Furnace MFG doubles its revenue on the revival of recordsJanuary 27, 2010 6:00 AM
by M.J. McAteer
Photo by Mark Rhodes
Furnace MFG is hot, although its business has nothing to do with that heating monster in your basement. Instead, the Fairfax-based Furnace is an audio/visual company that derives its name from the term for duplicating a recordable disc: a “burn.”
Since 1996, the company has made its living copying CDs, DVDs and flash drives. But that part of the business isn’t the reason that Furnace is the 2009 Virginia Small Business Success Story of the Year. In an industry where technology changes faster than you can say “Blu-Ray,” 37-year-old Eric Astor, Furnace’s founder, president and CEO, was able to double his company’s sales volume — from $2.5 million in 2008 to $5 million in 2009 — by dramatically increasing its production of vinyl records, a product whose demise has been predicted for decades.
Surprised? Just stroll into the Best Buy store at Potomac Mills. There, you might be startled to find racks of records once again. That’s because that staple of garage sales and darling of aging audiophiles has been making an unanticipated comeback in the past few years, and not just among those who spun platters at the sock hop long ago. Young people who have grown up on CDs and Mp3 Players are, to quote Madonna, “into the groove” now, too.
Nielsen SoundScan, which tracks audio sales at more than 14,000 major outlets in the United States and Canada, reported the purchase of 2.1 million records last year, an increase of more than 35 percent from 2008 and the highest volume of sales since it began tracking music purchases in 1991. That figure still represents only about 1 percent of the music market, making vinyl a boutique product. Record fans, however, staunchly maintain that Nielsen’s numbers are far too low because many record outlets are not included in its surveys.
Regardless of the exact figures, vinyl unquestionably has undergone a remarkable resurgence. Furnace saw an opportunity in the newfound popularity of records and seized it. “A lot of people have ideas and talent but don’t persevere,” says Randi Lombardozzi of the Fairfax Economic Development Authority, who has advised the company about growth and publicity. “Furnace is different.”
Manish Naik, Furnace’s chief operating officer, sums up the company’s philosophy this way: “When a customer asks, ‘Can you do it?’ The answer is ‘yes.’ “
For example, Furnace said “yes” to Frank Mauceri, who runs an independent music label called Smog Veil Records out of Chicago. Mauceri says his label is known for its green initiatives and that he wanted no part of the standard plastic CD case called a jewel box. “We wanted 100 percent recycled packaging material, and Furnace went out and found solutions,” Mauceri says. “Other manufacturers always fell short.” Smog Veil Records subsequently has made about 50 CDs and DVDs with the company.
Furnace also said, “yes” to Canon Virginia, a Newport News manufacturer of consumer products, including injection molding.
“We recently had an extremely tight lead time with a Canon software project,” said LiYu Chen Hitt, the company’s purchasing agent. “Furnace MFG required less than a two-week lead time from the time we provided artwork and master DVDs to deliver finished products to us.” That was twice as fast as Canon’s experience with other suppliers, Hitt says.
Furnace is unwilling to turn down projects as small as $50 or ones that have special needs it may not be equipped to handle. So when a high-end jewelry store wanted to “gift” 100 of its best customers with personalized iPods, Furnace said “yes” once again, even though it had to outsource the engraving. Naik says his company subsequently has been looking into the feasibility of getting its own engraving machine.
But the biggest “yes” of all was when Warner Bros. Records came knocking. Tom Biery, general manager and executive vice president of promotion for Warner Bros. Records, says his company approached Astor when RTI, the West Coast facility that Warner uses to press records, started to be overwhelmed by demand. Warner needed supplemental capacity but did not like its options. “We’re sticklers for quality,” Biery says. So Warner thought of Furnace and its reputation for high standards. “We asked Eric, ‘Can you come up with a solution?’” Biery says. “And he did.”
Furnace may be a small company, but its solution was global. Good record pressing plants are in short supply in the United States — the last new presses were made in the early 1980s, Astor says — so Furnace found overseas manufacturers to press the records. Astor has the records bulk shipped to Fairfax for packaging and handling. Warner now sends its masters straight to the foreign plants, mainly the venerable Pallas in Germany and Record Industry in The Netherlands, and Furnace takes it from there. “They have been outstanding in services, always coming up with ideas,” Biery says. “The guy [Astor] is not sitting still.”
In 2009, Furnace produced nearly a million records, including work by rock icons such as Genesis, Metallica, Madonna and Neil Young and by younger artists such as Wilco and Green Day, Naik says.
Furnace now has about 20 vinyl clients, although Warner Bros. still represents more than half its record business.
To accommodate this huge new aspect of its operations, Furnace had to make equally huge changes in its business model. Naik explains that the bulky business of record handling requires much more space than the 5,000 square feet Furnace occupied. So the company relocated last year from offices on Old Lee Highway in Fairfax to an industrial park in the county’s Merrifield area. The move more than tripled its space to 16,000 square feet, with about 10,000 square feet of that dedicated to vinyl. Furnace receives about 30 loads of cardboard a month, which alone requires a cavernous storage area.
Naik, 38, a friend and neighbor of Astor, joined the business about a year ago. He says that getting into records as a separate line of business also has necessitated major financial adjustments. Because Furnace needed working capital for expensive record-handling equipment — such as a sleeving machine, a folder, a perforator, a shrink wrapper, and a labeler — it took on debt for the first time. It also expanded its staff from eight to 14 and regularly takes on two to 20 day workers. For the first time in its history, Furnace also plans to do a little marketing, getting its feet wet with Google ads.
But doing business overseas has come with a special complication: dealing in foreign currency. For guidance, Furnace turned to SunTrust Bank.
Michael Pensky, an analyst with the bank’s foreign exchange unit, calls Furnace “an innovative company that recognizes that we are in a global market.” SunTrust has been helping the company with hedging products, such as forward contracts, to lock in exchange rates often a couple of months ahead of the actual transaction. Naik, however, says that Furnace may need to look at other strategies to contain currency risk.
“Our main difficulty with the euro is the increasingly unfavorable exchange rate,” Naik says (The euro was worth about $1.44 in early January.) “That poses a pricing challenge for us as we’re not entirely able to pass on those costs to our customers. So we end up with less profit than we’d like.”
Nevertheless, Furnace’s spin in the record business has paid off handsomely.
“I am impressed with how they [Furnace] found an additional niche to grow their business,” says Lombardozzi of the Fairfax Economic Development Authority.