Green River Rod Makers Alec Johnson, Ph.D., University of St. Thomas 10
Green River Rod Makers
written by:
Alec Johnson, Ph.D.
University of St. Thomas
St. Paul, MN
651-962-5125
Prepare written responses to the following questions to be submitted at the beginning of class on 2/9 (***Note: please print an additional copy of your submission for your personal reference during our discussion and to help you in the note taking process.):
- What are the strengths and weaknesses of GRRM as an ongoing business? Would you, as an outside investor, put money into it?
- Is this a good Opportunity for Scott to buy a business?
- What other market approaches are available to Green River?
- If you were Scott, what would you do? Be sure to provide the underlying rationale for your recommendation.
- Reflect on your feelings about risk and business failure. Can you accept the possibility of having to declare bankruptcy?
- Compare starting vs. buying a business. What are the pro’s and con’s of buying a business?
“Give a man a fish and he eats for a day, but teach a man to fish and he eats for a lifetime!”
Chinese Proverb
So the story goes with Burt Stanski and his company, Green River Rod Makers.[1] Burt and his only business advisor, Scott Fentress, toasted with a shot of tequila as they sat in the warm, wood stove-heated workshop overlooking the Green River and watched the falling snow. Both were feeling as inconspicuous and lazy as the Green River, having just realized that the business was about to enter bankruptcy and discussing the possibility of Scott buying the business from Burt, assuming managerial and marketing control. It was March 1998, the Burt’s bankers were at their breaking point and the ABC Corporation of New Hampshire had just filed a judgment against Green River. Burt was several months behind with his financial commitments and losing money on every rod he sold - a difficult situation indeed for a man who loved his work enough to describe it in the following manner:
"Flyfishing's best kept secret. That's the way we've been described by one of our industry's leading journalists. But then, we're not so secret anymore and, more importantly, we've been here long before flyfishing was an "industry." At Green River we're still craftsmen and flyfishers. And though we've grown we will never become part of that industry where factories produce cookie-cutter rods on an assembly line. We remain dedicated to that same intention with which we began: A small shop committed to produce the best flyrods our hands and technology can produce…please notice that they don't change with the new year as car and dishwasher manufacturers do. No hype, no changing slogans. Ever.”
Despite his passion for fly-fishing, Burt was unwilling to bring discipline to operations and marketing of the business. Given the banks’ warnings of foreclosure and other legal action recently brought against the business, Scott was under some pressure to decide whether this represented a good opportunity to get into a business of his own. He found himself engaged in some soul searching, considering the following issues: lifestyle, his personal risk profile, income needs, and viability of the business.
The Current Owner, Burt Stanski “I wanted a life without compromises.” Burt Stanski.
Burt’s slight build, gray beard and gentle voice gave the impression that he could be anyone’s kindly grandfather, yet his passion for building the absolute best fly rods slapped one in the face like a cold wind off the back side of a glacier. Simple, passionate, and caring, Burt’s story is certainly in the top echelon of interesting “life paths.” Burt started out as student of architecture at Taliesin, Frank Lloyd Wright’s architecture school in Spring Green, Wisconsin. Mr. Wright, failing to learn Burt’s first name, simply referred to him as the “blue-eyed boy.” Burt left Taliesin when he was drafted into the Army between the Vietnam War and Korean Conflict. Four years later he left the military and traveled to Japan to take up spiritual studies. Still searching for his foothold in life, Burt returned to the United States and enrolled in Yale University’s architecture program, where he was one of six to graduate from the program. He spent the next 30 years as a prominent architect on the east coast. In the mid 1970’s he began building fly rods as a hobby and found himself apprenticing once again, this time under the two most notable rod builders, Sam Carlson and Tom Maxwell (founder of Thomas & Thomas). Burt describes his shift from architecture to fly rods:
“I woke up one morning and realized I didn’t like what I was doing. I wanted a life without compromises, without the new materialism that had penetrated society and the architecture profession.”
Because of this epiphany, he aspired to develop a lifestyle that combined right-livelihood with his newly discovered talent for building fly rods. Therefore, on his 200 acres of prime Vermont real estate, in a little barn he designed and remodeled into a small fly rod manufacturing facility, at the end of a dirt road where the Green River runs 30 feet from the door, Burt began handcrafting some of the finest fly rods in the world.
Green River Rod Makers (GRRM) “…and then you discover it’s not the fishing; it’s not the ritual, but the river itself. And these things that were once important to your life become quietly and forever essential…you find your own Green River.”
A writer for Gray’s Sporting Journal stated, “My favorite rods come from Green River. They are magnificent fishing tools bordering on cybernetic appendages.” By the time Scott had met with Burt, GRRM had grown to producing about 150 rods a year. 95% of the rods sold were graphite rods, with about 5% a classic bamboo rod (Appendix A). GRRM had a full line of rods, ranging from lightweight small stream rods to heavy weight rods for larger salt-water species. Burt made each rod by hand, buying rolled graphite blanks made to his specifications and finishing the rods with nickel hardware, eyelets, and special, high quality paint job that could be customized on request. He also handcrafted rods in the time-honored tradition of bamboo. The eyelets were hand wound with silk by a cottage industry of winders who worked on a piece rate schedule. The windings were covered with a protective epoxy that required several hours of drying time on a rotating spindle. The labor intensive nature of this process limited Burt to producing about 200 rods a year; however, with an investment in a new spindle machine that could handle ten rods at a time, Burt felt that he could boost that rate to 800 rods a year. As Burt put it to Scott during one of their Vermont meetings,
“Our product is known for the extremely high level of castability, quality finish and fine craftsmanship, but I have to be priced below my competitors to develop a real advantage. I don’t want a big business, I just want to build fly rods and make a living doing it.”
While Burt had a passion for making the best fly rods available, he refused to acknowledge the business aspect of his vocation, particularly its typical responsibilities to debt holders. He was poor at record keeping and had no working knowledge of costs, profits or cash flow. In fact, he had no interest in acquiring such knowledge. His bookkeeper tended to mix accrual accounting with cash flow accounting, thereby producing essentially useless financial statements. Burt’s method for reporting earning for tax purposes was thus (Appendix B),
“I simply estimate the number of rods sold, multiply that by what I think my profit per rod is, and report that to the IRS.”
Burt would do custom orders for special repeat customers, but his primary channel of distribution was through retail sports stores, which he reached through the use of a single sales representative who received a 7% commission on each rod. A majority of sales occurred during the annual trade show in September. Retailers, who agreed to take delivery after the first of January the following year, would place orders for rods during the show. The industry had a policy of 60 days payment terms.
In addition to Burt’s substantial equity investment, the company was funded by two loans: a block grant from the City of Brattleboro and a loan from the Bank of Vermont. Each loan was approximately $30,000 and was collateralized with Burt’s real estate and other assets of the business including machinery and finished inventory. Burt spent very little on advertising, relying mostly on word of mouth and his presence at the annual trade show.
The Fly Rod Industry[2] “Pick industries that allow you to make a profit.”
Trends Up until 1994, when Robert Redford and Brad Pitt made a big splash with A River Runs Through It, the market had been flat for years. The movie was a shot of growth hormone in the arm of the industry, with the next three years averaging 15% annual growth. However, 1997 marked a sharp slowing, to near flat growth. The market was fairly consolidated, with three large U.S.-based producers owning about 80% of sales, and another two dozen small regional producers splitting up the remaining 20%. Few of these competitors possessed the reputation for quality and performance at the moderate price point of Green River. Several lower-end manufacturers used inferior fiberglass to produce fly rods, but true fly fishers wouldn’t even consider using those products.
Competition/Market Green River’s main competitors were Loomis, Sage and St. Croix. Each of these had enjoyed extensive distribution, excellent reputations, and competitive pricing. They offered a broad line of products that appealed to the novice and weekend recreational fisherperson as well as the enthusiast with excessive disposable income. Enthusiasts make up the smallest segment of the market, which is not growing but includes those people most likely to buy the best equipment available. They want to be part of the elite fly fishing crowd, with L.L. Bean or Orvis fishing vests, bamboo baskets for their fish, and pipes hanging from their lips. They read the prominent fly fishing magazines, like Gray’s Sporting Journal, and belong to Trout Unlimited. They are the “in crowd” of fly-fishing, predominantly white, male and between 35 and 65 years of age. They believe in the act of fishing, not the catching of fish; they seek to understand the rhythm of the river and wind, and the hatching of flies. For this small, image-driven market, it is more about the experience of fishing than it is about catching fish.
The Situation “Opportunity is a combination of preparation and luck.” Anonymous
Burt was well behind on his bank installments, struggling to raise sales with little or no marketing budget, and considering several options. One option was to open a retail store, scale back distribution, and just sell direct through the store. Another was to move into a larger facility in town and scale up production to nearly 1000 rods per year, a goal based on estimates provided by Burt’s sales representative. Burt felt that he could climb his way out of this hole by increasing sales. To this end he enlisted Scott to develop a strategy and business plan to raise money.
Scott was enchanted with Burt and with the business, while also recognizing some of their limitations. As he dug into the company’s records a disturbing picture began to develop; the problem was not a lack of sales, as Burt believed. The average price per rod was $225 wholesale and the average variable cost per rod was $237, yet Burt thought he could make up his losses on increased sales! When Scott suggested to Burt that an immediate price increase was necessary to stabilize the situation, Burt replied, “If I raise my prices, the mailman won’t be able to afford my rod.”
In the meantime, pressure was increasing from the banks with threats to call his loans, and trade creditors were threatening to shift their terms to C.O.D. Burt held discussions with several potential investors; one suggested that he could reposition the company against Orvis and develop an extensive merchandising program, taking Green River public. Burt’s predictable response to this was,
“I’ll be damned if anyone will bastardize the name Green River by merchandising. This is my living, my passion. It’s not about merchandising.”
Burt entered negotiations with ABC Corporation, an SBIC (Small Business Investment Company) from New Hampshire, for an equity/debt investment structure. Burt asked Scott to review the term sheet (Appendix C), after which Scott strongly urged Burt to drop ABC and search for another investor. Scott maintained to Burt that this was not a good investment given the existing business strategy, and that any SBIC willing to invest must not have Burt’s best interest in mind. Burt, under heavy financial pressure, signed the deal and three months later was in default of the terms, with ABC filing a judgment for repayment. This action was the final straw that forced Burt to seriously consider filing Chapter 11 Bankruptcy protection. Unlike Chapter 7, which liquidates the business, Chapter 11 gives the owner protection from creditors while a reorganization plan is developed.
Scott Fentress “If money was no object, I’d buy small businesses and run them right into the ground.” Scott Fentress.
Scott often made this tongue in cheek remark during weekly discussion sessions with his colleagues, who jokingly referred to themselves as “The Board of Directors.” Yet, money was very scarce for a graduate student, and the Board often discussed ways of bootstrapping business start-ups and acquisitions. As an MBA student at the University of Wisconsin, Scott met classmate Sasha Stanski, who approached him one day after class to ask hesitantly, “You’re an entrepreneurship major; can you help my dad’s small business?” Scott could not say no to this offer, being an avid fisherman and fan of the underdog. In fact, Scott was so excited he began to think of what it might be like to own his own fishing products company. After all, he grew up fishing and hunting the woods of Wisconsin and found the Brattleboro, VT area quite beautiful. This could become a great opportunity to learn the industry and make some good networking contacts. Over the next few weeks Sasha gathered some marketing materials and a business plan he was writing for his father; he then presented them to Scott as an introduction to the business.