Don't Judge a tile Store by its Interior

January 22, 2008 // Franchising.com // - (Rancho Cordova, CA)---The first Tile Outlet Always in Stock® opened in Sacramento, Calif., in November 2001. Within three months, customers were arriving in droves to buy first-quality ceramic and porcelain tile and stone products at wholesale prices.

Founder Doug Disney, 37, who had spent 10 years working for two major tile distributors before setting off on his own with a healthy dose of both industry expertise and entrepreneurial zeal, soon realized what his next step would have to be.

As a 19-year-old, Disney had started his own business called Yachtin' America, in which boat owners across the country agree to swap boats while on vacation, similar to popular home exchange programs. But now that Disney was in the tile industry, there was no doubt he had the drive and desire to succeed on his own. He just needed some direction.

That's when Disney came across the book, "Start Small, Finish Big" by Subway co-founder Fred DeLuca. The book contained DeLuca's 15 key lessons to start and run a small business.

"I read the book in two days," Disney said. "It made me realize that I already had a great concept, but that franchising was a much better alternative for growing than opening my own stores. As soon as I finished the book I called an attorney to get started."

Disney put the lessons he learned to good use when he began franchising in 2002. Today, Tile Outlet Always in Stock is not only one of the fastest-growing consumer goods franchises in the western United States, but it is positioned for national growth, as well. Tile Outlet is the only franchised retail tile concept of its kind with 65 locations in eight western states. Thirty-three more locations are in development and expected to open within 12 to 18 months. Disney's goal is to have 200 stores sold by the end of 2008.

Disney's strategy from the start was to systemize the process of bringing imported products to customers at the lowest overall prices in the marketplace. Tile Outlet's low-price concept is driven by its low overhead: showroom floors are stained concrete instead of elegantly tiled; there are no elaborate tile displays and staffing is limited to two or three employees.

The result is average savings of 20 percent on tile and stone products and as much as 70 percent on prefabricated granite countertops when compared to the cost of traditional installation.

"The no-frills showroom and low overhead allows us to offer outlet pricing," Disney said. "But nothing we offer is discontinued or closeout products. It is all first-quality imports and we pass on the savings to our customers. They don't care how the tile looks in our showroom. They care about how it's going to look in their house."

Tile Outlet stores are in Arizona, California, Colorado, Idaho, Nevada, Oregon, Utah and Washington. Expansion to Texas, New Mexico and Montana is scheduled for early 2008. Expansion to the East Coast is being targeted for mid-2008 with Florida and North Carolina as potential sites.

The company's initial growth has been focused on western states because of simple and sound reasoning. Because tile and stone products are heavy and cost-prohibitive to ship, the company's expansion has been tied to its opening of strategically located warehouse distribution centers that supply specific markets and help contribute to Tile Outlet's low pricing.

The company-operated distribution centers range from 4,000 to 25,000 square feet in size and are in Rancho Cordova and Ontario, Calif., Portland, Ore., and Salt Lake City. Additional distribution centers are expected to open in Houston by year's end and Phoenix in early 2008. Most also house a company-operated retail store.

"Our main priority is to get distribution centers open across the states," vice president Chris Nezbeth said. "As we do that, we'll begin expanding into areas outside the western states."

Dovetailing with that strategy, franchised expansion to the East Coast will first be preceded by the opening of a company-owned distribution center in that region.

"We've been very smart with our growth in going state-to-state," Disney said. "But instead of moving east slowly and hitting the midwestern states, we're now going to jump over those and hit the East Coast. That will immediately spur franchise sales up and down the East Coast. Then we will work our way westward again."

The estimated initial investment for a Tile Outlet franchise is moderately priced from $64,350 to $124,800 and a descending royalty structure rewards franchisees for strong sales. About 80 percent of Tile Outlet franchisees are owner-operators and 75 percent operate or have committed to opening more than one location.

Current franchisees run the gamut from former engineering and IT professionals to real-estate brokers and former Air Force fighter pilots. Only one of the chain's current franchisees has a direct background in the tile industry.

"It's a very diverse bunch," Disney said. "A very small percentage of our franchisees knew anything about the tile or building industry specifically. So if someone is a dentist, for example, our comprehensive training and support will provide everything they need to be a success in this industry."

Retail locations average 3,000 to 5,000 square feet in size and are typically located in "hybrid" retail/warehouse centers that might also include a service provider such as a paint or tire retailer. Such locations often have good retail exposure but rent typically averages 75 to 80 cents per square foot compared to $3 per square foot for a prime fast-food restaurant site, Disney said.

"We want people to see us, but we don't want to be next to the prime grocery store," he said. "It's just too expensive."

Adds Nezbeth: "If our franchisees only get 10 to 15 customers per day, they will have a successful store. If you have a fast-food concept you need customers coming through the door all day long to be successful. Our average customer spends $500. If you just make four sales a day, you're doing fantastic."

Another plus for franchisees who might be leaving corporate jobs but don't want to endure the grind of long retail hours: Most Tile Outlet stores are open 9-to-5 weekdays and 10-to-4 Saturdays.

"They're basically normal banking hours," Disney said.

Tile Outlet's competition includes independent tile and stone retailers, carpet stores and "big box" home improvement stores. Some of Tile Outlet's highest-volume stores are in smaller, secondary markets – proving the concept is sustainable outside major metropolitan markets – and Disney says he'll always go head-to-head with competitors, especially big-box retailers. In fact, he encourages franchisees to locate their stores nearby the behemoths.

"That's where people perceive they should go," Disney said of the home improvement heavyweights. "But when they don't get the selection, service and pricing they were hoping for, they come across Tile Outlet as they're leaving the parking lot. We get a lot of business that way. At the same time, we should also be able to offer better pricing, service and selection than any other small independents because of our size and buying power."

Because 90 percent of its customers are do-it-yourself homeowners, Tile Outlet has largely been able to ride out the current decline in the U.S. homebuilding market. With a promising long-term outlook on sales of home-improvement products, the chain is well-positioned as it begins its eastward push from its western roots.

"While new housing starts have taken a slide across the country, people are still remodeling their homes," Disney said. "I wouldn't say any business is recession-proof, but we're in a good spot when compared to other building-related products. People have to have some type of flooring in their homes and tile is the least expensive choice over the long haul."

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