Owners and CEOs of fast-growing companies discuss the likelihood of national and regional recession.
Owners and CEOs of fast-growing companies discuss the likelihood of national and regional recession.
The heads of America's fastest-growing companies tell: what they watch to alert themselves to changes in the economy; what those signs are telling them now; and what they're doing about it inside their own businesses* * *
While economists announce an official recession whenever the U.S. gross national product declines for two consecutive quarters, the men and women running fast-growth companies across the country have their own distinct and personal notions of what makes for a recession. John Bell says it's when worries about his direct-marketing business give him fitful sleep. To Soni Christensen, a recession means she might lose her new $500,000 design studio. California plastics manufacturer William Czapar is more direct. "A recession," he declares, "is when it hits your profit and loss, no matter what the rest of the economy is doing."
To be sure, this Inc. survey on the economic outlook turned up the usual suspects when folks were asked to name signposts that might signal trouble ahead -- high interest rates, unemployment rates, inflation, the stock market, even the number of help-wanted ads in local newspapers. But for Clarence E. Harris of Calhoun, Ga., a leading economic indicator is "gossip at the post office." Is Harris the kind of character you'd see on reruns of "The Andy Griffith Show," an entrepreneurial Barney Fife? Not quite. His Carriage Industries Inc. employs 1,000 workers and posted sales last year of $103 million.
Who's to say that the guys hanging around the Calhoun post office know any less than Alan Greenspan, chairman of the Federal Reserve System? His take on the economy comes from sheets of bloodless statistics, and numbers don't always tell the whole story. "You can feel a recession coming in your gut," remarks one company owner. "It's like a deer sensing the presence of a wolf that it can't yet see."
Differences within a region
What is striking, when one speaks with the survey respondents, is the divergence of economic outlooks among people in the same region, and sometimes even within the same industry. For depending on one's niche, a recession can be either a curse or a blessing in disguise. Take the Northeast, for example, which is already beginning to feel the effects of the rolling recession that wracked Texas, and before that the Rustbelt. It now is suffering the hangover of an exuberant binge.
Soni Christensen is president of Design East Interiors, in Concord, N.H. The company furnishes and equips model homes, lobbies, nursing homes, and the like. In 1988, when Design East made the Inc. 500 list, it had about 90 active models in its client base, and revenues reached $1.7 million. New Hampshire was hot. Then, very quickly, the bottom fell out of the New England housing market. The government's repeal of the investment tax credit did some of the damage, but mainly the supply of new housing simply outstripped demand. One of Christensen's projects was a condominium complex with 120 units; only 12 were sold.
Christensen had expected to have at least 20 employees by now. Instead, her staff peaked at 16 early in 1988 and has since been trimmed to 4. "This is the first time since I opened my doors in 1982 that I am going backward, not forward, in huge leaps," she says. "Sales are off by nearly 50% from our peak. I'm telling my people, 'Guess what? Be glad you have jobs. So don't be asking me for a raise, and don't pick up the phone and make a long-distance call, either.' My truck is worn out, but I'm not buying a new truck. Our van is worn out, too, and I'm not buying a new van. I'm not even buying clothes, and my daughter can't go on her ski trip."
Now consider the case of Mel Borrin. His New Hampshire real-estate firm, Preferred Properties Inc., sits on the shores of Lake Winnipesaukee, a scenic recreation area less than an hour north of Concord. Borrin specializes in the vacation-home market. Most of his buyers come from Massachusetts, New York, Rhode Island, and Connecticut.
Last year Borrin sold $22 million worth of real estate. This year, based on the volume of inquiries, he expects sales worth $30 million or more. "The volatility of the stock market has played right into our hands," he says. "People have seen too many collapses. They see that stability isn't in the market, it's in real estate. There's a lot of pent-up demand out there, and I think people have decided that now is the time to buy. Prices are more realistic. So I think we are in one hell of a great year."
Patricia Gallup, president of PC Connection Inc., in Marlow, N.H., feels the region's problems only indirectly. The $100-million mail-order retailer of computer peripherals and microcomputer enhancements is coming through the state's doldrums in fine style. But there is one problem, and that, too, has to do with the depressed New England real-estate market. "We used to attract employees from Boston and other urban areas in New England who wanted to live in a rural environment," says Gallup. "Now, those people are less likely to relocate because they're having trouble selling their homes." That's left Gallup with at least 30 vacant positions.
John Bell, the man for whom recession equals insomnia, is less sanguine. His company, Creative Professional Services Inc., had sales of $5.5 million last year. Its 45 full-time and 55 part-time employees handle business-to-business direct-mail marketing from their offices in Woburn, Mass., on Route 128 -- the high-tech corridor that not long ago was synonymous with fabulous growth. Bell's problem is not that business is down. If anything, it is up. No, Bell's problem is getting paid.
"We have had to install a program to speed up collections, because receivables are running from bad to terrible," Bell says. "That's true even with the best of payers, I might add. Everyone is trying to delay their payments, so nobody gets paid and we all go down together. I talk to a lot of CEOs of companies my size in this neck of the woods, and a lot of us are having trouble getting sleep these nights."
How companies are responding
Telephone interviews with scores of fast-growth company executives across the United States reveal that many believe they enjoy a special edge, some advantage, that will protect them no matter what the economy does.
Donald Eberly of Sacramento, Calif., is a businessman who sees a recession coming but is confident he'll emerge unscathed. His $11-million company, Qualimetrics Inc., manufactures, installs, and maintains meteorological sensors and systems for airports. "This is an area that is going to grow regardless of the short-term economy," says Eberly. "The modernization of airports is going to happen." The company now exports 28% of its volume, but what excites Eberly are his prospects in Eastern Europe, where airports now rely on antiquated Soviet-made equipment. He expects to land two major contracts shortly, probably in Bulgaria and Czechoslovakia.
It would be hard to find companies better positioned to avoid serious downturns than those doing environmental cleanups, since recent legislation has mandated what amounts to a national crusade. "We see ups and downs in our business on regional and yearly bases," says David Musser, of Enreco Inc., "but that seems to have less to do with the economy than with the regulatory pressures that are applied at the time." Musser's $13-million company, in Amarillo, Tex., solidifies noxious sludges in industrial pits, ponds, and lagoons.
Not that Musser ignores the specter of a recession. Like many companies that hope to remain buoyant in a downturn, Enreco is debt free. "We are fairly conservative and will continue to be," Musser says. "I want to have staying power. Should there be an industry shakeout, we're in good shape to weather several years of a very poor business climate. I think the economy is skating on thin ice, and if we break through, it could be messy."
For other businesses, unfortunately, the mess is already fast upon them. With sales flat or falling, with markets shrinking, they are moving aggressively to control damage. A search for new markets is at the top of the list. A scramble to speed up collections is another pronounced trend; so is reducing expenditures and debt. Those who still shudder at memories of the early-1980s recession, and the 21% prime rate, are the most concerned. "We desperately need to get into a larger facility, but we're holding off," says Gene Forte, president of Forte Industrial Equipment Systems Inc., a Cincinnati provider of automated conveyors. "Two years ago we were going to move into a new building -- a two-story, high-tech building. We were supposed to break ground, but I backed off. I paid $8,000 to get out of it. I had more new people than old, we were growing like crazy, but I just didn't want to take on the debt."
Some companies are making changes that go straight to the bottom line. "We have eliminated travel and entertainment," says Sal Salvatierra, president of C&S Data Solutions Inc., a technical-services firm in Marlboro, N.J.
Others are scaling back sales forecasts and shelving, or at least slowing, plans for growth. "Our business is expanding from 16 to 50 stores this year," says Sonny Cray, whose Philly's Finest restaurant chain is headquartered in Tucson. "If the economy were different I'd be saying 100 locations." Doug Pearson's NSS Corp. is a systems-integration business in Bedford, N.H. He had hoped to move on a second piece of property this year. Instead, he's concentrating on paying down a home-equity loan.
Otto W. Voit III is also putting expansion on the sidelines. Voit is vice-president and chief financial officer of Educational & Fun Ltd., a Reading, Pa., retailer of educational toys and products. The company made the Inc. 500 in 1989, but Voit is taking a cautious approach. "We were hoping to open new stores this year," he says. "We had plans to open two, then we scaled it back to one, and put it off for two quarters."
Up in Portland, Maine, Thomas Rand is taking advantage of the downturn to get back to basics. His Management Research Group, a consulting firm providing training and development products and services, grew more than 900% last year. "This company has seen tremendous growth in the past several years," Rand says. "In the past six months that curve has leveled off in the Northeast, and in the past two months it has turned downward. We have close relations with our northeastern clients, and the downturn has hit them and hit them quickly, especially in financial services. So 1990 is going to be a tough year.
"But the downturn has given us a breather," Rand goes on. "The growth of the company has been so rapid that we had not done much product development. It's time to get back to that. We had also become something less than efficient in the way we managed expenses. So we're now looking at that more carefully."
The chill of recession is forcing some companies to reach into less troubled locales and industries. Some of the most worried are companies that rely heavily on defense spending. The more prescient companies long ago began shifting to a more dependable business base.
Gary Fitzmartin's $10-million Office Furniture Specialists Inc. is typical of this group. Fitzmartin operates in two southern California locations, Long Beach and San Diego, a kind of ground zero of the potential military mayhem. "The southern California marketplace has extremely close ties to military spending," he says. "With peace breaking out all over and the deficit what it is, it'll affect this market and its concentration of defense suppliers. It's going to give us a downturn."
Fitzmartin anticipated trouble two years ago, when 40% of his customers were Pentagon contractors. The company retargeted its marketing efforts, pitching product maintenance, office redesign, and warehousing, as well as furniture sales. Today Fitzmartin pulls only 10% of his revenues from the defense sector.
C. J. Mead isn't hostage to defense spending, but he is being buffeted by negative currents in the building industry. His $7.5-million Construction Contracting & Management Inc., in Albuquerque, is having a tough go of it. "Most of the private-sector work has just stopped all over the Rio Grande Valley," he notes. "The developers have flat crawled under a rock for a while." Bidding for municipal and government projects is so fierce that contracts are going for 20% below what engineers estimated.
Mead has hunkered down to ride out the slump. "We're looking to sell some of our heavy equipment and pay down our debt," he says. "We're fixing the stuff that we have in order to do what work we get. But we're not buying anything new." He does see a safety valve in Las Vegas, however, where he'd like to open a satellite office. The Vegas market, he declares, is "going nuts."
Mark Ain's company, Kronos Inc., manufactures electronic time clocks in Waltham, Mass. "I don't think we're going to have a recession this year," Ain says. "We may well have a slowdown, and we're preparing for it. We have eliminated bank debt and put seven figures in the bank. We're watching our receivables and our inventory very carefully." Nonetheless, $35-million Kronos just had the best first quarter in its history.
HOW THE SURVEY WAS CONDUCTED
In late December 1989 we sent a two-page questionnaire to the 3,072 companies that have ever appeared on either the Inc. 500 or the Inc. 100, as well as to another 720 growth companies. We received a total of 960 responses -- a response rate of 26%. Survey results were tabulated by Harrison & Goldberg, in Cambridge, Mass.
The survey was conducted under the direction of special projects editor Sara Baer-Sinnott. Additional research was provided by reporter Anne Murphy.
1990 ECONOMIC OUTLOOK SURVEY
WHAT LIES AHEAD?
44% expect either a national or regional recession or both within the next two years
42% of those who expect either a national or regional recession or both expect a downturn in their business
37% expect a national recession will occur within the next two years
36% think their region will experience a recession within the next two years
29% expect both a national and regional recession
27% anticipate a downturn in their own business
HOW DO YOU TELL IF A RECESSION IS COMING?
Top 10 indicators used by respondents
1. Interest rates 22%
2. Unemployment rates 14
3. Stock market 10
4. Financial press 9
5. Sales 9
6. Construction starts 8
7. Newspapers and magazines* 8
8. Clients and customers 7
9. Real estate market 7
10. Auto sales 6
WHO EXPECTS A NATIONAL RECESSION?
By region: By industry:
Northeast 48% Service 41%
Far West 38 Distribution 38
Midwest 34 Retail 38
Southwest 33 Construction 34
Southeast 31 Manufacturing 30
WHAT SIGNS ALERT YOU TO CHANGES IN THE ECONOMY?
Top 10 actions taken by those anticipating a downturn
1. Explored new markets 72%
2. Reduced company's expenditures 69
3. Speeded up collections 69
4. Reduced debt/boosted cash 56
5. Postponed hiring 53
6. Diversified product or service line 52
7. Postponed capital expenditures 50
8. Reduced inventory 49
9. Laid off employees 43
10. Changes sales price or fees 40
I LOVE A RECESSION!
Jack Hasbrouck launched The Groundskeeper in Tucson in 1976 and, under the name Environmental Earthscapes Inc., made the Inc. 500 in 1983. But it wasn't until the Arizona economy hit the skids that the $7.9-million landscaping, maintenance, and construction firm started doing more municipal landscaping. With local jurisdictions turning to private companies for services, Environmental Earthscapes's 300 employees are constructing and maintaining public picnic areas, baseball and soccer fields, and parks, as well as landscaping a tremendous freeway expansion in Phoenix. "We're increasing our sales by 30% or more right in the midst of this recession," Hasbrouck says.
In Portland, Ore., meanwhile, down looks like up to Beau Bradley. He thinks Sonitrol Pacific, his $2.5-million company, stands to profit handsomely from the slowdown he sees ahead for the Pacific Northwest. Sonitrol installs and monitors state-of-the-art alarm systems, mostly for businesses. "Some of our best growth came in the early '80s," Bradley says. Recession will bring a corresponding rise in crime, he notes -- particularly burglaries. "We're projecting 30% growth."
Thrifty Auto Supply Inc., another Portland company, also hopes to thrive on adversity. "The after-market auto-parts business has been called recession-proof," says president Steven J. Hopkins, whose five stores make Thrifty the biggest independent auto-parts chain in the city. "When people can't afford new cars, they fix up their old ones. The average age of a car on the road today is more than seven years. So people are already replacing bigger-ticket items -- engines, front ends."
Larry Daniel also looks on recessions with a hopeful eye. The Daniel Company of Springfield, in Springfield, Mo., has a fleet of 35 tractor-trailers that operate as common carriers or on contract. "During a recession, more freight moves by truck than by rail, because businesses wait until the last minute to buy something, and then they want it immediately," he says. "People shorten their inventories and don't buy anything until they need it." A recession and higher unemployment will also ease Daniel's recruiting problems. "We now have about 52 drivers," he says, "and we need about 85."
Investment counselor Eugene Caldwell is equally optimistic. A principal at Atlanta's Caldwell & Orkin Inc., he predicts at least one negative quarter for both the national and regional economy. "I have 42 years of experience in this field," he says. "I have been through every postwar recession. And by and large, in recessions people turn to investment advisers. So we are likely to gain clients rather than lose them.'
WHAT THE EXPERTS SAY . . .
T. J. RODGERS
Founder and CEO
Cypress Semiconductor Corp., San Jose,Calif.
National recession: Perhaps
Regional recession: Irrelevant to business because serve international/national markets
Indicators: Book-to-bill ratio; sales forecasts; customer inventory
Strategic response: Added only 44 employees to a base of 1,350 last quarter; held capital expenditures to $4 million on a base of $160 million
Comments: "The way we run the company and think about planning presumes we are always in a state of siege. We're always prepared for the worst."
SIGAL Construction Corp., Washington, D.C. #1 Inc. 500 (1983)
National recession: Absolutely
Regional recession: No
Indicators: S&L crisis; vacancy rates; lack of architectural business, new building design
Strategic response: Holding general and administrative overhead flat for the past three years; eliminated all debt
Comments: "I used to be a high flier, but I've become conservative. When you don't have anything you can afford to be a high flier, but when you have something to protect, you can't."
Ben & Jerry's Homemade Inc., Waterbury, Vt.
National recession: Yes
Regional recession: "I haven't noticed."
Indicators: Overinvestment of money and talent in the military
Strategic response: Lower waste; improve worker productivity; investment in energy efficiency
Comments: "When you can't afford to buy a new house, a new car, or a new TV, you're still going to shell out two bucks for superpremium ice cream."
CEO and founder
Hayes Microcomputer Products Inc., Norcross, Ga.
National recession: No
Regional recession: "Some parts of the Southeast are pretty bad off and have been for awhile. The economy here in Georgia seems to be pretty stabilized."
Indicators: Prime interest rate; inventory turns within industry; performance of computer and telecommunications sector
Strategic response: Expandedin faster-growing Asian and European markets; emphasized quality
Comments: "At a time when heavy industry has reduced capital budgets, we find they're still buying our equipment because it helps reduce costs."