Saturday, October 15, 2011

Canadian firms prepare for U.S. expansion


Madhavi Acharya-Tom YewBusiness Reporter
In just two years, Doug Burgoyne and his environmentally friendly company, Frogbox, have leapfrogged across Canada. Now, the company is hopping across the border.
But is it really the best time for a U.S. expansion?
Frogbox started in 2008 with a corporate store in Vancouver. The company rents stackable, sturdy, green plastic bins to customers for residential and commercial moves, as a green alternative to cardboard boxes and tape.
The following year, they opened a location in Seattle. Then they came to Toronto.
“What we found is our biggest value point is convenience,” Burgoyne says, adding that suits him just fine. “In that case, we’re helping the environment by influencing someone who normally wouldn’t even consider that as important.”
In January, Burgoyne struck gold with a successful appearance on Dragon’s Den. Investors Jim Treliving, chairman and owner of Boston Pizza International Inc., and Brett Wilson, chairman of Canoe Financial, invested $200,000 for a 25 per cent stake in Frogbox.
The business exploded. It received 500 franchise applications in the first 10 days after the show. “These were really good, qualified people who said they had $100,000 ready to invest,” Burgoyne says.
The company went from three locations to 21 in just seven months.
“We thought, ‘The U.S. economy is not where it should be. Let’s postpone that, get Canada up and running, and further develop the brand.’”
The American economy has taken much longer to recover than many predicted. Three years after the recession, the housing market is still stuck and the jobless rate is over 9 per cent.
What’s worse is that the outlook isn’t very positive. With the debt crisis in Greece threatening to pull Europe’s economy into recession, many economists are worried that North America will slip into reverse gear as well.
Frogbox managed to open a handful of new franchises in select U.S. cities: Minneapolis, Boise, and Madison, Wisconsin.
“Now we have hundreds of franchise requests from all over the U.S., but the economy down there is just not where it needs to be,” Burgoyne says.
“The housing market is not good. We don’t know if it’s going to be a double-dip recession. The uncertainty is the big scary thing down there.”
That’s left Burgoyne unsure about whether to open more stores in the States right away or wait it out.
Waiting would give more certainty on the economy and ensure the company is not spread too thin. But slowing down expansion could give rivals a chance to pop up.
How does a small business owner know when it’s the right time to expand?
“There are lots of ways to gauge it,” says John Pliniussen, a professor who teaches marketing and innovation at the School of Business at Queen’s University. “The first step is most crucial: You have to be very good at what you’re doing right now in Canada.”
Most Canadian entrepreneurs in this position naturally look to our southern neighbour, which is more similar to us than any other foreign market.
The deep malaise of the U.S. economy is a problem.
“That means you will need to get in there with a better business product and a better business model,” says Alec Morley, a senior vice-president with TD Canada Trust. “You’re taking a slice of the existing pie. The pie down there is not growing right now.”
Although the American market can seem very similar to Canada, it is different in one crucial way: in its level of competitiveness.
“A lot of Canadians just aren’t aware of how aggressive and competitive the market is in the U.S. They really know how to hustle,” Morley says. “It’s not uncommon for Canadians to get their heads handed to them down there. Canadians have to be prepared to compete at a higher level.”
That means your business must be in tip-top financial shape before you expand.
“A lot of people get overextended when they try to expand. Small businesses confuse top-line revenue growth with bottom-line profitability,” Morley explains.
That means they take on many new orders, but then don’t have the cash flow to buy materials or deliver the service.
“Banks can help you manage that cycle, but they want to see that the company has a lot of working capital and a profitable bottom line,” Morley says.
Locking in exchange rates is important for Canadian entrepreneurs, he adds. “Otherwise, your business becomes as much about speculating in exchange rates as the original product or service it was intended to deliver. You get it wrong on the exchange rate, and you can lose a lot of money.”
Your banker can help by using a futures contract to lock in an exchange rate for a set period of time.
In fact, the banker should be just one of three expert advisors.
Morley says businesses also need advice from an accountant and a lawyer who are well-versed in the company’s history and business, as well as cross-border business issues. “That’s the three-legged stool every small business owner should have access to.”
Burgoyne is considering whether it’s better to franchise or open corporate stores. The former requires less capital but offers a royalty that’s lower than the profit margin the business would get if it stuck to corporate stores.
“The key when you enter another country is to make sure you spend a lot of time selecting your first handful of locations,” Pliniussen says.
“Whether you go corporate or franchise, these are the units everyone will scrutinize and think about.”
Right now, Burgoyne and his partners are doing sophisticated financial analysis as they try to come to a decision.
“We have pages of spreadsheets and best- and worst-case economic conditions based on an expansion with franchise versus one with corporate stores,” he says.
“We run hundreds of scenarios, but, at the end of the day, you have to go with your gut. There’s no right or wrong answer. You have to understand the potential outcome based on scenarios and make a decision.”
Within five years of first opening Frogbox, Burgoyne wants to be in the 100 biggest cities in North America.
“The question is, will we do it in 2012 or do we wait a year, focus on Canada, conserve cash and, when the economy starts to turn around, jump into it?” he says.
“It’s not a matter of ‘if’ we go into the U.S. We’re there.”