Tough Times in SoCal
By Bill Sendelback
The hearth business in the U.S. is recovering nicely; sales continue to increase in all categories. Retailers throughout the country are all smiles as more customers come through their doors, many leaving with expensive new hearth, barbecue and/or patio products.
That scenario is unfolding everywhere, except in Southern California (SoCal), which seems to have become a black hole for many specialty retailers.
More than 50 hearth, barbecue and patio retailers in SoCal have either consolidated by closing satellite stores, or have gone completely out of business over the past few years. Fifty retailers – that’s more hearth retailers than exist in many states. These companies were not start-ups. Most were well-established operations, in business for as long as 50-plus years.
Among the casualties were prominent hearth and patio retailers such as Anaheim Patio & Fireside (58 years), Zender’s (40 years), Leisure Living (37 years), La Paz Patio & Fireside (30 years), Wilshire Fireplace (15 years) and scores more. Sadly, the consensus among a knowledgeable group is that the fallout is not over.
Why are these stores in Southern California losing the battle to survive? The quick and simple answer is that the culprit is the state of California, with its “me-first to be Green at any cost” attitude. The less glib answer is that it’s a complicated concoction of a poor economy, a severe decline in the value of homes, anemic new home construction and over-the-top state environmental regulatory actions that have all but wiped out some hearth product categories.
The result of such negative factors is a population of consumers who are nervous, reluctant to invest and – perhaps – confused. The situation has been described as the Perfect Storm for SoCal retailers.
Perhaps the most prominent of these retail closures is Anaheim Patio & Fireside. Opened in 1956 by Kurt and Phyllis Lorig, Anaheim Patio had three hearth, barbecue and patio stores in the upscale areas of Brea, Irvine and Huntington Beach. The Brea and Irvine locations were closed first; the Huntington Beach store was liquidated during May and June of 2014.
The poor economy and resulting decline in sales, along with competition from the Internet, finally sealed the fate of Anaheim Patio & Fireside after 58 years in business. Sales had dropped from a reported $14 million in 2006 to less than half that in 2013.
Bob Worley, owner of La Paz Patio & Fireside in Laguna Hills, had been in business for more than 30 years before closing his doors earlier this year. With declining sales and competition from the Internet, Worley suffered six years of profit losses before throwing in the towel.
“The effect of the economic downturn was dramatic,” he says, “and consumers buying on the Internet were a significant factor. Consumers were buying down, and we were under increased pressure from the Big Box stores. Our patio business was clobbered by the poor economy.”
Regulatory actions that effectively eliminated wood burning hit the core of Worley’s hearth business. “With the switch to gas, there was no need for screens and accessories,” says Worley. “What used to be a market for high-end accessories also disappeared with cheap Chinese imports.”
Rent that was appropriate for his sales volume in 2007 proved too much for Worley after his landlord refused to adjust that cost. He couldn’t sell his business, so he finally closed it earlier this year.
Worley admits that social media and the Internet are keys to today’s retail marketing, but he says, “I’m too old to learn the Internet, and I don’t want to,” a sentiment some folks add to the factors harming today’s retailers.
After 33 years in business, Sue Grove closed her Hearth & Home store in Riverside in 2009. Still “in love with the fireplace business,” she now works for San Bernardino Fireplace.
“Everything was just making it hard for us to stay in business,” she says. “New home construction was huge business for us, and it collapsed. People were taking out loans on their homes only to find themselves underwater with their mortgages, so they quit spending. Actual unemployment numbers were a lot higher than reported. Environmental regulations were making it harder to sell hearth products. Then our workman’s comp rates kept going up.”
Grove reports that one large contractor installing house foundation pads had his workman’s comp rate double from $500,000 to $1 million, so “he shut down completely.” She says that even San Bernardino Fireplace, her current employer, with its more rural, mountain market that includes stove sales, has had to cut back and “run a tight ship” to survive.
Warm Hearth in La Mesa, in business for 15 years, recently was forced to close its San Marcos store, according to owner Debbi Ewans.
“We are having the toughest time,” she says. “Winter skipped us the last couple of years, which affected our hearth business, but at least that kept our grill business quite steady. Consumer Internet sales have really affected us. Consumers spend time in our store learning what they want and what they should have, and then they buy it online.
“Wood and pellet burners were the heart of our business, but now that’s mostly gone, along with the contractor business. We just received a letter canceling our installation insurance as rates continue to go up. I hope things calm down, but I don’t know what will happen to the hearth business in California. We’re looking for new products, and we’ve even started selling rolled up grass sod.”
Rick Ertel is the former co-owner of IsoCal, an installing distributor of Isokern modular masonry fireplaces, based in Ventura County but selling throughout all of Southern California. He sold his distributorship to Earthcore Industries, manufacturer of Isokern fireplaces, and then became a sales consultant for the new Isokern distributor.
After 28 years in the hearth industry, Ertel views the problems facing the hearth business as “multi-faceted – there are just so many factors, but mainly it’s the economy.” Those factors have taken their toll on his business.
“For 28 years I’ve been doing at least two quotes a day on new projects, every day. Now I’m lucky to get two quotes a week. When I owned IsoCal Distributors, we were doing $7 million a year. Now we’ll be lucky if we do $2 million this year. Some rich people may be building new homes, but other than that, nobody is building anything.”
Ertel points out that an average of three fireplaces used to go into high-end custom homes. “Now we get one – maybe,” he says.
“Los Angeles County reports an 8.9 percent unemployment rate,” says manufacturers representative Hank Ver Wayne, “but the real rate is much higher, perhaps 14 percent when you consider all the unemployed workers who have stopped looking for work. California is number 47 on the state list of unemployment rates. Only Rhode Island, Illinois and Nevada have higher unemployment rates.”
Adding to the bad news in SoCal, Ver Wayne says housing starts are off 50 percent in the state, and building permits are down 70 percent from 2007-2009.
“The economy hit us first, and I think it hit us harder than any place in the U.S.,” says Pat Rosengren, executive director of the Pacific Hearth, Patio & Barbecue (HPBA) affiliate. “I don’t think anybody knew just how far down down really is. We’ve had tremendous dealer attrition since 2008, and I’m hearing that some surviving specialty stores are still off 40 percent in sales.”
During the last five years a tremendous number of businesses in SoCal moved out of the state or just went out of business, taking those jobs with them, she says.
“They took away good middle-class and upper-middle-class salaries, and that’s the kind of customer this industry (hearth) caters to. The state in general makes it very hard to do business here. California is not business friendly. Hearth sales are weather driven, and Southern California always has a very short season. But we’ve been winterless the last few years.”
“More than half the sales of all hearth retailers in SoCal are based on new home construction,” says Ver Wayne. “With housing starts down 80 percent in 2011, 29 retailers went out of business.”
“An issue with hearth retail closures in SoCal and many other places is that a lot of owners are reaching retirement age and have never thought of grooming someone to take the business over or preparing it for someone to purchase,” suggests John Crouch, HPBA’s director of Public Affairs. “They just have always assumed there would be plenty of folks who would want to buy it.”
The hearth business in California is the target for the state’s air quality districts “because they have too few industries they can target. These regulatory challenges are not going to go away,” according to Rosengren.
“My biggest concern is that the state government has put so many restrictions on the hearth industry that it’s becoming harder and harder to do business here,” says Rick Ertel. “All the different state agencies and air quality management districts, especially the California Air Resources Board, are putting pressure on the hearth industry with their main goal being to eliminate the hearth industry and fireplaces in California homes all together.”
Ertel says the head of the Sacramento branch of the California Air Quality Management District stated that the group plans to make it more difficult to burn wood or use gas logs, and to eliminate fireplaces in California because the group feels even gas fireplaces waste gas and pollute the atmosphere.
According to Ertel, the state-issued Rule 445, that will go into effect in 2020, allows only direct-vent gas fireplaces. But many building departments, particularly in the Los Angeles area, have already banned all but direct-vent models.
“Isokern can’t even put a fireplace in Los Angeles any more, anywhere,” he says. “Eventually, new construction will have to use either electric fireplaces or no fireplaces at all in California. That’s their ultimate goal.”
“When Rule 445 was issued defining the fireplace as a gas-fueled appliance, it indirectly banned wood-burning fireplaces,” says Hank Ver Wayne. “When you outlaw wood-burning fireplaces, the $600 or $700 fireplace now becomes a $1,500 direct-vent fireplace, and that leads builders to put in fewer fireplaces in their homes.
“The Cal Green Title 24, Part II energy code of the state Building Code also outlawed B-vent gas fireplaces after a major fireplace manufacturer convinced the air quality people that B-vent models wasted air-conditioned air, so their answer was direct-vent only.”
But Net Zero, an extension of the Title 24 energy code, could be the “coup de grace” for the fireplace industry in California, Ver Wayne predicts. Net Zero will require, as of Jan. 1, 2020, all newly constructed residential homes and commercial buildings to create as much energy as they consume, using on-site sources to create that energy.
The homeowner will pay a monetary penalty for energy used that is not replaced by the home. Net Zero also will apply to remodeling projects of $10,000 or more. It will certainly encourage solar and wind energy products, but the consensus is that it will eliminate the use of hearth appliances since those products are considered energy consumers.
The HPBA is working to get zone heating recognized in the next version of the state energy code; that may keep some hearth products in use, says John Crouch. An even larger concern, he says, is that the idea of Net Zero might well find its way to other states.
Although most of the economic and regulatory challenges do affect the entire state, Northern California retailers are not feeling the pinch as much as those in SoCal.
“Northern California and Southern California are really two different markets,” says Rosengren. “The cooler northern part of the state makes that market a stronger freestanding stove market, while SoCal is primarily a market for fireplaces, grills and patio products.”
“Hearth shops like you find in Northern California really don’t exist here except in the high desert. In SoCal, the typical fireplace shop is a patio shop,” Ver Wayne explains. “They all sell primarily patio items, and hearth products are their off-season products. They sell gas logs, glass doors and fireplace accessories. Very rarely will you see a SoCal fireplace shop displaying wood- or gas-burning stoves or inserts.
“Northern California is quite different. Their climate is cooler, they have higher energy prices and many use propane, so you see a lot of hearth shops that sell as many as 400 stoves and inserts a year. You just don’t see that in SoCal. Those hearth shops in Northern California can operate with a couple thousand square feet of showroom, meaning less overhead and fewer employees, while the typical hearth and patio retailer in SoCal needs four to six times as much (very expensive) space, making it tougher to survive a downturn.”
“But even in SoCal, not every single retailer is ready to close their doors,” says Rosengren. “Retailers with high-end business had a couple of years of concern, but they bounced back faster.”
Typical of SoCal retailers who are surviving is Bob Vartanian, owner of four thriving hearth and barbecue stores in the greater Los Angeles area (Encino, Pasadena, Glendale/Burbank and Thousand Oaks). He’s even considering opening a fifth store. He doesn’t sell patio furniture because of the expensive space it requires; he owns his own buildings, so he has no high-priced rent and less overhead.
“We’ve turned our stores into high-end outdoor living centers – very high end,” he says. “There’s not enough profit in low-end products to stay in business. At the high end, we have fewer customers, but there is much more profit in each sale. The middle- and low-end business is not there anymore in SoCal because, right now, those people don’t have money to spend.”
Vartanian hates to see his competition go out of business, so he feels free to offer his advice. “First, you have to have excellent customer service, and you need a good, well-trained crew that can give that service.” He’s amazed at the things most retailers don’t do that he feels hurts their chances for success.
“Some dealers are closed two days a week. That adds up to 100 days a year when they’re not selling. Many are open only short hours. Those dealers are losing business to others.” New home construction may be down in SoCal, but Vartanian targets only high-end custom-home builders.
Finally, Vartanian advises, “Be aggressive. If you give up, like the dealers who are going out of business, you’re done.”
That advice sounds pretty simple for Vartarian, and it’s working well for him. But it may not be so simple for most SoCal retailers.
Besides being Pacific HPBA’s executive director, Pat Rosengren also is part of Huntington Marketing, handling the marketing for many SoCal companies in many industries.
“We’re seeing the same conditions and the same results in all the arenas in which we work,” she says. “To survive in this environment, you have to improve the business that exists, so it’s a struggle.” She recommends that retailers work with their suppliers to improve their inventory position and product mix.
“Quit worrying about the low end and go after higher-end customers,” she says. “They’re the only people with money.” She also recommends adding electric fireplaces to that product mix.
“The state is just putting so many crimps on wood- and gas-burning. As builders come back into the market, they’re probably not going to put in regular fireplaces, so electric is looking much better.”
Retailers can’t be passive – they must promote, adds Rosengren, a sentiment echoed by Bob Vartanian. “We see almost no promotion in this industry other than from the Big Box stores. And retailers need to embrace the Internet and social media as sales tools and not be fearful of them. I’ve heard too many retailers say they don’t understand the Internet and are too old to learn about it. You have to change. You have to be more aggressive than ever to survive.”
Manufacturers rep Hank Ver Wayne recommends that retailers live within their means and diversify. “If you are strictly in fireplaces, you must find other products to get involved in,” he says. “Fireplaces no longer sell well here. I would put a lot of emphasis on grills and outdoor kitchens. They’re humongous business here because we grill 12 months a year. I’d certainly sell hearth, but if you’re going to survive, you should expand into the whole outdoor living concept.”
“The style of doing retail business has changed in SoCal and all over,” says Jerry Scott, senior vice president of SoCal-headquartered RH Peterson. “Those holding on to the old ways of getting to today’s consumer will continue to struggle. But we are cautiously optimistic about this market. It will probably never get back to the highs of the past, but the market will become more solid.”
Surviving hearth, patio and barbecue retailers in Southern California – and elsewhere – sure hope so.