought about how we could capture those clients. I never wanted to be at the mercy of rises and falls of the new residential construction market again,” he explains. “We did a lot of soul searching and praying and came up with a little hybrid, small home automation/ audio video boutique store concept.”
Location: Jacksonville & Orlando, Fla.
Years in Business: 13
Number of Employees: 27
Revenues (for 2014): $3.3 million ($3.8 million for 2015)
Specialty: Full integration targeting new construction and small retail
Top 5 Brands: Control4, Sonos, Sony, Alarm.com, Episode
FYI (One piece of advice to another dealer): Be humble … keep your ego in check. Remember that we deposit dollars in to our bank, not profit margin. Don’t get hung up on product margin.
The 1,500-square-foot stores (one in Jacksonville and a brand new one in Orlando) operate under a new dba called Five Smooth Stones and are located in higher end retail centers. The Jacksonville location, for example, sits in a shopping mall with an organic grocery store as the anchor tenant.
“We kept our ego in check,” he says humbly. “It would be problematic for us to still have a huge showroom with a $10,000 monthly rent payment to cover. The numbers would be out of whack. If you can keep your ego in check and put yourself in a smaller store, you can afford a nicer area. We don’t need 5,000 square feet to show what we can do. Your showroom does not need to be a Taj Mahal dedicated to yourself.”
The smaller-footprint locations still cost between $30 and $40 per square foot to lease, but they are affordable because they are so small. Each location also includes a 6 x 10-foot stock room in back.
Embracing DIY with Small Retail
After opening the first store, the company immediately found it could still do its builder business as it grew while at the same time cater to an entirely new class of clientele: walk-in retail customers.
“It opened up a new market to us among retrofit customers who maybe just wanted a more personable, fun and professional experience than they could get elsewhere. So the little hybrid store — a smaller, ego-in-check store crammed full of every technology — has been a great niche,” says Prince.
Today, Five Smooth Stones has a balanced revenue mix, with 60 percent from new construction and the other 40 percent derived from retail walk-ins.
“It’s not as if we have a line of customers backing up in the store. Our volume of customers is not high, but they are very high quality. They are the type of customers we want. Our conversion from a walkin to a sale is very high. We have been flush with jobs that I don’t think we would have if we did not have this little, hybrid retail A/V boutique presence,” he says.
The stores are open from 10 a.m. to 6 p.m. Monday through Saturday and staffed by at least two people. Builders, architects, interior designers and homeowners can set appointments or simply walk in. There is a counter where customers can purchase cash-and-carry products like Sonos and Bose, as well as cables and accessories, and two meeting spaces where clients can sit down with plans to meet with a salesperson/designer.
The showrooms are also designed for browsing, with a speaker wall where patrons can hear good/better/best demos for eight to 10 speaker lines, a lighting control area and 4K flat panels that are prominently on display. The typical customer, notes Prince, might be an empty-nester who wants to turn a spare bedroom into a mancave. About 15 minutes away in an industrial park is where the company has its warehouse, trucks and administrative offices.
“That [physical separation] is the only challenge, but the numbers don’t work to have the warehouse space at the same location as the retail. I don’t want to pay $30 or $40 per square foot for warehouse space,” says Prince.
The staff stays in touch using a single Google-based email server and quality CRM system.
“I am a firm believer in this hybrid store concept,” he says. “I do not believe you can survive 100 percent off of the builder business and you can’t live 100 percent off of the retail business unless you are a big-box store. These two business models support each other and feed off of each other. It is a really neat, synergistic revenue mix/relationship.”
Indeed, some customers who come in have ended up introducing Five Smooth Stones to their homebuilder, and now the company is the go-to integrator for some of those builders. For Five Smooth Stones, an important element of the new hybrid retail concept was embracing the DIY market by converting those clients to pay for installation labor.
“We love building a portion of our business around the DIY market,” says Prince. “You can’t stop the DIY market by saying you don’t like it. The train has left the station … just jump on it and make the best of it. It’s just like when the iPad came out and everyone went crazy because they wouldn’t be able to sell $7,000 touchpanels anymore. At some point, everyone decided to just jump on the iPad bandwagon. The result has been great; it opened up home automation to the masses. The same thing is true for DIY.
“There will always be DIY; there will always be Do It For Me. I truly believe that the DIYers need integrators to set up their systems, but they don’t have to take out a second mortgage anymore to get it done,” he continues. “Quite frankly, if a customer is unwilling to pay me a few hundred or a few thousand dollars to set up their system correctly, then they are not my type of customer. I am going to move on to the next customer, because there are plenty of them out there.”
Builder Business is Still There
While the small storefronts opened up the DIY market, Five Smooth Stones did not abandon the builder business. Since 2009, its builder revenue has been slow and steady as the market began recovering.
Remember those $4,000 prewires (in $300,000 homes) the company did before the housing market collapse? Today, those are $500 to $800 prewires with fewer drops and a much smaller security system. After the crash, builders had to get to a lower price point.
“They cut everything back. We had to go with the flow. We had to decide whether to reject that builder business or take that business and try to make more money on the upsell,” admits Prince.
But the signals are encouraging. Prince recently held a focus group with a half dozen top builders.
“I believe we are going to begin to see builders embrace commercial class wireless networks in new production homes from Ruckus, Luxul or Araknis. It’s what Millennials want. Millennials today don’t complain about the quality of the TV picture or the lack of food in the refrigerator, they complain about the Wi-Fi,” he says.
Five Smooth Stones is doing a new project for a builder with three different communities and multiple model homes for each community. Every one of the model homes has high-end wireless access points on each floor.
“We are blanketing the homes with phenomenal wireless access,” Prince says. “The smart builders will see the light and present themselves as technology-savvy.” He adds, “There are always going to be builders that just don’t get it, and they would rather upgrade the level of their granite, carpet or tile than spend $1,500 on technology. You have to qualify builders the same way you have to qualify DIY customers.”
What's in a Name?
The new name for Atlantic Home Technologies is also a reflection of a new attitude, explains principal John Prince. Five Smooth Stones comes from the Old Testament in the Bible in which David slays the giant Goliath after procuring five smooth stones from the brook.
“We kind of felt like we were the little guy out to kill the giant, like Best Buy, hhgregg and other big-box stores,” Prince says. “We were out matched and outnumbered.”
The company is still legally Atlantic Home Technologies, but Five Smooth Stones is a registered trade name. It’s also a good conversation starter with prospective clients.
“We wanted a name that was memorable and different,” Prince says. “It has really been cool. People ask us about the name.”