Rugs to riches
Our experts smooth the wrinkles in a carpet dealer's expansion plans.
Brian O'Reilly/San Francisco
June 7 2007: 11:13 AM EDT
(FSB Magazine) -- AS A SUCCESSFUL DEALER IN ORIENTAL RUGS for more than three decades, Peter Pap has a well-honed sense of the market. These days he's picking up vibes that make him both excited and increasingly anxious. He sees a once-in-a-generation opportunity looming in the business. Back in the postwar boom years, wealthy Americans went on a shopping spree, snapping up valuable antiques, including rugs, in Europe. Now, as those folks die or downsize into retirement homes, their kids, lacking space (or, perhaps, taste) are selling the family heirlooms. Serious collectors all over the world are eager to bid. Pap is impatient to better tap this burgeoning trade and grow his business, Peter Pap Oriental Rugs. But it's not easy.
PAP, 52, IS A SELF-DESCRIBED perfectionist who drowns in administrative detail, from shipping hassles to insurance paperwork. "I do best buying and selling," he says, "but I'm spending 80% of my time doing what others should do." He wants to borrow money to buy rugs, but he's frustrated because banks won't let him use his multimillion-dollar inventory as collateral. Not least, Pap is thwarted by technology. His website (peterpap.com) offers photos of only a few rugs, and images are slow to open, which frustrates potential customers. His showrooms in San Francisco (where Pap lives) and Dublin, N.H., use different accounting programs, which complicates bookkeeping. Staying in touch with important customers is a spotty effort; he doesn't have even a simple customer-relationship-management program.
Admitting he was stuck, Pap contacted FSB for a Makeover, and we assembled a crack team of consultants to help. To conquer administrative hassles, Pap met with Chris Abess, 42, a management expert at the San Francisco office of Deloitte Consulting. For insight into the mysteries of small-business banking, he sat down with Ivan Ruiz, 29, a senior loan officer at Wells Fargo Bank in San Francisco. And for technical difficulties, Patrick Cook, 40, came from San Jose, where he is chief technology strategist for the Small Business Technology Institute, a nonprofit that helps tech-challenged entrepreneurs.
At a coffee shop near Pap's San Francisco showroom, Abess pulls out a list of questions. Pap, he learns, is one of a handful of U.S. dealers with the expertise and resources to buy and sell the most costly rugs, including some that go for $250,000. (Pap is also a frequent guest on PBS's Antiques Roadshow.) His 2006 sales were $3.5 million, and his business is profitable.
Many of his customers are wealthy art and furniture collectors seeking magic carpets for their well-appointed mansions. But Pap confesses that he often spends more time educating a new customer interested in a $5,000 rug than catering to an old one willing to spend $250,000. "I love fine rugs, and I want other people to love them too," says Pap. "I want to teach them everything." Unlike many brick-and-mortar merchants, he doesn't worry that shoppers will educate themselves at his expense and then hunt for better deals online. Every antique rug is unique, after all. And he will buy any rug back at the original price if the customer finds another Pap rug that he likes better. Pap concedes that he is mismanaging his most valuable asset: his loyal following among the nation's serious collectors. He rarely makes time to call them. He has neglected to collect many of their e-mail addresses. Even if he had an up-to-date e-mail list, Pap lacks an effective online marketing program.
"In the world of antique rugs, you're a celebrity," Abess comments. "And Peter Pap Oriental Rugs has become a celebrity business." However, Pap is violating a cardinal rule: Celebrities even niche ones should never try to manage their businesses day-to-day. Pap needs to hire a marketing manager and an administrator so that he can concentrate on buying and selling rugs. Pap and his marketing manager should analyze the customer list to decide how and when to contact former buyers. Every day afterward, Pap should get a list of customers to call. "And shame on you if you haven't talked to them in two years," Abess adds, only half in jest.
Pap's marketing manager should build relationships with art dealers, high-end homebuilders, design-magazine editors, and interior designers. Other salespeople should take over the time-consuming task of educating first-time buyers. Pap could also add educational features to his website, such as rug FAQs or even a staff-written rug blog. Although customers can view pictures of the rugs on the site, Pap's business doesn't lend itself to remote online sales. High-end rug buyers prefer to touch and feel the product before they buy. The new administrator should handle operations such as insurance, shipping, and finance.
By the time he meets with Ivan Ruiz from Wells Fargo Bank, Pap is itching for a loan to fund his great escape from administrative purgatory. Pap hopes to borrow several million, but not just to add inventory. "I want to ramp up the business with new employees, more advertising, more PR," he says. His collateral: some 1,000 antique rugs, worth several million dollars. Pap leads Ruiz to his basement office. In contrast to the well-lit showroom on the first floor, Pap's workspace is dark except for a few fluorescent lights hanging between the floor joists. Rugs, rolled and tied in brown string, are stacked in every corner. And the un-heated office is so chilly that the bookkeeper is wearing a parka at her desk.
Ruiz is a friendly guy with a lopsided grin, but he makes it clear that he has some reservations about doling out dough. He starts by outlining some basic rules about small-business banking. Commercial lenders will analyze Pap's balance sheet to make sure his business is properly capitalized. "We don't want you to have to sell a rug to pay the electric bill," Ruiz says. Bankers typically lend three dollars for every dollar of equity in the business. Pap is clearly disappointed. He had hoped he could qualify for a larger loan by using rugs as collateral. Ruiz demurs politely. Pap challenges him, pointing out that bankers often lend against buildings or equipment. Why not rugs? Ruiz shakes his head. Banks can establish the market value of buildings and equipment, and they can be sold quickly if the borrower defaults. "We don't have experts who can value rugs," he says, and selling them takes a special skill.
RUIZ SUGGESTS A SO-CALLED 7A project loan backed by the Small Business Administration (sba.gov). Commercial banks dole out more than $15 billion in 7A loans each year. The loans are available to any qualified U.S. entrepreneur, regardless of gender or ethnicity. If Pap intends to use the money to expand his business, the agency might guarantee the loan based on anticipated earnings, not historical cash flow. Pap is intrigued but noncommittal, so Ruiz offers a few more suggestions. Pap should find a bank he likes and get to know a lending officer. Bankers are more willing to lend to someone they know and trust, Ruiz says.
Later that afternoon, Patrick Cook of the Small Business Technology Institute gets an earful of the dealer's tech woes. "It takes forever for someone to download an image from my website," Pap laments. "When I'm in New Hampshire, I could make a cup of tea in the time it takes to get a reply from the server in San Francisco." Cook is a former manager of technology services for British banking giant Barclay's. He grills Pap about his connection to the Internet and offers a quick solution. Pap's 462K DSL connection is too slow. Pap needs to upgrade to a faster DSL line (cable can be slower depending on local traffic levels). Cook also advises Pap to get a more direct and powerful connection. "Try setting up servers with fat pipes high-capacity connections to the web in several places around the country to speed things up," he says. Firms such as Covad and EarthLink provide this service.
Cook also advises Pap to invest in CRM (customer relations management) software that will help him make use of his customer data. CRM software for small business is an increasingly crowded field, but leading products include Entellium CRM (entellium.com), Microsoft Dynamics (microsoft.com), and SAP Business One (sap.com). He should also focus on collecting customers' e-mail addresses. That would enable him to launch a more sophisticated marketing campaign aimed at the buyers most likely to purchase the rare rugs that are now beginning to come on the market.
A few weeks later Pap reports that he's following up on the advice. He bought a budget consultation from Deloitte: For a small, un-disclosed fee, a Deloitte consultant spent a week with Pap during the Winter Antiques Show in New York City. He helped Pap install software that captured contact data from shoppers who visited his booth. Even if only a few browsers buy rugs, the investment will have been worth it, Pap says. He also asked for more tech help from the Small Business Technology Institute. As for a loan, he plans to work the kinks out of his business plan before visiting bankers. As with all our Makeover subjects, we will stay in touch with Pap, and keep you posted on his progress.
CHRIS ABESS is a management expert who works out of the San Francisco office of industry powerhouse Deloitte Consulting. (deloitte.com)
PATRICK COOK is the chief technology strategist for the Small Business Technology Institute, a nonprofit in San Jose. (sbtechnology-institute.org)
IVAN RUIZ is a senior loan officer at Wells Fargo Bank, a prominent commercial lending institution headquartered in San Francisco. (wellsfargo.com)
FSB's consultants provided a wealth of advice for a logistically challenged rug merchant.
Peter Pap Oriental Rugs (peterpap.com)
San Francisco and Dublin, N.H.
Sells antique Oriental carpets.
Pap is swamped with time-consuming administrative responsibilities and technology problems that are hampering his ability to capitalize on a boom in high-end antique carpets.
Our consultants suggested tech fixes and advised Pap to hire an administrator to handle the day-today, as well as a marketing manager to oversee an organized campaign to reach serious rug collectors.
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From the May 1, 2007 issue