Exploring the different levels of business expansion to determine which might be right for you

By Sharon Elaine Thompson

You did it. It took years of blood, sweat, and tears but the business you spent so long building is finally a success and turning a comfortable profit. It’s normal to feel like you can finally ease your foot up a little on the gas pedal. After all, your business is turning out a great product, you have a solid and loyal customer base, and your employees are happy. But while there’s no need for you to continue putting in 18-hour days, seven days a week, it doesn’t mean it’s time to rest on your laurels. In order for your company to continue to succeed, you always have to try to stay one step ahead. And for you, that may very well mean considering expanding your thriving business.

It may seem like a somewhat easy task. After all, if you could build up your business from scratch, how hard could it be to expand it? But there are different levels of expansion, and determining which one is right for you and your business can be a challenge. Here, we outline the different business expansion possibilities along with the risks involved to help you determine which type might be right for you.

Why Is Expansion Necessary?

Expanding your business can be a good strategy if you see a strong opportunity or there is a new market for your product. Expanding can increase your customer base and profits, putting your business on even firmer footing. And in this ever-changing global economy, expansion has become a necessity to ensure a business’s survival.

“It’s always time to change,” says Andrea Hill, owner of StrategyWerx, a Chicago-based consulting firm serving the international jewelry and luxury goods industries. “If you’re not changing, you’re dying. If you’re not looking for ways to try new things, changing, growing, you’re not doing the work of a business owner. It’s really important that you constantly look for ways to enliven your business.”

When considering expanding your product lineup beyond your own line of jewelry, start slow and consider what would make the most sense for your customer base.

If you don’t think that your business needs to change, consider the case of Blockbuster and Netflix. In 2000, executives from Blockbuster arranged a meeting with executives from Netflix. Although at that time, Netflix was still just a DVD-by-mail rental service, it recognized that the internet would be the future of movie viewing. But the company was struggling to stay alive as the dot-com bubble was bursting, and it viewed a possible buyout by Blockbuster as a lifesaver. Blockbuster executives viewed Netflix as a small niche business and passed on the opportunity to buy it for $50 million. Today, after pioneering media streaming, Netflix is worth around $180 billion and has become such a household name, it’s turned into a verb and a hobby (“Netflix and chill, anyone?”). And Blockbuster? It filed for bankruptcy in 2010 and closed the last of its company-owned stores in 2014.

While that’s an extreme example of what happens when companies fail to evolve and expand, it emphasizes the importance for business owners to always be looking at additional opportunities that could improve their businesses and bottom lines. And sometimes those opportunities might mean expanding product lines, a company’s physical footprint, or even into a new market by buying another business.

Expansion on the Small Scale

When looking at expanding your business, there’s no one-size-fits-all model. For some companies, simply expanding the product lineup may be sufficient. To Hill, “leaning on a known thing and introducing a new element” can be a “smart way” to expand a business.

It’s the path that Erin Wendland, owner of Goldworks Jewelry in Eugene, Oregon, decided to take. When she bought the business, the shop’s focus was on creating custom designs. However, Eugene is the home of the University of Oregon and is awash in a younger market.

“There has been a generational change in the age of the customers, changes in the style of jewelry customers prefer, and the metals and gemstones they wish to utilize,” says Wendland. To address those changes, she added the work of other studio jewelers in a wider selection of price points that might be attractive to students or recent graduates.

“I wish I could take credit for the idea of having consignment artists in my shop,” says Wendland, but the additions happened organically as friends who were also jewelry artists approached her about consigning their work. She was already working with some of them. “One was an amazing hand engraver, and one did pavé work. It isn’t necessarily the work I want to make in my shop, but this was an opportunity for them to showcase their specialty.”

While the artists pay Wendland a 40 percent commission, the additions have been positive in less definable ways, too. “Having these different makers with different visual languages is appealing for my customers,” she says. The variety sometimes leads to custom collaborations with the various artists as well.

She began adding other products as she noticed a demand. “Cards and jewelry boxes were two things that customers asked for on a fairly frequent basis,” she says. Initially, she directed people across the street to a bookstore and gift shop. “But at a certain point, that just started to feel like a lost opportunity.”

Wendland did not invest in a commercial line of cards, however. In keeping with her brand as a custom designer/jeweler, the cards she added were unique. “I was lucky enough to gain a customer who designs and creates cards. That was my opportunity to make unique, beautiful, locally made cards available to my customers.”

The effect on her bottom line has been positive. “The overall increase in sales has been modest,” she says. “However, often the mark-up on these items is much high-er than on jewelry items.”

When adding this kind of product line, Wendland advises that jewelers be a bit conservative. “Take the time to find out what your customers actually want. You have to add enough of a product for your customers to feel like they have options but, at the same time, be conservative about how much you add and how quickly so that actual customer activity can guide your decisions.”

Expanding Your Footprint

Sometimes expanding your product lineup is all that is needed to introduce new cash flow and new customers to your business. But other times, you might need more space.

When Deborah Spencer, Mary Wong, and Kathe Mai opened Trios Studio in Lake Oswego, Oregon, it was a small, tight space that they sublet from another business in the corner of a strip mall. Initially it seemed like an adequate space since the studio features only the work of the three custom designers. But part of their marketing strategy has always depended on quarterly events that serve as a thank you to customers and as a way to introduce new customers to their work and hopefully provide a quarterly bump in sales.

Eventually, the events became so popular that they outgrew their studio. When a space twice as large in the strip mall became available, the partners took the risk and moved their studio into it.

It wasn’t an easy move. The trio had just signed a new five-year lease for their small space the day before they learned of the vacancy. In addition, the store that was leaving was an anchor store for the shopping center.

“We felt the vacancy was going to be a devastating blow to our business,” says Wong. By taking over the larger space, they would dramatically improve their visibility. They felt the risk would be worth paying almost double the rent of the smaller space.

They negotiated a deal with their landlord to pay base rent along with “percentage rent,” which required them to pay a low percentage on sales that exceeded a certain set level.

The move has paid off: They can now comfortably host twice as many people for events, and they have the space to feature several other jewelry lines that complement their work along with some custom knives and pens. Not only did their custom work sales increase to the point that they were easily able to cover the increase in rent for the larger space, they were able to hire a full-time sales assistant and two part-time goldsmiths to help them.

After outgrowing its small studio space, Trios Studio reviewed their sales figures and business plan and realized it could afford to move into a larger space in the same strip mall.

Though the move came up unexpectedly for Trios Studio, the partners were not ill prepared. They knew their numbers. They had a business plan. Their business had grown in their five years, and they knew they could handle the rent. The move gave them more visibility in a central area of the shopping center, one that is visible from both entrances. They could add more inventory to their store and have comfortable events. With a lot of work and research, even with a reluctant landlord, they were able to negotiate a reasonable lease.

Wong cautions against making a premature move. Moving to a new location if you’re not ready, or if you’re hoping a larger space will boost stagnant or sagging sales, is taking a big risk. Even if you’re feeling crowded in your space, “it might be better to strain at the seams until you have the numbers to support a move,” says Wong. She points to a designer she knows who is considering a move from a studio space to a retail space. The designer has growing sales, a strong internet presence, people coming from out of town to attend her events, and a demand that is outstripping her ability to meet it. The move will give her more space for production and the ability to hire help. She’s in a good position to move and expand.

Sometimes expanding your footprint means opening additional locations. David Nygaard, owner of David Nygaard Fine Jewelry in Norfolk, Virginia, built a freestanding store in 1999, intending it to serve a regional market. “By 2003, it was obvious our business still came from just a seven-mile radius and we weren’t going to breach that. So I decided to multiply and place stores approximately seven miles apart in the center of a community where an estimated $12 million in jewelry purchases were made.”

After initially looking for existing stores that he could purchase and being disappointed with what he found, Nygaard decided to expand by leasing good locations; purchasing fixtures, equipment, and inventory that dovetailed with his existing brand; and hiring and training people into his way of doing business.

He wound up opening six additional stores, though that wasn’t his original intention. In hindsight, he says, “four stores would have been the place to rest and redesign some administration management systems and to catch up. However, we continued [to expand] because there were areas in our market where we simply didn’t have a presence and where I felt we had opportunity.”

One thing Nygaard learned during the growth process was that some levels of business are more profitable than others. “Two stores are not twice as profitable as one, but four stores may be. You have to accelerate through those unprofitable stages to get to a profitable position and survive an expansion. It can take a lot of cash flow.”

One of the benefits of the expansion that Nygaard discovered was the ability to become his own supplier. An avid consumer of business articles and books, Nygaard found through his research that vertically integrated luxury products averaged a 12x markup and “can capture the lion’s share of the profit pools.”

He focused on that as his next step, as at that time, “banks were lending suppliers money for receivables,” he says. “We were the premium product in our market at the time. At six stores, we were large enough to vertically integrate and import and manufacture overseas. I took a small interest in a factory in Thailand where we could produce private-label luxury products. We owned our own supply chain.”

Large-Scale Expansion

Becoming your own supplier doesn’t just apply to retail stores selling direct to the consumer. It can also be a viable business expansion for larger wholesale manufacturers looking to branch out into other parts of the industry.

National Chain Group in Warwick, Rhode Island, has been a proponent of this kind of incremental growth to achieve vertical integration, having expanded to acquire complementary products.

Where Nygaard chose to expand by re-creating his own successful retail business in new locations, National Chain Group has chosen to expand through acquisition. Over time, the long-time chain manufacturer has acquired key suppliers: National Fabricated Metals, which provides mill products such as solder-filled wire used by chain companies; James A. Murphy & Son, which produces fancy metal beads, tubing, and findings; and C&W Steel Stamp Co., which has coining and stamping capabilities. The company has also added precision design capabilities through acquiring National Design Studio, Village Goldsmith, and Colorado Casting.

When you can buy a company that shares your values regarding quality and production, expanding by acquisition saves time and money compared to reinventing an existing wheel, says CEO Steve Cipolla. This broad-based expansion strategy has allowed National Chain to acquire new intellectual property, products, and services; the facilities and equipment for producing them; and the trained staff necessary to run the operations for far less than they could develop their own versions, explains Cipolla.

A case in point is their acquisition of Standard Chain, which produces knit, interwoven, and flexible mesh chains through a proprietary process. Though National Chain could certainly have developed a similar product, through acquisition they got facilities, equipment, knowledgeable staff, and the proprietary process. In addition, there was an existing cash flow. And since Standard Chain already had a customer base for their products, National did not have to invest time and money into developing one. They also reduced competition in the chain field by buying a company that produced a similar, though somewhat different, product.

Although National Chain Group could have developed similar chains as those produced by Standard Chain, it opted to acquire the business instead, gaining its facilities, equipment, staff, and processes.

National Chain Group’s purchase of their vendors has eliminated hiccups in their supply chain and given them better quality control and the ability to offer competitive pricing. By combining the backend of all these divisions, they reduce costs by eliminating duplication of departments and facilities. Through their expansion, they’ve not only acquired products and services they use, they can provide those products and services to their customers as well as the customers acquired with the various divisions. The end result is a stronger, more stable business that is better able to serve the needs of its customers.

Accepting the Risks

Even if you do your homework, be aware that expanding a business can be difficult, time consuming, challenging, and stressful. You’ll face a period of upheaval and probably a drain on your cash flow. And you won’t be alone: It can be a strain on your family, as you disappear into the business for an extended period of time.

Expansion can also take a toll on your staff, who may have to learn new systems and processes. They may also worry about their jobs should the expansion not wind up working out, which is always a possibility because, as with most things in life, there are risks involved.

And it can take a toll on you, which is why, before taking on an expansion project of any size, you need to be honest about your strengths, weaknesses, and abilities. You also need to be realistic about both the opportunities and the threats the expansion presents and what they’ll mean to your role within the business.

“Get some really good advice from people who know you well, [who] know if you’re capable of running a large operation,” recommends Nygaard. “That’s a big question. Are you the guy working on the business or the guy who works in the business? You can’t have four stores and be one of the guys who opens the store and sells. You have to be the CEO. It’s owning a business as opposed to having a job.”

As a business owner, you’re probably comfortable with taking on risk, but be aware that expanding your business is taking on additional risk and that sometimes, things will be completely out of your control.

Nygaard knows firsthand how risky expansion projects can be. In 2008, just as he was getting “to a profitable place,” his lender, Wachovia, went bankrupt. No amount of pre-expansion planning prepared him for this.

“[Wachovia was] looking for quick cash, and we had precious metals,” he recalls. “Those metals became bait for a predatory lender.” With the price of gold rising, “they were after my inventory, which they could liquidate quickly.” In a matter of days, they forced Nygaard to close six of his seven stores.

A catastrophe of that scale can destroy a business owner. “The idea of shame and failure, people get caught up in it,” says Nygaard. But he knew the crisis wasn’t his fault and that his business had been solid. “If we’d had a different bank, we’d have been fine. We weren’t late or delinquent.” Knowing that, he didn’t give in to a feeling of shame or failure.

In fact, he was able to turn the experience into an asset. When his business contracted, he lost his inventory but was left with design software. He learned how to use it and began to see its potential. In his remaining store, he displayed “brass and glass” models in open cases to let customers handle and choose their designs. He then made any alterations in CAD and used an industry supplier’s just-in-time production service to provide the finished pieces. When 3-D printers became fast enough that he could present clients with a 3-D printed model within a few hours, he gave up the models and his brick-and-mortar location entirely. He now works exclusively from co-working spaces. “You can’t sell CAD at a noticeably higher price, but the lower costs and lower investment create greater profitability with less risk.”

Risks are inherent in any business venture, and expanding is no different. But if you don’t risk, you don’t grow. In your business, says Hill, “you should be making a lot of mistakes and learning from them. However, you should make measured, thoughtful mistakes. It’s not gambling.”