It’s amazing to think that the first pool and spa Internet sites are approaching 20 years old.
It’s true. The e-commerce side is becoming a more mature field.
“[Markets] go from start-up to growth to maturity,” says Dennis Marunde, president and a founder of Pools.com and Arvidson Pools & Spas in Crystal Lake, Ill. “And we’re definitely moving past the start-up phase.”
As in any market, part of maturation means consolidation. Although it’s just in the beginning stages, the Internet side of the business has entered this phase, with some companies purchasing competitors, and others closing their doors.
It’s too early to know exactly how the Internet landscape will look in the future, but here experts discuss the kinds of consolidation they’re seeing, why it’s taking place, and how they think this side of the industry will progress.
Internet players in the pool and spa industry are generally a secretive group. For this reason, many acquisitions go unannounced, and the companies involved don’t want to discuss them.
There’s actually a monetary benefit to this secretiveness, says one web retailer who wished to remain anonymous. Whereas some brick-and-mortar companies publicize new acquisitions to reinforce the perception of market dominance and open up opportunities for better volume pricing from vendors, it’s different for many online businesses. When an e-commerce company acquires new websites, vendors won’t necessarily offer better pricing based on volume. It isn’t assumed that its purchasing volume will go up, because a new website won’t introduce a company to a new market.
“With one website, I can capture an entire nation’s worth of consumers,” the source says. “So I’d still be advertising to the same population.”
And there’s another benefit to flying under the radar. Say Company A, which has a good relationship with its vendors, quietly purchases Company B, a website that historically doesn’t adhere to minimum advertised pricing. The acquired website can continue ignoring MAP to the benefit of Company A, without manufacturers knowing the connection. Company A maintains its relationship with producers, while the new site continues to drive traffic with its below-the-floor prices.
Yet not all purchases are secret.
Last fall, brick-and-mortar giant Leslie’s Poolmart purchased Pool Supply World, one of the industry’s major e-commerce sites, with the intention of essentially leaving it alone to be run by the same management.
This was largely seen as an efficient way for Leslie’s to enter a side of the business in which it had previously made a weak showing. Leslie’s did not return phone calls to discuss the acquisition, although the company did issue a press release.
But industry observers note that other, more secretive, acquisitions also have taken place. Though they would not return phone calls for comment, long-time catalog-turned-Internet firm In the Swim, based in West Chicago, Ill., has reportedly made several purchases over the last few years.
According to sources, another site, Amerimerc, was purchased by Doheny Enterprises in Kenosha, Wis.
Some web retailers have been approached by companies outside the industry, largely “online mall” outfits interested in selling to a variety of markets. But this probably will not become the norm, said web retailing veteran Dan Harrison. In his experience, online retailers explore the pool and spa industry only to find that it’s very much a niche market.
“[Our industry] is complicated,” says the president of PoolAndSpa.com in Las Vegas. “It’s not like selling shoes or eye glass frames or iPad accessories. They can’t just open up a call center in India to give advice for a 1978 Cal Spas. It’s a hard industry for an outside company [and] a lot of them might think about it, but once they get into it, they find it’s difficult to apply a lot of their standard supply chain methods.”
As with any consolidation, the acquisitions that are starting to occur for online companies generally fall under two different models.
Some industry firms are buying online businesses and leaving their infrastructures intact. The Leslie’s acquisition is an example of this strategy.
“[Leslie’s] wanted to do something with their website, which was, let’s say, less than state of the art as of a year and a half ago,” Harrison says. “They never really focused that much on the Internet [before]. I thought that was a brilliant move. They did the acquisition that they did to get the back-end technology involved and all the more higher-tech stuff.”
Pool and spa e-commerce giant In the Swim also has purchased other sites over the past few years but preserved their independence, according to industry insiders. “Their model is to buy competitors and run them as separate entities,” Harrison says. “So … they’re run by the same people who used to run them.
“It’s a very common practice nowadays among websites,” he adds.
Other web retailers are more like Harrison, who has purchased weaker firms essentially for their domain name, then restarted them from scratch using his own business model. “Basically, whether they’re buying it off our property on eBay, Amazon or [any of his websites], it ultimately comes back to our own agents here and goes through a central ordering system. In my opinion, it’s much more cost effective that way, but other people disagree.”
But regardless of the strategy involved, Marunde believes the biggest commonality between the companies being purchased is volume or market share. “I doubt that profitability is part of the equation as much as volume, actual purchase volume, and a path to the … most customers possible,” he says.
Consolidation of the online retailing space isn’t solely the result of M&A activity; it’s also caused by websites going out of business.
This is happening more often to sites that rely solely on cost competition, insiders say. The environment isn’t as friendly to that model as it was in the past, and even some once-thriving businesses are finding it harder to stay afloat today.
“I think a lot of [online retailers] found out that it’s not a given that you’re going to succeed,” Marunde says. “[And] it’s not always a sink or swim. Sometimes you can just learn to swim badly. Some have sunk or have expired, others have been swimming badly for a long time and others are beginning to succeed.”
Pricing had a major part in what spelled these companies’ failure, suggests Keith Ainsworth, CEO of Nationwide Pool Supply, a Las Vegas firm that owns a website and brick-and-mortar locations. “You see that they tried to be the low-cost leader on every item just to maintain market share,” he explains. “But at some point you have to pay for the product. There are only 100 pennies in a dollar.”
Some web retailers attribute the consolidation of pool and spa e-commerce largely to one major force — Amazon. At first, pool and spa products were sold on the website mostly by third-party vendors. But in 2009, Amazon significantly grew the selection of pool and spa products it sold and fulfilled. “That’s when, I think, the real heat came on, because they will lose money on a category to dominate it, and they sold product for years and still do at below distributor cost,” Ainsworth says. Because the site sells such a wide range of items, it can afford to take a loss on some categories until it owns enough market share.
To compete with the selection and quicker shipping times offered by Amazon, online retailers now need solid infrastructures in place, Ainsworth adds. “There were a lot of small guys that were in it, but they realized that to be really competitive, you have to have a warehouse that has product in it. And that’s incredibly expensive.”
On the flip side, one online retailer believes that Amazon has had a positive effect as well.
“I think they’ve raised the bar for online pool and spa sites,” says Patrick Paroline, CEO of InyoPools.com, headquartered in suburban Orlando. “I think healthy competition ... constantly challenges us to become better. I feel like the companies that use Amazon to make themselves better, are potentially going to be in for a longer haul than those who feel like there’s nothing they can do.”
Another anonymous pool and spa e-tailer agreed in theory, but not in its current application. “You can’t compete with somebody who’s losing money,” the professional says.
But these business owners agree that the companies left standing are generally stronger firms with a more established infrastructure and better track record, leaving the so-called garage operators out of the equation.
Whatever the cause, observers expect the current pattern of consolidation to continue.
“Over the course of the past five years, as the cost of [driving] traffic to the website and serving that traffic has increased, that fundamental business model is far more challenged than it was previously,” says Manuel Perez de la Mesa, CEO of PoolCorp in Covington, La. “In the logical evolution, what’s happened is that only a select few will be able to be successful. The common profile [of successful companies] is that they have a certain amount of scale, they do a very good job of online marketing to an existing customer base, and they are disciplined in how they price their products.”
Others agree, and also wonder if the low-ball approach used by many companies is leading to the shrinking number of e-commerce businesses in the pool and spa industry.
“I think they have a flawed business model,” one insider says. “They pay a lot of money to Google to try to always be on top, and then they chase price, or they chase Amazon or chase each other.”
Others consider this the regular evolution of business. “I would say that what’s happening is typical in the life cycle of businesses,” says Bill Kent, president and owner of Team Horner in Fort Lauderdale, Fla. “This is a very normal thing to happen, that it will mature and parties will get bought up by other parties as they mature.”
For whatever reason, the days when someone can start a website in their garage for a few dollars are over, says Perez de la Mesa. “Somebody asked recently if I thought getting into Internet retailing in the pool industry was a good idea,” he says. “I told them they’d have to invest at least $10 million.”
Many believe that the number of online retailers in the industry will begin to go down, with fewer large companies owning most of the terrain.
With e-commerce becoming more and more a part of life, the number of brick-and-mortar companies that start selling online will only increase, Harrison says. Considering that surveys have revealed relatively few brick-and-mortar retailers currently sell on the Internet, there’s plenty of room for growth here.
“They might not make $50 million a year,” Harrison says. “But whatever they make, they make, and they’re going to do that. People are always going to do that.”
Ainsworth believes that the future will see Amazon and other large general sites dominating sales of so-called commodity items. “Then there are going to be a handful of full-service websites that have everything,” he says. “So there’s going to be a niche guy with every O-ring, every gasket, every part.”
But for the larger web entities jockeying for market share, the environment is becoming more challenging, even to those that have been quite successful thus far. The game is always changing. With the growing sophistication of search engine optimization, for instance, having a stellar web address is no longer a direct path to success. “I think [a URL] is still very important, but not the only factor …” Marunde says. “If it used to be an eight on a one-to-10 scale of importance, now it’s a six. Now there are other factors that come into play: How good is your SEO? Once you attract a consumer to the site, how successful are you at actually converting it to a sale?”
The speed of change in this part of the business actually can hurt the more well-established sites operating with larger infrastructures. They could be placed at something of a disadvantage if their size prevents them from quickly responding to new technology, the rise of mobile devices or potential game changers such as the same-day delivery predicted by Amazon.
“I don’t necessarily think that the successful large players of the future are the large players of today,” Marunde says. “I’m not exactly convinced that everybody’s going to make that transition successfully, even through acquisition.”