A Rug Store Floored by the Economy

I never even knew what an Oriental rug was before I started dating my future wife some 20 years ago. When I was growing up my family aspired to wall-to-wall rugs, which covered the entire floor, not just part of it.

But Polly, my wife, started dragging me to Oriental rug stores. I quickly learned to bring reading material, and I would plop myself down on a pile of rugs, nod agreeably and feign interest as she pointed out the intricacies of design and fabric.

I knew I had to do time in the rug stores if I wanted to buy tickets to sporting events with no questions asked.

Last week I was summoned to a rug store by an intriguing tale of bad business timing.

Ofer Ben-Aharon finds himself trapped in the throes of a recession. His ill-timed purchase last August of Hadji Oriental Rugs, a fixture on Wisconsin Avenue in Bethesda for 32 years, provides both a glimpse into the economics of Oriental rugs as well as a high-end retailer blindsided by the worst economic downturn since the Great Depression.

When Ben-Aharon, 51, and a business partner set their sights on Hadji Oriental Rugs, they figured the store might sell more than $500,000 worth of rugs in a good month. Like most retail businesses, the markup on Oriental rugs is significant; Ben-Aharon said full price is about three times what a retailer might pay at wholesale.

Their business plan assumed they would pay $1.5 million for the shop and its 4,000 or so rugs and then quickly celebrate Hadji's retirement with a one-time sale, offering rare 20 percent discounts. Ben-Aharon hoped the rugs would gross $8 million to $12 million. Under the plan, Ben-Aharon and his partner would split $1 million in profit for less than one year's work.

After the sale, they would reduce the size and expenses of the store and run it under Hadji's longtime chief of staff and top salesman, Fred Vaziri.

Ben-Aharon went to work. He used his contacts to recruit salesmen from around the country who could "move" the rugs under deadline pressure. (His lease expires in May.) He has four salesmen whom he pays $100 a day before commissions, and he pays $4,000 a month to put them up in temporary housing nearby. They earn another 5 percent on the price of each rug they sell.

At $55,000 to $60,000, the monthly expenses are significant. Rent is $19,000. Labor costs come to $30,000 a month before those salesman commissions. With each salesman, he pays two "schleppers" who help move the rugs around for display to the customers. The schleppers earn $12 to $17 an hour.

Insurance is another $2,000. Delivery and transportation is $1,400. And on top of that is a monthly advertising bill that has grown into the six figures.

The deal closed in August 2008. He planned on giving Hadji's former owner another big check once most of the rugs were sold.