An ailing American industry finds opportunity overseas

July 22, 2011
| By Pete Daly |
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Russia isn’t known as the most ethical country in which to do business, so it might seem dicey that after four years, the only contact Tom Kneeshaw of Viking Spas has had with his customer there has been via e-mail.

But it’s a relationship that works, because Viking Spas has shipped quite a few large overseas shipping containers loaded with hot tubs to Russia with no payment problems.

Viking Spas, 2527 Prairie St. SW, is one of 48 small businesses in Michigan that were successfully exporting products in 2010 with a little help from the Export-Import Bank of the United States. Those exports were worth $126 million, and Michigan ranked eighth in total exports assisted by the Ex-Im, according to Jamie Radice of the bank’s communications staff. She noted, however, that Ex-Im has committed to doubling the number of investment deals with Michigan small businesses, with the goal of having 100 customers by 2014.

Viking Spas, a family-owned business headed by CEO Tom Veneklase, was founded in the 1990s to manufacture hot tubs and now has sales in excess of $20 million annually, with about 30 employees producing more than 8,000 units per year.

The modern spa or hot tub industry really took off in the U.S. in the mid-1970s. Kneeshaw, who has worked in the industry for about 20 years, said there used to be about 100 companies across the U.S. — especially in California — producing about 400,000 tubs a year. The industry thrived through the 1980s and 1990s, but began to see a slowdown after 9-11 in 2001. Then the banking and housing crises “crippled it.”

Now, said Kneeshaw, there are about 80 or 85 companies left. In Greater Grand Rapids, there were four; now there are three, and since the recession began in earnest, total annual U.S. production has been “pretty much hovering at 125,000” units.

“Our industry was decimated by that recession,” said Kneeshaw.

“The (hot tub manufacturers) who have been able to survive are just getting by,” he said, hoping for improvement in the market.

Kneeshaw said the common belief in the industry is that there is pent-up demand for hot tubs. “But, obviously, it’s not as much of a priority as it was back in the heyday.”

He said that before the recession, when hot tubs were still selling like hotcakes, consumers didn’t focus on the total cost of a hot tub. “It was a question of, how much a month is it?”

Few customers today are focused solely on the monthly payment, he said, which is perhaps a reflection of tight consumer credit in the wake of the subprime mortgage fiasco. Now the hot tub industry is competing against the snowmobile and big screen TV industries “for that discretionary dollar,” he said.

Viking Spas wasn’t hit as hard as other hot tub makers. “We were basically the Kia and Hyundai of the spa industry. We’re pretty much in that low to middle category, which was not quite as affected as higher-end tubs,” said Kneeshaw. The higher-end tubs can cost $10,000 or more, while Viking’s line generally ranges from $2,000 to $7,000.

Viking, however, promotes the quality and safety of its products as part of their value. For example, the company has developed a proprietary surface finish that is less slippery.

“We’ve always been considered a value purchase,” he said. “In fact, we are on our fifth year where one of our models is a Consumers Digest best buy.”

Another reason for Viking’s relatively good health today is because “we were able to hook up with distributors in Canada, as well as distributors across the world, that were bringing us business as our business was starting to dip a little (in the U.S.),” he said.

Viking made a conscious effort to develop a network of dealers in other countries six years ago, “and we’ve been growing our business through those efforts,” said Kneeshaw.

About 45 percent of Viking sales are in Canada and about 15 percent overseas. Australia has good potential with Viking working on a distribution deal there now, and Sweden and Norway are very good markets for hot tubs. Viking also has distributors in Russia and India and has been building connections in Brazil.

The hot tub sales season in the Northern Hemisphere is generally from February through October, but Viking is “trying to get the Southern Hemisphere involved, because, obviously, their season is flipped.” However, Brazil has very high tariffs on certain types of consumer products coming into the country, a problem Viking is working to resolve.

Another challenge is technical, with many countries having their own electrical requirements, and regulatory agencies like Underwriters Laboratories in the U.S.

Because most of the components of Viking hot tubs are produced in the U.S., they are assembled complete here and shipped overseas intact. Shipping something as large as a hot tub might seem cost prohibitive, but Kneeshaw said that is not necessarily the case. A 40-foot shipping container can hold as many as 20.

“It’s actually cheaper to ship to Rotterdam than to California by truck,” he said. Viking just sent a container to Turkey holding 15 spas for about $5,500, he noted, and the prices they sell for in Turkey is well worth the shipping cost.

When the swimming pool industry really got moving in Europe about 50 or more years ago, Europeans came to the U.S. to get more information on them, according to Kneeshaw. After spas started going gangbusters in the U.S., the same thing happened: European business people began showing up at the U.S. spa trade shows to study the products and the industry.

“The Scandinavian countries, believe it or not, are our best distributors in terms of moving units per capita. They pretty much understand that lifestyle,” he said, noting that people in Sweden and Norway have had saunas for generations, so the acceptance of hot tubs seems a natural progression.

Sweden is really big on mail order business for consumer goods, said Kneeshaw, with one catalog company alone putting out 1 million catalogs a month to a region that has a small population compared to the Eastern U.S. “They move an incredible amount of spas out of catalogs. People order our products through a catalog,” said Kneeshaw, with a laugh.

When Viking began building its export business, it worked with the Small Business Administration, which works with banks willing to finance exporters. Kneeshaw said it now works with the Export-Import Bank, which connected the company with Global Commercial Credit LLC. A fee of a couple hundred dollars or so helps Viking research potential distributors overseas. If Ex-Im determines a distributor candidate is a good credit risk, it will set a credit limit and offer credit insurance on that amount, which Viking pays for.

“They basically provide the backbone to a small company like us that wants to send our products overseas and not get burned,” said Kneeshaw.

“They eliminate the gamble. It’s a great feeling to know that if you ship overseas, you’re not going to have to fly to Germany or some other place to sue” if the overseas partner defaults.

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