Destination: Retail

“If we had not gone into retail, I don't think we would be here now,” says Bob McNellis, president of Peaks & Plains Medical in Spokane, Wash. Last year, sales from two retail stores helped the home care business recoup about 25 percent of gross sales that were lost to Medicare and Medicaid cuts.

McNellis moved into retail three years ago, and for the first two years, he lost money. But during the third year, his retail venture finally lived up to its promise. “Today, we're on our way back to health,” he says.

With thousands of home medical equipment businesses feeling the pressure of declining reimbursements, many may soon face decisions similar to those McNellis wrestled with.

Between 14,000 and 18,000 HME businesses currently operate in the U.S., according to consultant Jack Evans of Malibu, Calif.-based Global Media Marketing. While a number have built retail showrooms into existing warehouse locations, Evans estimates that fewer than 10 percent of all HME operators sell products from stores in retail shopping locations.

But that could be changing, he points out, since more and more HMEs believe that retail may help solve their business problems.

Retail, however, is not for the faint of heart. Success requires commitment, cash — and more commitment.

Two years ago, one home care provider opened a 4,200-square-foot store plus a 2,200-square-foot warehouse and office nearby. He explains that he wanted a one-stop shop “with everything from soup to nuts” in a highly visible location with lots of parking and easy access. And he got it — but his rent grew from $9 per square foot in a warehouse district to $20 per square foot in a retail area.

The lease called on the new retailer to pay about $136,000 in rent per year. “When we opened, we were doing about $4,000 in sales per month,” he says, not enough to pay the rent (or any other expenses) by a long shot.

But he reasoned that he had a good location with lots of prospective customers nearby. So he swallowed hard, stuck with his commitment to the new business model and followed his pro forma until the store started to perform. Today, the business does $140,000 in sales per month, which comes to $1.68 million per year. The $136,000 annual rent now represents only about 8 percent of gross sales.

Brokers say that most retailers, as a rule of thumb, spend up to 10 percent of gross sales on rent.