Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / Why This Leather Company Bought a Tannery to Scale
Transcript
- Lucas: Let's talk about why buying your own tannery might be smarter than just complaining about leather prices. Luna: That sounds like there's a specific story behind it. Lucas: There is. A company called Hollow Leather — they make belts, bags, wallets, small leather goods. For years they sourced everything through a middleman: a supplier who bought from tanneries and added a markup. And like any small business, they felt squeezed on cost and quality. So in 2022, they did something most businesses in their position wouldn't even consider: they bought a small tannery in Ohio. Luna: That's a huge move. How much did that cost, and how did it change their numbers? Lucas: The tannery cost about $1.2 million — which was basically their entire operating cash at the time. But by 2025, their revenue had gone from $4 million to $12 million. A lot of that growth came directly from the integration. They got better margins, they could offer custom leather finishes that competitors couldn't, and they locked in raw material costs. Luna: That's a three-year window. Did they ever worry it was too risky? Lucas: I'm sure they did, and we'll get into that. But before we dig deeper, I want to mention something briefly. A lot of what we talk about on this show — these real stories of small businesses scaling — stays free because of listeners who support the show. A couple of dollars a month makes a real difference. If these conversations have moved your work forward in some small way, you can help keep them going at buy me a coffee dot com slash fexingo. Luna: Yeah, it's genuinely small amounts that add up. We don't have ads, so that support is what keeps the episodes coming. Lucas: Exactly. And now back to Hollow Leather. The founder, a guy named Dan Phelps, started the company in 2016 making belts by hand in his garage. By 2021, they were doing $4 million in revenue, but he told me he was spending about 40% of his time dealing with supply chain headaches — late shipments, inconsistent leather grades, price increases every quarter. Luna: So the tannery wasn't just about cost. It was about time and quality control. Lucas: Right. The move gave them three things. First, margin. They were paying a 30% markup to the middleman. After buying the tannery, that markup disappeared. The tannery's operating costs were roughly 15% of the leather value, so they picked up 15 points of gross margin overnight. Luna: Fifteen points is huge. What were their gross margins before? Lucas: Around 48%. After integration, they hit 63%. That extra margin allowed them to invest in marketing and product development without raising prices. Second, they gained control over quality. They could now source hides from the same ranches every time, and the tannery processed them to their exact specifications. That consistency helped them land wholesale accounts with retailers like REI and Nordstrom. Luna: So the tannery became a competitive moat. Competitors outsourcing leather couldn't match that consistency. Lucas: Exactly. And the third benefit was speed. Before, lead times from order to delivery were 8 to 12 weeks. After owning the tannery, they could turn orders in 4 weeks. That let them do smaller, more frequent production runs and reduce inventory risk. Their inventory turns went from 2.5 times a year to 4.8. Luna: That's almost doubling. How did they finance the purchase? You mentioned it cost $1.2 million. Lucas: They used a mix of an SBA 7 loan and some seller financing from the previous tannery owner. The seller was retiring and willing to hold a note for $400,000. So they only needed $800,000 from the bank. They put up the business assets as collateral. Dan told me the monthly loan payment was about $14,000, which was manageable because their cash flow was positive at the time. Luna: But a tannery is an industrial operation. They had to learn how to run it. That's a totally different skill set from making leather goods. Lucas: It is. And that was the biggest risk. They kept the existing tannery manager and his team of six. Dan's background was in product design, not chemistry or heavy machinery. So they relied heavily on the incumbent talent. They also spent about $50,000 on training for their own quality control staff to understand the tanning process. It took about six months before they felt confident in the operation. Luna: Six months of uncertainty. That's a long time when you're making payments on the loan. Lucas: It is. And there were some hiccups. In the first quarter, they had a batch of leather that came out too stiff because of a temperature issue in the drum. They had to write off about $30,000 worth of hides. But Dan said that was a learning cost. By year two, the tannery was running smoothly and even started selling leather to other small leather goods makers, which created a new revenue stream. Luna: So the tannery became a profit center on its own. How much of the $12 million revenue came from that? Lucas: Roughly $1.5 million from external sales. The rest came from their own product lines. So the tannery not only lowered costs but also opened a B2B channel. That's a classic vertical integration play — you start by serving yourself, then realize you can serve others. Luna: What about the risks of owning a facility that's tied to one industry? If leather demand drops, they're stuck with a tannery. Lucas: That's a real concern. The leather goods market is growing at about 4% annually, but it's not recession-proof. Dan's hedge was diversifying into other leather sources — they now also process hides for automotive and furniture clients. That's about 20% of the tannery's capacity. So they've reduced reliance on fashion cycles. Luna: Smart. So the lesson isn't just 'buy a supplier' but 'buy a supplier you can also sell to'. Lucas: Exactly. Dan says the key is to look for a supplier that has excess capacity you can fill with your own demand first. Then gradually add external customers. If you try to run a tannery purely on your own volume, it's hard to make the numbers work. Hollow Leather's own volume covered about 60% of the tannery's capacity from day one. That gave them a solid base. Luna: That makes sense. What would you say to a small business owner listening who thinks 'I can't afford to buy my supplier'? Lucas: I'd say don't assume you need to buy the whole thing. Maybe you can buy a minority stake, or sign a long-term contract with volume guarantees in exchange for better pricing. But if you have a critical supply that's inflating your costs and hurting your quality, vertical integration deserves a look. Starting small — like buying a piece of the supply chain — is better than doing nothing. Luna: And Hollow Leather is a good example of making it work without being a giant. Lucas: Right. They went from $4 million to $12 million in three years. That's a 44% compound annual growth rate. Not every company needs to grow that fast, but the move gave them resilience. Even in 2024, when consumer spending on accessories slowed, their margins held because they had the tannery buffer. Luna: Interesting. So the tannery was both a growth engine and a shock absorber. Lucas: Exactly. And I think that's a framework worth considering. If you look at your biggest operational headache — whether it's raw materials, logistics, or a key service — ask yourself: can I bring that in-house? Not necessarily by buying a factory, but by controlling more of the chain. Luna: It's a mindset shift from 'I'm a leather goods company' to 'I'm a leather company that also makes goods'. Lucas: Perfectly put. Hollow Leather now calls itself a leather manufacturer, not a leather goods brand. That identity change helped them see new opportunities. Next time you're frustrated with a supplier, maybe the answer isn't finding a better one — it's becoming your own. Luna: That's a powerful thought to end on. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.