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Wednesday, April 23, 2008

Article in MarketNews

By Wally Hucker
http://www.marketnews.ca/

The challenge to me in this business," Stan Sprenger began, "is that I'm not a custom person or custom thinker, but rather a scale thinker." Sprenger is the founder of, and a partner in SmartHomeShop, of North Vancouver, BC, which operates as a custom design and integration business with absolutely no retail sales; and may just be the launching pad for a whole new way of doing custom.

"I see an opportunity in this business to do something similar to Home Depot Design Boutiques, which seem very successful." There are currently two in Canada: one in West Vancouver, and another in Toronto. "Upstairs are design centres, such as for kitchen design, or floor covering, where you can sit with a consultant and design things for your home. It would be great to open an audio-video and custom centre using the same approach."

With no background in consumer electronics retailing or custom, Sprenger took the first step to do that in late 2003. He had recently left a very successful career in the travel industry, where he was president of the Vacation Division of Intrawest. The latter, considered the largest ski resort company in the world, operates Whistler and Mont Tremblant resorts, among many others. His main pastime was working on his house, which got him thinking about houses, house construction, and various systems within houses.

A Brainy Abode

"Then," he said, recalling the epiphany, "I was driving in my car and wondered, "Why can't my house work like my car. In my car, as soon as I turn the key, everything comes on the way I like it: the seat is adjusted, the air conditioning and music (are set to) levels I like. I want to enter the house and have it "know' I'm there: to turn on the lights according to my preference, turn my favourite music up, set the thermostat to my preferred temperature, and do the opposite when I leave.

"My approach to this business is all about integration of systems." Having an IT background, which he fostered effectively with Intrawest, Sprenger wasn't entirely building castles in the sky. The tangible result is the SmartHomeShop showroom at 50 Fell Ave. "We have a full showroom, but no retail trade. We never intended to build a retail store. There is no product on the shelf, but rather four or five vignettes in the 2,300 square feet of space. It's set up as a functioning and fully furnished house, with an office in the back. The kitchen has appliances and a pull-down screen, for example." There is also a family room, living room with electric fire, and a master bedroom with en suite bathroom.

"The shop works the way we like to see a house work." Thanks to phony walls, half walls (which afford views into other areas of the house), clients can see and hear lighting and music change ahead of, and behind them, as they make their way through the shop.

Control Freaks

Although it's been in business just under four years, SmartHomeShop has become established. "When we were new to the business, we first went after the low-hanging fruit," he recalled, "like friends of friends." After establishing a Web site and getting feedback from it, they developed a broader client base. "Generally, customers call us now. After all, we're across from an auto mall on the second floor of a commercial-industrial building with the windows blacked out, and people have to be buzzed in."

Sprenger said the shop does a lot of work with designers, and some with architects, contractors, and builders. "After a while," he mused, "we felt designers were the best to go after. While people having custom homes built generally have architects, they usually also have a designer, who understands our systems and cuts through the technical stuff."

Integration of systems, he reiterated, is key to the business. "I saw the need for this when I was with Intrawest. These monitors on steroids can be more than just a big TV. I should be able to move all my digital images through them: photos, my computer work. And I should set my music through them. There should, I thought, be more horsepower to this.

"This is a new need in consumer electronics. The old complaint of customers was that things were too expensive; whereas the new complaint is that there is now no service at the big box stores. They can sell hardware, but they are clueless about integration. In this business, we have a total migration and integration of the products."

Coming from an IT background, Sprenger found himself asking of home theatres, lighting, and other systems: "Why isn't this set up as a network, so that everything has an Internet Protocol address?" He said he then found a company whose product allowed SmartHomeShop to sell an integrated network with IP addresses for electronic components as diverse as A/V receivers and thermostats. "We were the first Control 4 dealer in Canada," he stated.

"We set up a separate router with static IP address for our components in the house. Control 4 software identifies all the components and communicates with them." If available, he prefers using an RS232 port, as on Marantz receivers. Otherwise, he said, an infrared emitter is employed. "One remote then controls everything from A/V through HVAC to security, lights, blinds, and so on."

He noted that, like other custom integration specialists, SmartHomeShop is not selling gear. "We sell solutions. Our focus is automation. "Making Living Easy' is our tagline." He said that his concept of how a house should be controlled is based on what his wife would want. "My wife wants one remote, and to use one button to turn music on and off."

Follow the music, is what he calls the approach. "Mostly we start in the kitchen, where the whole family spends a lot of time. The other rooms follow. It's a very easy way of designing." Sprenger and the other SmartHomeShop sales staff usually suggest one main touchpad, not touch screen per house. If needed or strongly requested, there might be a secondary desktop or wall panel touchpad in the master bedroom, family room, or rec room. Other rooms would have a six button keypad for the follow me music and lighting control.

"I think that we are a little unique," he ventured, "given that there is often a very open door for selling solutions, because we don't want to oversell. If they just need audio-video, okay. If they just need four or six zones, we don't sell 12. For example, the kitchen and family room is usually the same zone. How often do you listen to different music at a different volume in adjacent areas?"

Typical Jobs

A typical job for SHS would either be new construction or a completely gutted house to be renovated. Both projects are abundant in the hot Vancouver housing market.

When potential customers arrive at SHS, Sprenger, Managing Partner Drew Campbell, or another sales person will give them the walk through. "Most go "Wow! I didn't know you could do that.'"We're working towards a system approach: we build the whole rack in our shop, test it at our warehouse, and install it as a whole at the customer's residence. We're looking to a model where we are subbing out prewire and installation, while selling hardware and design." "

A basic 3,000 square-foot home would engender about $40,000 to $80,000 worth of work for SHS, with the average being smack in the middle at $60,000. For $40,000 the customer would get integrated security, a modest 5.1 home theatre, and distributed audio. Distributed video adds about $5,000 to $10,000 by Sprenger's calculations. Higher prices depend on more expensive hardware components. "An amp can cost $500 to $5,000. Some people want all the bells and whistles." Such SHS jobs can wind up being over $200,000 with items such as the Kaleidescape System. Security is subcontracted, but integrated into SHS systems.

"When people do the tour, we do a very light sales job. We tell them, "Once you've got things together, we can go over your plans and build you a proposal. We don't charge for a proposal. We put in all the bells and whistles."

For new and total reno' construction, all pricing is on a simple, per-room basis. "A lot of custom integrators," said Sprenger, "will talk about the distribution panel, but most people don't really understand all the gadgets and cables. We don't over explain the technical; just the cost per room.

Some customers, he allowed, are uncomfortable with the price. "They get sticker shock. So we suggest they undertake the pre-wire. They know they have to commit to pre-wiring because once the framing is complete and the interior walls go up, there will be no chance to pre-wire later. They get comfortable with pre-wire."

This rough-in, he noted, means 60 to 120 runs of wire. A client who is building a new home has so much on his or her mind: flooring, kitchen, HVAC, roofing, permits. So quoting is often a two-step process. Some CIs won't do it this way. They want, say, a $500 retainer for a quote."

He added that if the clients are dealing with a contractor or designer, the latter push the project forward. "They have confidence in us, and the consumers then think, "SmartHomeShop knows how to do it right.'"

Bricks & Mortar

Sprenger emphasized he would not disparage those who work from a home vehicle, in CI or other trades. "There are some people doing that who do great work, but we felt it would limit customers to those who learn about them by word of-mouth." While not demeaning personal referrals either, a good Web site and a shop are important to him. Every week, homeowners walk in here with their plans after finding us on the Web. Once we walk them through the shop, we've hope they become customers."

Staff complement at this writing is nine. Sprenger oversees finance and sales. "I basically bring deals to the table." Campbell and one other staffer handle most of the sales. Other members of the team include an accountant-controller, software design engineer, project manager, and lead installer. Two staff installers are augmented by another two contracted as needed. "Sometimes we subcontract the whole pre-wiring (of a project) to electricians. We like working that way."

Package Sales

Sprenger recalled the original vision he had for an operation like SmartHomeShop.

"Do we at SmartHomeShop," he asked rhetorically, "want to be just one mom & pop?" The answer is obviously no. "We're working towards a system approach: we build the whole rack in our shop, test it at our warehouse, and install it as a whole at the customer's residence. We're looking to a model where we are subbing out pre-wire and installation, while selling hardware and design."

He sees a hurdle for other electronics retail specialists, such as audio specialty shops, who want to get into custom. "They have to reinvent themselves, and there is a big learning curve to get where we are. Our idea is to convert their storefronts into SmartHomeShop showrooms. They would sell the pre-packaged systems to their customers, while we would do all the ordering and building." The franchisee would hire electricians from a pool vetted by SmartHomeShop, and just plug and play, said Sprenger. "We don't even have to go to the residence to program the system. We can do it online."

SmartHomeShop is already setting up the standard system packages, and will soon test the relationships with stores close to its home base (Western Canada). "We already have had expressions of interest," Sprenger noted. He envisioned three in a large metropolis like Vancouver; perhaps south, central, and east. While SmartHomeShop currently has clients who will drive from Surrey in the south to North Vancouver, it can be awkward for them. A midterm goal would be to have stores in other major Western cities. In the long term, he said he could foresee entering the Toronto market. Montreal, as a bilingual city, is a unique market, he mused, and merits serious study before deciding. "Seattle," he stated, "needs more custom integrators, and we get asked down there all the time, but let's take baby steps."

The biggest challenge to custom growth, he felt, is scaling it up. "Custom is what it says, and it's hard for CI specialists to get out of that box. Again, there are some great mom & pops. But now that SmartHomeShop is financially stable on a one-store basis, we want to replicate it. We want a cookie-cutter approach to the product; yet while doing the same things over and over, still remain "custom' to the customer."

Sprenger was aware of having said that a successful one-off custom shop "is a hard act to follow." Through CEDIA, he was aware that the concept is being tried in the United States, "but there is nobody with more than four or five stores." SmartHomeShop had been benchmarking itself against other custom shops in from San Francisco north through Seattle, Vancouver, and Calgary. "I did not see anything I really liked, and nothing like we are today. Tweeter in the U.S. looked like it wanted to be a showroom, but wasn't. It wasn't exactly custom and it wasn't a retail shop. It’s Web site looked like it wanted to compete with Best Buy. It had an identity crisis."

The spring of 2008 should see a rollout of the new concept SmartHomeShops. "Right now, we're revamping our Web site, and integrating software to refine quoting. We can use the model to build some exceptionally nice packages. "Any business," he added, "can build on good people to go to the next level." The next level for the headquarters of SmartHomeShop is to enter the business of advertising, designing, assembling, and shipping custom systems, almost like a mini-factory. "We would almost be a marketing machine, but we would also design and assemble.

"The biggest challenges to the individual custom integrator are to market themselves; and to have easy-to-install systems. There is so much choice, almost too much. Some great installers don't want all the paperwork and to invest the time and effort that it takes to establish relations with manufacturers. This way, they can have a turnkey business model. They can leave the assembly to us, and they can install the rack."

An immediate goal for Sprenger and SmartHomeShop is to create more awareness of custom integration in Canada. "I marketed Whistler as a destination," he said in explaining his approach, "and I'm a taking a page out of that book.

"For an individual hotelier to market to the world is like a peashooter against an elephant. So I got the co-op advertising dollars from all the Whistler hotels, and created a 32-page booklet, and had it inserted in all the major ski publications in the U.S. We called it the Whistler Travel Guide, and had our toll-free 800 number in it; and got a commission from the hotels for rooms sold through it.

"We can take the same approach for custom integration." Intending to call it the Smart Home Guide, Sprenger has got the ball rolling by talking to a national newspaper about a 16-page advertorial insert, and some distributors and manufacturers like Marantz and Monster. "They're all extremely excited," he said, adding that he foresees great support for the project.

"The whole business of CE retailing is evolving, and anybody deeply into custom integration is ahead of the curve. A successful model for plug-and-play would be great for the business." iPod is a great PNP model, adds Sprenger.

"Manufacturers are trying for greater integration of PNP in home products, and they realize that the growth market is in custom, and they don't want the big boxes to be their only customers." Thus, he continued, the custom integrators are starting to see excellent cooperation from large brands like LG Electronics. "There has always pretty good cooperation among CI people. They are all pretty open and all strive for good quality.

Will custom integration in Canada go down the road to prebuilt standardized systems? "I don't know," Sprenger stated. "But," he concluded, "We’re going to look down that road."

Big Boxes & CI

Big box retailers, and for the Canadian CE business, that means Best Buy Canada, are definitely going to reach for a slice of the custom integration pie. Indeed, to that end, Best Buy Canada bought Howell & Associates of Burlington, ON, two years ago.

He did admit, however, to having had trepidations about the big boxes when he first entered the custom business. "My first thought when I got into this business is that they were going to kick my ass when I start selling LCD and plasma. But, no, they did not. Yes, they can buy the hardware 10 per cent cheaper, but they have huge overheads. They have marketing, head office distribution, retail store, inventory, and warehousing costs. They can't give everything away."

"They will do light custom, plug-and-play, such as a flat panel on a wall with a 5.1 audio system and a Harmony remote. They are smart, and they will stay within that box, because that's what 75 per cent of the market wants and can afford."For the record, SmartHomeShop and Future Shop competed on a 70-unit condo project to supply LCDs and a basic integrated remote for each.

SmartHomeShop won the contract.