What It Takes to Survive a Recession
Doom-and-gloom economic headlines have haunted small-business owners this year.
Many saw their stress levels soar as credit markets remained stalled for months. Others saw little to encourage future prospects for hiring, as payrolls shrank and jobless claims hit 26-year highs. And few were surprised when the National Bureau of Economic Research, the country's business cycle arbiter, officially declared last month that the United States has been in a recession since December 2007.
The National Federation of Independent Business recently gauged its small-business optimism index at 87.8 -- the fourth-lowest reading in the survey's 35-year history, according to the Washington-based advocacy group. But even as economic fear cripples owner confidence, some entrepreneurs are bucking the trend. They represent a range of industries, many of which have faltered along with the economy. Cautiously optimistic, they say their unique business models will keep their companies healthy in these tough times.
Still, they're not entirely immune to the crisis. Some have laid off workers, others are retooling their operations, and all are clamping down on unnecessary spending. Inc.com pulled together a panel of CEOs to find out how these well-positioned entrepreneurs plan to ride out the recession.
Has the recession affected your company?
C.J. Franklin, CEO of Harley Stanfield, a Washington, D.C.-based real estate investment trust that finances and manages LEED-certified properties: We were No. 9 on the Inc. 500 this year. But I have a sneaking suspicion that if the data had been reported today, we would probably be one of the top three. Over the past three years, even during the real estate meltdown, green real estate has increased in value at an average of 6.5 percent per year. And the bulk of the meltdown was centered on subprime lenders who loaned money to people who had borderline credit. My average client is in the top one percent of investors based on their credit score and their income. It's kind of like, 'OK, there's been an economic meltdown, but do you really think it's affecting Bill Gates?'
Kevin Reddy, CEO of Noodles & Co., a Broomfield, Colo.-based restaurant franchising company: We're still projecting to have real growth through the recession. People are eating out less or they may be cutting back on what they order, but interestingly enough, our average check is up. I think Noodles & Co. is different from other restaurant concepts in that you're able to get the service elements of casual dining, with the affordability of a quick-service restaurant. There are people who were spending $15 per person at a casual diner, and they can now come to us and spend $7 per person. I think gaining those customers has offset some of the other ways that folks are cutting back.
John Baackes, CEO of Senior Whole Health, a Cambridge, Mass.-based company providing a health care plan to Medicare and Medicaid patients: We still anticipate rapid growth. There are about 7.5 million people in the United States on Medicare and Medicaid. We think that number will continue to grow as baby boomers age and a similar share falls into the poverty category. In fact, because of the downturn, we expect more people to fall into the category.
Burt Cabañas, CEO of Benchmark Hospitality International, a Woodlands, Texas-based hospitality management company focusing on corporate retreats: No additional growth, but no real loss. We haven't had any definite business canceled, but I will say that our individual properties are looking at a 10 percent downturn in revenues in 2009. Most of it will be driven by a reduction in spending by the majority of our clients, which are Fortune 1,000 companies. But no company will go more than 18 months without a meeting, so business should pick up in the third quarter of next year.
Bob Allen, Senior Vice President of CH2M Hill, an Englewood, Colo.-based global engineering and construction firm: Our growth depends on two things: work with existing clients and the amount of new work opportunities that come up over the course of the year. We think 2009 will be a bit of a challenge, but one that we can handle going forward. A lot of our work is related to infrastructure. No matter what's happening to the economy, communities have to to take care of their road and bridge issues.
Many companies are currently reorganizing, revising fees, or looking for ways to cut costs. What kind of changes is your company making to adjust to the economic climate?
Franklin: During the mortgage meltdown, we picked and chose properties in very specific parts of the country. We do a lot of stuff in college towns where the real estate isn't necessarily expensive but universities don't ever go out of business. Our formulas called for us to be able to buy a property and resell it with property taxes, mortgage and insurance payments of at least 20 percent less than the going market rate for rental in that area. We very simply didn't buy unless all of those circumstances were met.
Reddy: A few years ago, we redid our menu. So while you saw food prices growing at almost double-digit rates over the last few years, we actually lowered prices. In a tough economy, you can't just raise prices, pass them on to the customers, and survive. You might be able to cover margins in the short term, but ultimately, you end up losing transactions and it's not good for business. Our objective is to make sure that we keep prices down like we have so diligently in the past.
Baackes: Medicaid is a state program, and because every state has to balance its budget, the Medicaid reimbursement we get is likely to be impacted. So we have to adjust our expenses and look for ways to continue to provide the same benefits. In our Massachusetts plan for example, we cover patients' co-payments. If something were to happen with our Medicaid reimbursement, we might have to forgo that benefit.
Cabañas: I think there are other ways we can save money rather than to follow the airlines' lead of eliminating pillows and blankets. That is a bate-and-switch game that we're probably not going to play. There are things that have more to do with our ability to work harder rather than to have the customer get less. For example, we can revise the hours of operations in certain restaurants, or how we staff for recreational activities that may not be used.
Allen: If we have a downturn in our manufacturing business, and we have top engineers whose projects have slowed down, we might redeploy that engineer to a sector that's doing fairly well like energy. So we're not hunkering down and holding back. I'd say it is cautious bullishness.
Have you done or do you plan to do any layoffs or hiring freezes?
Franklin: No. I actually just hired two administrative people within the last week, and I hired another broker two months ago. We bring people in as our business expands, and there's no need for us to hire more until we do an IPO, which will probably be in 18 months. In terms of morale, our lowest-paid broker last year made $168,000. If you keep your employees well-fed and give them plenty of toys to play with, they don't fuss.
Reddy: Absolutely no layoffs and not really a hiring freeze either. If you never let staffing get out of control in the first place, you don't ever have to cut it back. Our management team clearly is making wise decisions with budgets, investing resources, and hiring talented people. As long as they continue to do that, I don't see any change in how we're operating.
Baackes: We will continue to hire nurses and social workers as our enrollment grows. But we don't anticipate hiring more people to take care of insurance company functions, paying claims, enrollment and so forth. We will use more technology and increase production out of the existing labor force that we have.
Cabañas: There is a salary freeze, a hiring freeze, and some layoffs at the management level at each property. The layoffs are in the 10 percent range and the salary freeze is for everybody. But I know of one competitor that has actually demanded a 20 percent payroll cut from all of its managers. That kind of activity travels through the industry rapidly, and as people hear about it, it boosts our morale because we are holding our salaries, not decreasing them. We are doing much less to hurt the employee and the manager than others.
Allen: Around the world, we've had to lay off about 300 people. That's less than two percent of our workforce. But we don't have a hiring freeze. For example, we have a project with the U.S. government in Afghanistan that we're being asked to bid on. And if we're successful, in a short amount of time, we're going to have 100 people ready to fly into Afghanistan to do support work for the government.