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Wal-Mart Venture

Futon Life Feature Story
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
by David Garretson Part
2

Wal-Mart

Haworth moved to Sparta with his team to take over the merged company, now known as New West - From The Source. Things changed rapidly. The slow-and-steady, let's-take-months-to-study-it Shaffield approach was gone. It was time to move fast and grow the business. This was it!
A Wal-Mart contract was in the offing. It was a big deal, a very big deal. Gary Shaffield was bitterly opposed. He argued that selling to Wal-Mart would undermine the company's existing business with small futon stores and furniture stores. It was decided to produce the Wal-Mart futons under the Southern Wood label. Gary Shaffield left the company.

Bill Shaffield stayed on as Import Manager. When Futon Life did a cover story on the company, Bill Shaffield was absent from the company-provided photo of the management team. Soon after, he left the company too. "I left about a year after the buyout," said Shaffield. "They fired me. I think I was making too much money. They got rid of my entire management group, too."
"The heart of the company left when they left," said Gary Peterson, referring to how he felt when the Shaffields were gone.
It was full speed ahead, with plenty of important projects cooking. For the existing customer base, the entire product line-up was being re-vamped and expanded, with more high end futon frames, more pine futon frames, more imported futon frames. The line would be so big that there had to be something in it for any futon retailer.
For Wal-Mart, Sam's Club, and the big volume of mass merchant business on the horizon, there was a new promotional product line, including a 72" bi-fold futon frame and mattress packaged together in a single box. To produce futon products for the mass merchants, a new factory was being readied nearby in Cookeville, Tennessee.

The payroll zoomed from 130 to 320, and the company started running two, sometimes three, manufacturing shifts at both plants. "The Wal-Mart production took precedence," said Peterson. "We were working three shifts, crazy hours, the pressure was on. When you're growing that fast, it's a nightmare to control. Cookeville was mostly new workers, they could not keep up, and so some of their production started coming back to Sparta."

With Wal-Mart production having top priority, futon orders for existing customers lagged behind. Product quality began to slip too, for several reasons. The lower-end Southern Wood products were often being produced side by side with the high end From The Source products in the Sparta plant. Intense pressure to meet production demands was no longer offset by quality control measures. Also, design changes had been made in the product line. There were bugs to work out, but the pressure was on to fill orders.
The import program became troublesome also. Rocky Bastian owned the plant in Indonesia which produced virtually all of the company's imported futon frames. The plant was struggling to keep up with demand. The product line was restyled and re-engineered, One change, switching to one bolt on stretchers, later affected product quality. Also, there were no firm specs on materials such as hardware or wood. The wood used in import futon frames was sometimes just too weak. "Some of those futon frames... the mattress itself would break them," said Peterson.

Relations with Bastian began to turn sour. The company's credit line for imports, now controlled at Loewenstein headquarters, would sometimes be cut off unexpectedly.
It was at this critical time that Loewenstein Furniture merged with Winston Furniture to become WinsLoew Furniture. Winston President Bobby Tesney became CEO of WinsLoew, and Haworth now reported directly to him. For Mike Haworth [who declined to be interviewed for this story], the pressure of growth, production demands, marketing and new product introductions were complicated by the shifting structure of upper management.
New West/From The Source saw its sales balloon to over $40 million and its workforce to nearly four hundred. On the surface, it looked like a runaway success. In reality, things were not as they seemed. "We did forty-four million dollars in sales," reflected Mario Morales, then VP of Product Development & Marketing, "but nobody in the company (New West) had forty-four million dollars worth of experience."

By the end of 1994, it was clear that a problem was developing. The Wal-Mart deal, for one, had lost its luster. Core customers were troubled by the Sam's Club program, complaining that the product was too similar to theirs and undercut their prices. Meanwhile, Wal-Mart and Sam's Clubs' mounting chargebacks and allowances for advertising and returns were surprisingly high. Margins were being squeezed. Had they figured it right?

"You can't sell those guys and win," said Morales, "not unless you're as big as they are, like Proctor & Gamble. We needed a whole team to stay on top of Wal-Mart and Sam's Club. We didn't, and they ate us alive."
Receivables were creeping upward too. Some of the unpaid receivables were related to poor product that had been shipped to core customers. "We went through Customer Service VP's and Finance VP's like nobody's business," said Peterson. "One after another. It was an impossible situation for those people to work under."
New West, as the company now called itself, had gone from bright hope to lightning growth to stumbling giant, all in the space of one short year. The numbers were bad. From headquarters, the threat of shutting off the credit line for imports was constantly hanging over Haworth's head. Without imports, the company would be dead in the water. It was time to bring things back into line.

In January 1995, it was decided to close the Sparta futon frame plant and consolidate it into the bigger Cookeville factory. Unfortunately, Cookeville wasn't equipped to produce the high end products. The finishing line, for instance, lacked an overhead conveyor system. Even worse, few members of the Sparta workforce, the company's most experienced, made the move to Cookeville, causing the quality of the high end oak products to suffer. The mistake was recognized almost immediately, but more time and money had been lost in the effort.
In May, as the futon season was warming up, the company was scrambling to get the Sparta factory open again, while Cookeville slowly began to wind down its operations. To meet price demands, and in the hope of improving margins, the Wal-Mart program was switched to imports. The import volume went through the roof, but the credit line was still a problem. At one time, when the credit line was cut, Bastian sold a cancelled shipment to a competitor still packed in New West boxes.

By the end of summer, Haworth was on shaky ground. In a dispute over payments, Bastian had stopped shipping imported futon frames to New West. Consequently the line-up of new products, recently introduced at the Futon Expo in St. Paul, could not be produced. The core customer base of futon stores and furniture stores was eroding, due largely to inconsistent product quality and customer service. In the face of this, New West grew lenient with slow-paying accounts, and receivables mounted. On top of everything else, the California economy was soft. With its pine futon factory and distribution center there, New West still relied on the west coast for about half of its core business.

Wal-Mart was not enough. By now, it was clear that if the core business kept declining, the game was over. "Mike sat me down one day, and told me to put the QC program back in," remembered Peterson. "He said he didn't know how to pay for it, but we'd cover it somehow."

continued on next page

Spring 1998
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