Groucho Marx once said that he never wanted to belong to a club that would have him for a member. There must be times, we suspect, when companies on the INC. 500 feel similar apprehensions about the industries of which they are a part.High-growth industries -- the glamour sectors of the economy -- provide any number of opportunities for smaller companies, but they are treacherous. The market niches that looked so appealing yesterday are likely to be jammed with eager new competitors today. Shrinking segments of the economy, or sectors unusually vulnerable to the business cycle, can be even less appealing, in that they force growth-oriented companies to find ways of circumventing the market's trends. Fast lane or slow, it can be hard to fight the traffic.
That said, it is, of course, easier to make the INC. 500 grade in a high-growth business than in a sluggish one. Some 145 companies on the list, for example, are involved in such rapidly expanding industries as telecommunications, computers, cable television, and publishing. None are in cigars or ladies' shoes. Still, there are dozens in other industries that either remained flat during the past five years or exhibited a marked downward trend.
How did the fast-laners avoid the potholes? And how did the slow-lane standouts outstrip the pack? In the stories below, INC. takes a closer look at some of the companies from each category -- at what made them unique and at what they have in common. What emerges from the stories, oddly enough, is a sense that the 500 companies resemble one another more than they resemble their counterparts in the same industry.
Maybe that makes them members of a new kind of club -- and maybe it is one that even Groucho, had he been a businessman, would have wanted to join.
PUBLISHING The hot medium
A word of advice to all the electronics buffs who have been predicting the demise of the printed word because of computers, telecommunications, cable television, and such: If you have been holding your breath, let it out.
For all the hoopla surrounding electronic communications, the printing and publishing industry has never been healthier. It employs 1.3 million people, puts out a total payroll well in excess of $20 billion annually, and projects 1984 sales of some $100 billion. Every single category of printing and publishing -- from books to magazines to greeting cards -- grew last year, even adjusting for inflation, and nearly all are expected to grow at the same rate this year.
"We're in the middle of a boom that is not all that fragile," says William Lofquist, an industry analyst -- and master of understatement -- with the U.S. Department of Commerce. According to the department's figures, Lofquist adds, printing and publishing depends more heavily on small businesses than does any other manufacturing industry. Of the more than 50,000 printing and publishing establishments nationwide, four out of five employ 20 or fewer people
Part of this words-on-paper boom can be traced to a buying binge among advertisers. Magazine ad revenues, for instance, have increased nearly 50% from 1979 to 1983, says the Magazine Publishers Association, from $2.7 billion annually to almost $4 billion. That growth far exceeded the percentage increase in both the number of magazines and their total circulation.
Still, it may be only a matter of time before the proliferation of magazines catches up with the growth in advertising support. Magazine publishing requires relatively modest capital for a start-up, and the killings being made in the business have already attracted a host of new players. Even though few of these new ventures succeed, those that survive find it a fast "cash-generating business," according to A. Emmet Stephenson Jr., founder of General Communications Inc. (#255) in Denver.
Stephenson should know. The owner of a kind of miniconglomerate, he counts banking, oil and gas, and mobile homes among his various business interests. "Actually, I'm a venture capitalist," he says. "Publishing is just one of my businesses." In 1978, he started a small tabloid called Denver Business World, and later converted it to a glossy magazine. Revenues promptly doubled and profits soared -- despite the added costs of a magazine format. He has since acquired city magazines, in Denver and Vail, and two real estate trade publications, one in Denver and another in Colorado Springs. General Communications grossed nearly $2 million last year despite an ongoing newspaper war in Denver that has kept ad rates low.
Once you have a couple of publications up and running, says Stephenson, the economics of starting another become irresistible." You use half your money and half tax write-offs to build the business," he says. "So it's easier to make the decision to start something new."
Vincent Testa, who started Testa Communications Inc. (#170) in Carle Place, N.Y., in 1979, publishes a swarm of trade and consumer magazines and tabloids for professional music and sound production industries, music equipment dealers, and home-entertainment enthusiasts. Testa, a onetime record producer who used to work with the rock group Vanilla Fudge and singer Janis Ian, formed the company with "well under" $100,000 and grossed $2.3 million last year. His specialty now, he says, is "starting magazines."
In fact, his specialty may be finding unexploited markets. "I always look for a hole to fill," he observes. Except for Home Entertainment, a ritzy magazine for well-heeled audio and video buffs, Testa's publications are "hard core" magazines carefully targeted to established professionals in the music and sound business. "We're not trying to reach 300,000 teeny-boppers who might want to be musicians," he says. "There aren't enough 17 or 18 year olds trying to be the next David Bowie. We focus our editorial content for people already working in the business."
Steven Simon, who spent 12 years in his family's lithography business before moving to Florida 10 years ago, found his own hole in the printing brokerage business. Simon originally planned a career switch into real estate when he left New York for the sunny South, but discovered on arriving in Miami that "nobody approached printing services as a large volume brokerage business" there. Figuring to become the first, he launched Miami Printing and Publishing Corp. (#42) as a clearinghouse for small and medium-size printers.
That was five years ago. Starting out with a mere $6,000 of his own money and another $22,000 borrowed from his family, Simon quickly earned what he calls "a PhD in negative cash flow." Happily, he passed the course with honors, repaying his debts in only five months and turning a profit his first year and each one since. Now, he says, the company's margins are roughly twice the industry norm of 10%.
Simon originally concentrated on financial printing -- prospectuses, 10-Ks, and the like -- in which quick turnaround time is critical. Since then he has expanded to include virtually every type of printing order. Capable of handling print jobs 24 hours a day, seven days a week, Simon's company places work with printers throughout the country, although principally in south Florida, guaranteeing customers quick turnaround time.
He has also developed an innovative system for in-house typesetting -- innovative because it isn't really in-house at all. The company employs typesetters who work at home, and then encourages them to develop their own typesetting businesses in their spare time. Miami Printing and Publishing supplies them with the equipment -- a system that Simon says is "very cost effective."
All told, Miami Printing and Publishing may be one of the fastest-growing companies in a fast-growing industry. The secret, claims Simon, is that his company isn't afraid to tackle the tough ones."When we go after new business," he says, "we ask the customer for whatever job it was that gave them the biggest headache last year."
TRUCKING Start-up fever, anemic recovery
Deregulation," Harry Brooks says with a sigh, "was like the old joke about watching your mother-in-law drive off a cliff in your new Cadillac. You didn't know whether to be happy or sad."
The trucking industry was largely deregulated by the Motor Carrier Act of 1980. But Brooks, founder and chairman of Miami's Brooks International Inc. (#436), remains ambivalent about his new economic environment even today. Although his company's sales mushroomed from $1.5 million in 1979 to $6.3 million last year, he sees so much flux in trucking that he still worries about "the guy around the corner who up and decides to go into the business."
Since deregulation, the number of trucking companies in the country has in fact doubled, to more than 30,000. But the opportunity suggested by this proliferation of start-ups is only half the story. Many of the new companies were moribund almost from the beginning, overleveraging themselves to buy trucks and often facing murderous rate wars. The industry's overall business, moreover, declined for three years running from its peak in 1979. Since then, it has exhibited a recovery that even the Commerce Department describes as "anemic."
With trends like these, truckers scarcely need enemies. Even so, highway-user taxes have been on the rise, and state and local governments have been slow to make road improvements for the longer and wider trucks the industry says it needs.
These grim financial realities have shaped an industry that remains top-heavy despite the influx of newcomers. Fewer than 10% of trucking companies gross upwards of $1 million a year, and much of what growth there is in the business has been limited to a few large, well-capitalized carriers. The industry's continuing difficulties, says Lana Batts, vice-president of policy for the American Trucking Associations, are likely to drive 20% of its companies out of business within the next 18 months.
Ironically, even going out of business can be a tough trick for some. Just months after it was deregulated, the trucking industry was hit with new restrictions governing pension plans in unionized shops (see INC., October, page 100), which account for between a third and a half of the industry. Now, any company that goes out of business theoretically has to pay off all future liabilities in its pension program. In fact, says Batts, there isn't a trucking company in the country that could do that. When Johnson Motor Lines of Charlotte, N.C., shut down in 1980, for example, it had a net worth of $6.5 million -- and got a bill for $20 million to cover employee pensions. Johnson's trustees are still trying to figure out how to pay off the debt. Deregulation, Batts observes, opened up entry to the industry while pension guidelines closed off some of the exits.
Despite his worries about the competition, Harry Brooks believes he can avoid becoming a casualty. A 30-year veteran of the business, he moved from Philadelphia to Miami in 1972 and founded his company in the same year. His strategy was to start small and remain highly specialized. Beginning with local deliveries in the south Florida area, he gradually added longer hauls between distribution centers throughout the Southeast.
Today, independent owner-operated trucks under contract to Books carry goods for such companies as Avon, Eastman Kodak, and Revlon. The owner-operators haul to terminals, where the company breaks down shipments and reloads them for delivery to product representatives or stores. What Brooks calls the "magic" of the system has been his ability to maintain high volumes within discrete market segments. "Basically," he says, "we do the same thing Federal Express does, except that we do it all on the ground."
All the truckers on this year's INC. 500 run cost-conscious, nonunion shops, but they aren't all following similar strategies. Jerry Waugh, head of aptly named Rising Fast Trucking Co. (#391) in Batesville, Ark., has taken pretty much the opposite tack from Brooks, going national with company-owned trucks. Using only his own drivers and equipment, he says, gives the company tighter control over its operations and an edge on the competition, which he describes in a sharp Arkansas twang as "all 2 million trucks out there." Waugh now runs 90 trucks to 48 states, carrying perishables and general commodities.
A former house mover and real estate man, Waugh started the company in 1979 with $100,000 and a conviction that incipient deregulation afforded opportunity. "We figured we'd be able to give the big companies some headaches," he says. Although he closed out 1983 with a not-uncommon headache of his own -- new equipment purchases put the company in red ink at year end -- Rising Fast hit $6.2 million in sales for the past 12 months and is expected to gross more than $10 million this year.
Another trucker who took advantage of deregulation is Charles Grindstaff, who set up G&H Transportation Inc. (#106) in Houston in 1979. Starting with a scant $4,000 in capital, Grindstaff secured temporary city-to-city hauling approval within four days following passage of the Motor Carrier Act. Later, G&H contracted with a shipping line to handle cargo in and out of the port of Houston, doubling its business overnight. What started as a husband-and-wife operation now employs more than 80 people and produced $4.4 million in sales last year.
A onetime distribution superintendent for Schlitz beer, Grindstaff says having worked the other side of the shipping business gave him an important insight: "There is no effective competition against good service." Like everybody else in the business, though, he thinks the handwriting is on the wall for the inexperienced and the overextended. "The weaker outfits are going to fall by the wayside in the next few years," he observes, loading up a classic business homily. "After all, that's the American way."
COMPUTERS A niche in time
Say "growth industry," and the business most likely to pop into your head has to be computers. And indeed, no other big industrial sector has evolved so rapidly during the past five years. In constant dollars, the total value of U.S.-produced computing equipment virtually doubled from 1979 to 1983. Large mainframe computers continue to be the dominant segment of the market, with sales last year almost equal to those of micro- and minicomputers combined. But the emergence of the microcomputer -- the market segment in which-most smaller companies are to be found -- is changing the mix. Peter Lowber, a senior analyst with The Yankee Group in Boston, estimates that sales of micros (or personal computers) will catch up this year with sales of minicomputers, with both hitting $18 billion. By 1988, Lowber says, microcomputers will be a $35-billion-a-year industry.
Despite the growth, microcomputers are a business riddled with risk. IBM now controls at least 50% of the total market and an even higher percentage of the corporate market. The export trade is depressed by the strong dollar, and lower-price imports are invading domestic shelves. With the possible exception of the so-called super-micro market, says Lowber, there are relatively few safe opportunities for small companies that want to manufacture personal computers.
Luckily, manufacturing is only part of the personal computer business -- and some of the other parts are rather more appealing. While only about 400 U.S. companies make microcomputer hardware and peripheral equipment, there are almost 5,000 companies writing software for that equipment, and about 3,700 retailers selling it to customers. With domestic sales of personal computers rising from 2.4 million units in 1983 to a projected 5 million this year, those markets can only increase.
Even now, they have spawned a lot of companies that have made the INC. 500. One of the winners this year is Computer-Land Inc., the giant retailing chain, with four franchises showing up on the list at #21, #36, #116, and #157. Among the others are Microware Distributors Inc. (#7), an Aloha, Ore., wholesale distributor of microcomputer hardware and software, and Central Data Corp. (#122) of Champaign, Ill., an original-equipment manufacturer supplying component boards to microcomputer makers. The latter pair illustrate some of the unusual niches successful small companies have carved for themselves in the personal computer industry.
Rick Terrell, himself a former computer retailer, founded Microware in 1979 with just $15,000, adding another $60,000 from investors the following year. Between then and 1983, his sales rocketed from $125,000 to more than $12 million.Microware is a "true distributor," Terrell says, in that the company buys a variety of equipment and software direct from manufacturers and sells it at a markup to retailers.
At least some of these vendors, Terrell figures, will have something the individual retailer wants. "When I go into a store in Spokane, I've got a big bag of tricks," he says. "I know I'm going to make money on the call. That doesn't necessarily happen when you've got just one product to sell."
Terrell's operating goal has been to build a well-entrenched business in the Pacific Northwest that can survive the inevitable weeding out of the industry's weaker players. He maintains particularly close credit control, he says, because of the precarious financial status of many retailers he works with.So far, the strategy has been successful. Although the attrition rate among the independent retailers he serves is high -- as many as one in four may have gone out of business in the past 12 months, Terrell estimates -- Microware's sales should be $18 million in 1984.
"We've looked at going national from time to time," Terrell says, "but our conclusion has always been that national distribution won't be viable in the future. Our local market is growing, so we just decided to concentrate on getting a bigger piece of our own pie." As for products, Terrell believes much of Microware's future sales lie in the areas of networking software and hardware, which link microcomputers into single systems, and with rapidly growing "system houses." System houses are small, independent suppliers of operating software packages for such specific applications as doctors' offices. Already they constitute about 50% of Microware's business.
"I've got one customer now who specializes in systems for tire stores," says Terrell. "We're talking about people with very little overhead and very small volumes. It's a great market niche that is going to stay with the small independents." Yankee's Peter Lowber agrees. "Software is where the opportunities for new vendors are," he says. "It's the glue that holds the systems together."
Jeffrey Roloff makes some of the parts that get glued. A hobbyist who began manufacturing microcomputer boards while attending community college in Champaign, Roloff started Central Data in 1977. Three rounds of venture financing later, he has a company that supplies hardware makers with boards for such functions as memory, terminal linkup, and disk control. Central Data's sales of $4.7 million last year gave it only a 3% market share -- but it was nonetheless the third largest U.S. supplier of Multibus board products, behind Intel Corp. and National Semiconductor Corp.
Market share, in any event, is not what Roloff sees as his prime objective at the moment. "As far as I'm concerned," he says, "our mission now is profitability growth." That may be because of Roloff's intention to take the company public "when the market looks right for it." Although he thinks Central Data can continue to increase sales in the 50% to 100% range in the future, he believes profitability -- now running from 8% to 10% -- can grow faster. "Maybe," he says optimistically, "we can earn as much as some of the companies doing $100 million in sales."
Roloff reasons that the fast-moving nature of the computer business -- which threatens many smaller players -- works to his advantage. Manufacturers faced with a rapidly changing market cannot develop everything themselves, he points out. That creates a never-ending need for OEM suppliers.
"As long as the market grows," maintains Roloff, "we'll grow with it."
HOMEBUILDING The five-year slump
No industry gets its comeuppance as routinely as homebuilding. The hot and cold cycles of the real estate business -- determined mainly by the cost of money, both to builders and to buyers -- are awesome in their extremes.
Homebuilders that made this year's INC. 500 did so during one of the leanest periods the housing industry has ever seen. The "boom" of 1983, although much ballyhooed, followed a four-year decline that made 1982 the worst year for housing since 1946. The total value of new home construction in 1983, adjusted for inflation, was actually lower than in 6 of 10 years during the 1970s. And the upturn appears to be petering out almost as quickly as it began. Houston's U.S. Home Corp., which netted $27.6 million on sales of nearly $1.2 billion last year, managed to lose more than $8.7 million in just the first six months of 1984. U.S. Home is the nation's largest homebuilder, with operations in 15 states.
Despite such trends, a handful of smaller builders have managed to beat the odds consistently during the past five years.One is D. O. Thompson Jr., founder of The Thompson Co. (#139), in Hendersonville, N.C. Started at seemingly the worst possible time -- 1979 -- Thompson's homebuilding company grew from a three-man operation in its first year to 56 employees by 1984. Even in the industry's dog years of 1981 and '82, Thompson's sales climbed at around 300% annually, hitting over $5.8 million last year. This year, Thompson says, the growth rate will slacken -- to around 120%.
Thompson owes some of its success to its location: The Hendersonville region has a reputation as a prime retirement area. The company specializes in planned unit developments (PUDs) for retirees, and has also entered the burgeoning life-care community business. Thompson finances such ambitious projects through joint ventures, both with savings and loan institutions and with nursing homes; it has already finished one PUD and has five more on the way, with an average of 90 units apiece.
Thompson, 26, learned the business from his father, for whom he first worked at age 9. By the time he was 16, he had his own subcontracting company, which did cleaning and various odd jobs in construction. But the real key to his success, he says, is not just experience but also knowing whom to sell to. "We just target the market better," he observes, pointing out that almost 95% of his customers pay cash. "Interest rates," he adds carefully, "haven't had much impact on our sales."
In Houston, David Weekley also has been able to dodge the interest-rate bullet, at least until this year. Eight years old, Weekley Homes Inc. (#308) grossed $53.7 million in 1983, selling more than 600 houses. Some of Weekley's fast growth in the past five years, of course, was due to Houston's oil-boom economy, which protected the city's single-family home market from the downturns that plagued the rest of the country. Oil's current doldrums -- and the overbuilding that is finally affecting homes and offices in Houston -- will, says Weekley, depress his sales to between $35 million and $40 million this year.
Nevertheless, Weekley promises to stick by the game plan that worked so well in the past. "Our main strategy is to not give houses away," he says. "We're very conservative that way." At $90,000-plus, Weekley's homes are among the pricier entries in Houston's tract-home market, intended for what the builder calls "the BMW" crowd. He maintains that his was the first company in Houston to apply sophisticated design to standard houses."Houston was still building homes that looked like they came out of the 1950s when we started," he says.
Like Thompson, who says inventory is a builder's biggest nightmare, Weekley sells from models, building only what he is reasonably sure he can move. His current inventory amounts to a scant 30 units. He also enhances his houses' appeal through an innovative financing mechanism called "builder bonds," in which buyers' mortgages are packaged for sale as securities on Wall Street in much the same way savings and loans sell mortgage portfolios on the secondary market. The secondary packaging mechanism allows buyers to get mortgages through Weekley cheaper than they could get them elsewhere.
By trimming his operation now -- he has already cut back from 92 employees to 65 -- Weekley hopes to increase profitability in Houston while venturing cautiously into new markets.
"A lot of builders are cutting margins drastically to maintain market share," Weekley says. "We'd prefer to remain in the black."