EXECUTIVE SUMMARY DESCRIPTION OF BUSINESS The National Pool Retailer’s Cooperative (PRC) has been formed to enable independent pool and spa retailers, like you, to compete more effectively against growing competition from e-commerce internet sites and big-box brands that are encroaching into the pool and spa industry. By pooling the collective purchasing power of hundreds of independent retail stores, the PRC can effectively pick up significant margins from the Cooperative executives negotiating with vendors and manufacturers directly. Members gain significant savings through mutually leveraging and negotiating third-party services such as insurance, marketing costs, technology savings and other similar services common to all pool and spa retailers. In addition to helping increase the traditional “brick and mortar” retail channel to market competitiveness, the PRC intends to enable its members to compete in other channels to market such as: e-commerce, social media, direct mail, and national media advertising. To compete in the e-commerce retail market, PRC will enable its members to participate directly in revenue generated by e-commerce customers in each member’s market area and nationally. The National Pool Retailer’s Cooperative owns a website called YourLocalPoolStore.com. It was developed as a retail website that sells directly to consumers online, with a variety of products related to swimming pools, spas, and home leisure. A unique, multi-channel fulfillment strategy, broader product offerings, and dependable, easy-to-use technology systems provide the highest levels of customer satisfaction available in the industry, compared to all other competitors. © 2014 National Pool Retailers Cooperative. All rights reserved. 1 Confidential EXECUTIVE SUMMARY DEFINITION OF MARKET NEED In the US market, there are more than 10,000 independently owned pool and spa dealers and more than 17,000 retail outlets. These independent dealers are by and large successful, small, family-owned operations. Historically, their success has been based on technical expertise and personalized service. Although many specialty retail chains, catalogues, and mass merchants have secured their own segments of the marketplace, the independent dealers’ share of the market has gone largely unchallenged for many years, until now. The dynamics of this retail segment of the industry have changed. Mass merchants, specialty retail chains, e-commerce sites, and catalogue companies are each developing their own strategies to better compete with each other. This takes a new slice of the independent dealer’s market segment as well. Additionally, consolidation at the manufacturer and distributor levels has left independent retailers with fewer options to help them differentiate their offerings. A ripe opportunity exists for an organization that can bring new value propositions and competitive advantages to these independent dealers. The greatest opportunity awaits the organization that embraces the traditional competitive strengths of the independent dealers and allows them to maintain their independence while helping them organize and secure better competitive positions. The rise of the internet presents vast new supply chain opportunities at all levels in the industry. So far, no one has actually implemented a plan that marries existing businesses to the new marketplace models that are now possible. Although consumer use of the web is growing steadily, the vast majority of manufacturers, distributors, and dealers have not yet determined how to utilize this powerful new tool. Manufacturers fear offending dealers and distributors if they go directly to consumers. Most manufacturers don’t have the budgets or ability to access consumers and consumers are not intensely brand conscious in this industry. Distributors are caught in a margin squeeze and have many of the same obstacles as manufacturers. Dealers are fragmented and uncertain as to how to go about incorporating e-commerce into their existing businesses. So they usually elect to do nothing. Dealers also struggle to obtain the necessary resources to restructure their businesses and incorporate a new business model. FULFILLING THE MARKET NEED A cooperative made up of independent pool and spa retail stores will have the potential to compete as a strong competitor against powerful threats that exist in three distinct segments of the pool and spa industry. The cooperative offers a way to “surf on, not drown in” the tidal wave of change in product distribution, coupled with margin pressures in the older retail-channel to market. 1) Traditional Retail “brick and mortar” Stores: Leslie’s Pool stores, the largest retail pool store operator with 800 plus stores, has become a significant retail competitor to the independent pool and spa operators through acquisitions and organic growth. Leslie’s is a chain-based retailer that uses mail-order catalogues and an Internet e-commerce site to locate consumers before placing retail storefronts into their targeted markets. Leslie’s size and national purchasing power has become a significant margin threat to the independent owners. The other threat to the traditional “brick and mortar” independent pool store owners is the explosion of “Big Box” retailers who have entered (or are threatening to enter) the DIY (do-it-yourself) market. These “Big Boxes” include: Home Depot, Lowe’s, Costco, Sears, and others. © 2014 National Pool Retailers Cooperative. All rights reserved. 2 Confidential EXECUTIVE SUMMARY We believe the combined purchasing power of the proposed cooperative should provide the independent members a strong national answer to competitors like Leslie’s, as well as the other large “Big Box” retailers. The ability to buy and source with the strength of the Cooperative and to be able to use national scale to negotiate very competitive marketing and third party service contracts, will allow the independents to regain or exceed their former profitability positions. 2) Explosion of Internet Retailers: The retail channel-to- market has experienced a tsunami of change with the explosion of consumers who are purchasing products online and comparing prices on multiple sites. The ease of purchase, combined with competitive shipping options, has made this segment the most significant threat to the future of traditional brick and mortar stores. Most independent store owners cannot afford the initial investment, or the ongoing investment of human capital and marketing capital to gain scale and compete with the largest direct-to-consumer retailing competitors. The biggest include: 1) In the Swim, a mail-order catalogue retailer that also sells online. 2) Doheny’s, a catalogue focused website. 3) Poolandspa.com, an internet-based retailer that relies on a significant portion of revenue derived from manufacturers’ advertisements on their website. Our Cooperative, with the power of combined membership scale, can control or own their own retail website. YourLocalPoolStore.com was developed with the strategy of being an innovative, fully tested, and strategically functioning retail website that will reach in excess of 90% of pool and spa owners nationwide. It fulfills the independent dealers’ need to find an e-commerce solution to pressing competitive challenges without requiring prohibitive capital investments and ongoing maintenance expenses. Through the strength of its domain name alone, linkage to the members local stores nationwide, and with minimal expenditures on advertising or search engine utilization, YourLocalPoolStore.com is poised to be visited by thousands of consumers. That, combined with the link to hundreds of our PRC members’ locally owned stores, will drive traffic directly to the PRC website. 3) Wholesalers/Distributors: The explosion of direct-to-consumer retail marketing through the use of technology has negatively impacted the traditional wholesale distribution model of retailing. In effect, through direct buying with manufacturers and squeezing margins with distributors, the direct-toconsumer model has significantly disrupted the old (Distribution Model) retail channel- to- market. The wholesale/buying group competitors include: 1) PoolCorp, the leading retail distribution company in the industry. 2) PWP Distribution, a distant number two among distribution companies. 3) Carecraft and AquaTech, two territorially exclusive-retail based dealer buying groups with approximately 250 members each. We believe that by offering a non-exclusive, and retail focused membership, we allow a huge number of independent store owners who have been excluded from the exclusive buying groups to become much more competitive. This also means decreasing their vulnerability to the predatory pricing and dictatorial practices of the largest distribution suppliers. By negotiating directly with the Manufacturers and regional distributors who have been shut out or handcuffed in their ability to compete, PRC will be able to demonstrate a very strong alternative to PoolCorp, simply by its size and scale. We will offer the Manufacturers leverage against the current terms that must be met for major access to the retail market. As our organization grows, manufacturers will recognize our ability to provide central marketing support, central billing for our Members’ accounts, and our ability to reduce one level in the distribution chain. This will make us a very favorable alternative to the biggest players’ “Walmart style” negotiations. © 2014 National Pool Retailers Cooperative. All rights reserved. 3 Confidential EXECUTIVE SUMMARY HOW NEED WAS IDENTIFIED The Founders and Directors of both the PRC and the website all run successful independent pool and spa companies in the industry. Understanding the changing dynamics of their industry, and realizing the enormous potential of the Internet to challenge existing business models, they conducted extensive research on the best ways to protect and expand their businesses through both retail storefronts and e-commerce. They concluded the best model was a national collective of independent pool and spa dealers with similar strengths and competitive challenges. They understood that their greatest challenge to future profits was not other independent pool and spa dealers, but rather the big boxes, retail chains, and large e-commerce websites. By organizing dealers to buy and work together, and by utilizing internet technology, we believe independent pool and spa dealers can reach more consumers than ever and develop new competitive advantages in their marketplace. A Co-Op that is mutually owned with other independent pool retailers is the only way independents can achieve the buying scale to increase their competitiveness in both the “brick and mortar” and e-commerce markets. Failure to change will doom independents to continue to lose market share and profitability. EXISTING STAGE OF BUSINESS 1) E-Commerce: YourLocalPoolStore.com will create, test, and measure the market acceptance of consumers to purchase products through a national retail website. Beginning with the website launch in 2015, the company will sell products directly to the consumer utilizing state-of-the-art technology and data infrastructure. It has aligned with several major manufacturers within the swimming pool and spa industry to introduce a broad range of products and product lines to the internet consumer. The company has working relationships with industry-based distributors on both coasts to strengthen fulfillment. It is establishing “company” warehouses strategically located around the country. It will purchase (at container-load prices) top-selling products to be sold at competitive retail pricing and with superior margins for the benefit of its PRC Members. It has obtained legal access to a proprietary mailing list of 4,000,000 pool owners (one half of the existing US market). We believe that YourLocalPoolStore.com is the perfect platform to launch the Cooperative’s strategy of linking Members’ stores to a Member- owned and controlled retail website. 2) Cooperative Membership: We have early (pre-launch) commitments of over 200 memberships and expect after post launch to have an additional 150-300 members to join in the first full year. The Membership fee of $1000 per Member and the monthly service fee of $199.00 per month per retail store will provide the necessary funds to cover most (if not all) of the Cooperative’s annual overhead. That will then allow for the majority (90-95%) of the rebates earned by the Members’ purchases to be returned to each Member at the end of the year. Our goal is to have a minimum of 1000 members representing 1500 stores by the end of five (5) years. 3) Founding Investors: We have presented the PRC concept and received an overwhelming positive response to investing in the startup. We currently have received multiple non-binding commitments to invest, with some candidates indicating an interest in multiple units. We reached our minimum goal of twenty units sold at $50,000 per unit by Aug 15, 2014 and we believe the remaining twenty (20) units needed will be sold by late year 2014. These investment units will provide the initial funds for startup and the capital necessary to provide financial security through the first year or two of operations. 4) Strategic Relationships: The PRC is in discussions with several manufacturers, third party service providers, and distribution companies to provide products and services to our Members at competitive margins and exclusive product lines to our Cooperative as Preferred Vendors. Some of these Preferred Vendors will have exclusive relationships with the PRC in exchange for industry best © 2014 National Pool Retailers Cooperative. All rights reserved. 4 Confidential EXECUTIVE SUMMARY pricing and rebates. The initial response of these Vendors indicates that there is a significant need in the pool and spa industry to have a fresh, new, and invigorating stimulus to the current status quo, and that the industry will reward a “new agent of change” handsomely. We believe our Cooperative will be that “agent of change” and can, and will, provide the leadership for the independent retail store owners to fight back and regain industry significance. 5) Personnel and Board Development: We are set to have nine (9) voting Directors on the Board with an additional two (2) outside non-voting Directors who will serve as Mentors to the Board as to best practices of other large national Cooperative’s in other industries. The nine voting Director Members will initially be made up of four (4) members of Founding Investors; three (3) Directors will be from the Membership at-large; and two (2) Directors will be the Founders and Executive Officers of the PRC. The PRC will be Board directed with annual budgets and pro-formas pre-approved with the executive officers responsible for executing the approved budgets within pre-determined variances. All significant changes in operational focus, debt encumbrances, voting rites, and additional changes in Membership requirements will require the Members -at-large majority approval as outlined in the Cooperative’s By-Laws. Every Member will receive a copy of the By-Laws and will be required to acknowledge acceptance and receipt. Upon initial funding, the two Founders and Executive Officers will begin the process of recruiting and hiring key personnel to staff an executive office. It is anticipated and expected that the PRC will function utilizing third party service providers for many functions normally provided by corporate offices. This strategy is based on several successful national cooperative models which are designed to limit the overhead of the cooperative to facilitate more dollars returned out of the Net Rebates earned by Members on their annual purchases. We initially project having no more than twelve (12) personnel in the corporate office at full maturation, this could change based on scale and if the Board desires to acquire additional assets or as opportunities arise in the future. 6) Marketing and Branding Strategy: We have engaged a brand development marketing firm to explore ideas for a logo and brand name for the Cooperative and to prepare print materials and advertising media for the launch of the PRC. In addition, we have taken steps to trademark “FreeStyle” as a potential in-house exclusive private brand for the Cooperative. We have also reserved “my local pool store” and “your local pool store” as registered domain names and are registering those as trademarked identities for the Cooperative. 7) Vendor Relations and Negotiations: The two Founders are having confidential initial negotiations with a few targeted Vendors so that we can expedite the public launch of the Cooperative with an initial platform of products and services. We will also initially rely heavily on our Founding Investors and Board Members, who are all very successful in the pool and spa industry, to assist us in the initial contact with the larger Vendors in the industry. This will utilize their reputation in the industry and represent the quality and strength of our strategy as we begin the process of developing credible and effective representation of our Members to Manufacturers and Vendors. We intend to hire a Senior Executive to head this department, but will rely heavily on our Board and Member Committees to use their spheres of influence with certain Vendors to aid or assist in the negotiation process for the best leveraged pricing and rebates available. © 2014 National Pool Retailers Cooperative. All rights reserved. 5 Confidential EXECUTIVE SUMMARY NET INCOME POTENTIAL Member Purchasing and Services The net income of the Cooperative (to be returned annually to the Members) will be non-taxed at the corporate level, but will be taxed at the individual Member’s tax rate on all net income generated by each Member’s prorata purchases of all the Members’ collective annual purchases. This prevents the Members from being double taxed at both corporate and personal levels. The net income of the Cooperative is earned in several ways: 1) The primary operating revenue generated monthly for overhead purposes is funded by the Monthly Service Fee of $199 dollars paid by each member for each retail store he owns and operates; 2) The primary net income revenue generated is through rebates paid to the PRC on all purchases made by Members to various manufacturers and/or distributors. These rebates will range from 3%–9% on all purchases based on volume and brand loyalty; 3) Additional PRC negotiated Pass-Through Rebates will be payable directly to Members above the base rebate rate, which will be an extra incentive for exceptional continued brand loyalty and volume purchases by individual Members above the expected average purchases by all Members; 4) Manufacturers typically have several pockets to draw additional incentive payments from: marketing support funds, fees or additional discounts for the PRC providing central billing services and/or guarantee of payment of Member’s purchases, new store opening contributions in either product or purchasing credits; 5) Extra revenue margins earned by captive channels of distribution or by PRC owned products or service providers. Our member owned website YourLocalPoolStore.com is a prime example of this opportunity. The PRC’s additional profit margins from the website revenue (after the inventory cost) will be based on whether the order is fulfilled directly by YourLocalPoolStore.com warehouse or by a regional fulfillment distributor. Those additional website margins will be shared pro-rata with all PRC Members. With the Cooperative overhead being substantially covered by the Members’ Monthly Service Fees, it is expected that the PRC’s Net Income will be 6%–12% of all annual gross purchases made by the Members through the Cooperative. The Cooperative’s Net Income will be directly linked to the collective purchasing consolidation efforts of the individual Members in recognizing the purchasing power and margin leverage of becoming one large industry presence out of many small individuals. Our minimum goal of 600 Members is achievable, we believe, because that goal represents only 6%–8% of the potentially available retail pool store market. © 2014 National Pool Retailers Cooperative. All rights reserved. 6 Confidential EXECUTIVE SUMMARY E-commerce Opportunity Our expectations for the e-commerce site, YourLocalPoolStore.com is extremely conservative in our view. YourLocalPoolStore.com can demonstrate that it has the potential of reaching approximately 90% of the pool and spa owners in the US. We believe our website can reasonably command one half of one percent (0.5%) share of the total market estimated at $7.5 billion annually. This market size estimate is defined as aftermarket purchases exclusive of new pool construction sales. The Cooperative conservatively estimates it will yield 12%– 22% of earnings on revenues projected to grow to $36,000,000 by year five in its projections. This will be driven in large part by the linkage of the expected 4001000 Member-owned stores providing the local ownership search engine emphasis to all online searches. This local ownership to the “Your Local Pool Store” website will provide opportunities for local in-store pick up, install of of online purchases, and the pro-rata sharing of all net income of YourLocalPoolStore.com to the Members on all website sales. This reinforces the value proposition of the Members all owning one national retail Website. The Projected Five Year Pro Forma attached to this Executive Summary is based on each Member’s average annual purchases growing from $100,000 in the first year to $400,000 by year five and is reflective of the Cooperative’s ability to provide more services and to negotiate better pricing as more Members join. EXECUTIVE SUMMARY PRO FORMA: Year 1 Year 2 Year 3 Year 4 Year 5 Avg Annual Member Purchases $150K$240K$300K$340K $400K PRC Gross Annual Purchases $45M NET REVENUE: $4.7M $12.3M$24M $32M $45M Avg Member Annual Rebates $11,407 $24,600 $34,285 $35,555$45,000 $120M $210M $306M$400M SUMMARY OF COMPETITIVE ADVANTAGES The Cooperative will operate in a $7.5 billion dollar pool and spa marketplace where a small but unified group of interests should be able to gain significant market share. The company is not locked into the typical product development costs, marketing costs, brick and mortar costs, and fulfillment channel limitations of virtually all other players in the industry. The PRC is free to introduce new value propositions to the industry that result in benefits to the consumer, the dealer, and the manufacturers who embrace the model. The model represents a large amount of flexibility compared to other business models in the pool and spa industry. This flexibility includes product line extensions, private label branding for better margin and customer loyalty, negotiations with large numbers of manufacturers, new supply chain models, national marketing strategies and access to technology systems which exceed those available to the small business owner today. All of this is at a price well below what it would otherwise cost them. © 2014 National Pool Retailers Cooperative. All rights reserved. 7 Confidential EXECUTIVE SUMMARY THE MANAGEMENT TEAM T. Vincent Purselley, Chairman and CEO Robert G. (Rod) Sterling, President and COO PROPOSED INITIAL PRC BOARD MEMBERS Please refer to Exhibit B for proposed and elected Board Members SIGNIFICANT INDUSTRY TRENDS Over the last three years, the market is reported to have grown at an annual average rate of 4%–9% depending on product category, despite economic slowdowns experienced by other industries. Industry experts cite the aging demographics of the American population as evidence that this growth trend will continue unchallenged for at least 10 years. Another trend has been the ongoing consolidations that have occurred among businesses at the manufacturer and distributor levels in the industry. GREATEST RISKS PERCEIVED BY MANAGEMENT E-Commerce Retail Site: Under other circumstances, the greatest risk of failure would be a failure of consumers to find the website and adopt the process of online ordering. However, the obvious advantage in reducing this risk is our domain name and is underscored by the fact that it links the site to hundreds of local Members’ retail stores is a natural starting point making our platform attractive and available for internet shoppers. Furthermore, our in-depth knowledge of search engine utilizations, detailed mailing list of pool and spa owners, and the demographic correlation between pool and spa owners and internet users, leads us to the conclusion that this is the predominant advantage for YourLocalPoolStore.com. The greatest risks of not succeeding are the inability to provide competitive national pricing and satisfactory fulfillment. Failure to provide competitive pricing could result in rejection by consumers seeking fair prices. We believe that is mitigated by the collective purchasing power of the Cooperative and the ability of each Member to direct their consumers to the website as immediately available inventory to be delivered directly to consumers. Failure of the fulfillment process could disappoint consumers, and reduce the enthusiasm of dealers to support our model. We think this is offset by having a controlled existing distribution center (Memphis) that acts as a fulfillment partner to the Cooperative, along with distribution fulfillment agreements with regional based distributors who are willing to ship product on a one-item ship basis. These fulfillment distributor partners will be losing some margin on any of our Members who are their existing customers, but will be picking up additional significant revenue on our Members who are new customers to the Distributor. We will have strict performance parameters for the regional distributor to meet in order to maintain a preferred status with the PRC. Most e-commerce consumers want the best price and quick ship response, not necessarily overnight shipping. Competitive Pricing: Members who will be attracted to the Cooperative will be those independents that have been shut out of participating in the two or three existing buying groups. Many of these store owners who are excluded are © 2014 National Pool Retailers Cooperative. All rights reserved. 8 Confidential EXECUTIVE SUMMARY equivalently successful or even more so than the buying group members. These existing buying groups are usually territorially exclusive as well as financially exclusive, and it is our belief that this limited or out of date membership requirement automatically reduces their industry leverage to negotiate better pricing agreements. This built-in cap of their membership that impacted the ability of these groups to effectively negotiate the best pricing for its members is also creating the impetus for many of these members to look at alternatives like our Co-Op. Independents who are not part of a group may also feel like they have few options to get competitive pricing because they have only one or a few stores and not much leverage to negotiate with their existing distributors. They are also well aware of the explosion of internet availability and pricing that makes it almost impossible for them to compete at a retail level. Our combined non-exclusive national membership will give tremendous leverage in negotiating better pricing for not only whole goods, but pool parts and construction components as well. Though we are non-exclusive in our membership, we believe we offer the small independent owners better pricing than they have available currently and ownership participation and access to competing on the internet. The larger “industry legacy type” store owners also benefit because of the additional loyalty and volume rebates available exclusively to them (as “Direct Pass-Thru Rebates from vendors), but it is only possible because of the overall scale of Membership in the Cooperative. The PRC model of buying direct from manufacturers as often as possible will help reduce cost to our Members as well as our e-commerce customers. Cooperating with manufacturers to sell their inventories directly provides additional value-added services to both the manufacturer and to the consumer. Outsourcing generic or private label product purchasing to offshore manufacturers also ensures pricing competitiveness on a national scale. The PRC distribution plan includes five possible options to get product to the customer. The potential for fulfillment to be performed through multiple channels reduces the risk of customer dissatisfaction. If one channel proves ineffective, there are multiple “back-up” alternatives, including a nationwide network of dealers who can be tapped to provide both the product and the fulfillment. The PRC distribution plan includes five possible options to get product to the customer. The potential for fulfillment to be performed through multiple channels reduces the risk of customer dissatisfaction. If one channel proves ineffective, there are multiple “back-up” alternatives, including a nationwide network of dealers who can be tapped to provide both the product and the fulfillment. SUMMARY OF DISTRIBUTION CHANNELS The PRC model identifies five channels through which product may reach a customer. These are: 1) Manufacturer volume purchases direct-to-Member, 2) Distributor-to-Member/consumer, 3) PRC’s own warehouses-toMember/consumer, 4) Member-to-consumer, 5) PRC contracted outsource fulfillment center-to-Member/ consumer. PRC and YourLocalPoolStore.com will assign a distribution channel best suited to the timely and effective delivery of products to the consumer. This multiple channel fulfillment strategy increases the PRC and YourLocalPoolStore. com’s ability to provide alternative fulfillment methods to the consumer whenever the primary channel for a particular product isn’t suitable. © 2014 National Pool Retailers Cooperative. All rights reserved. 9 Confidential EXECUTIVE SUMMARY MOST LIKELY EXIT STRATEGY Cooperatives are generally not available for acquisition given the inherent competitive strategy and benefits to the membership who beneficially controls the cooperative. Cooperatives are typically developed for long term membership advantage and as a mechanism to provide long term retirement savings and benefits for family owned businesses. As Members retire, they are able to cash in all of their patronage savings as well as have the opportunity to sell their businesses to fellow Members. That said, within three to five years, management believes that the Cooperative will: be a proven concept, will be profitable, and will have captured enough market share to become an attractive acquisition candidate for another entity that wants to further expand its: 1) existing Co-Op business by buying into another Co-Op industry, or 2) a Distributor wanting to gain or solidify its market share, or 3) a large retailer or internet competitor needing to get scale for a public offering or to consolidate competitive strength, or 4) a private equity player wanting to acquire a Co-Op to convert and monetize its value in the market. Likely candidates within the industry would include other companies in the distributor or direct marketing segments of the industry. Outside the industry, candidates for purchase of the company include other internet based or direct mail catalogue companies. Whether or not an actual sale of the business occurs will depend on a number of variables which will include the interests of investors at the time. SUMMARY In conclusion, we welcome you to join us in the launch of an exciting new force in the national pool industry. Come partner with us as we advance the Pool Retailers Cooperative into a significant industry player using the combined purchasing power and scale of our members and providing tremendous financial benefit and long-term security to independent pool retail store operators just like you. NATIONAL POOL RETAILERS COOPERATIVE A MISSOURI COOPERATIVE 4800 Shelby Drive, Memphis, TN 38118 | 901-591-8040 fax 901-591-8041 | poolretailers.coop © 2014 National Pool Retailers Cooperative. All rights reserved. 10 Confidential