A close-up look at what it takes for a small business to battle with giant, nationwide competitors.
Nowadays running your company professionally isn't just a good idea. It's a requirement for survival -- one that is transforming American business. Witness the tale of Harry W. Schwartz Bookshops
David Schwartz thought the morning meeting with Bill Pattenson would be nothing but a formality. As Schwartz prepared to see his banker on that warm Milwaukee morning in the spring of 1986, he thought Pattenson wanted simply to go over the numbers on his bookshops' loan. Perhaps, Schwartz speculated, Pattenson wanted to extend the company's line of credit or offer a few cash-management pointers.
After all, Schwartz thought, he and his new partner, Avin Domnitz, were turning the business around. Only the year before, their six local bookstores had lost $300,000 on revenues of $2.7 million; this year, Schwartz knew, they were close to break-even. They had reduced the bank loan from $550,000 to $442,000 without missing one of their $6,000 monthly payments. Business in their upscale new store, in the city's trendiest urban mall, was boffo. All in all, the company's prospects were bright.
Pattenson, it turned out, thought otherwise.
What Pattenson saw was not a company being made ever more professional but a company that had merged with a competitor only to lose more money as one unit than the two could have lost combined. Worse, he saw a book industry growing and changing everywhere but in Schwartz's stores.
Over the previous 15 years Waldenbooks and B. Dalton had opened more than 1,500 bookstores across the country, bringing financial systems, sophisticated merchandising, and computerized inventory controls to an industry once dominated by independent store owners. The pattern wasn't unique to bookselling. Home Depot was starting its assault on independent hardware stores. Toys "R" Us was decimating toy stores. And Wal-Mart, the behemoth of retailing, was challenging every sort of shop in the country. Beyond retailing, industries -- from waste management to funeral services -- were being professionalized (see "The Demise of Mom and Pop?" page 7) in now-predictable but then-tumultuous ways. In short, what Pattenson saw when he looked at Harry W. Schwartz Bookshops was a company under threat. And that's what he told Schwartz and Domnitz that morning.
Pattenson opened the meeting by announcing that he was moving the company to the bank's workout division. He and a younger banker, playing "bad cop/worse cop," ridiculed the pair's anemic inventory turnover, out-of-control salary expenses, and feeble advertising -- even what they paid their accountants.
And then Pattenson turned to them and challenged, "So -- when are you closing the company?"
Schwartz was rocked. He had always pictured himself to be "a progressive businessman." Then 48, he had run his family's 59-year-old bookstore since 1972 -- and over the past 10 of those years he'd adopted virtually every tactic big business brought to this once-quaint industry. When Waldenbooks and B. Dalton took the radical step of discounting best-sellers by 30%, in the 1970s, Schwartz marked down the top 10 New York Times best-sellers. When the chains began to display books near their store entrances, he copied the so-called Dalton stack. When they marked every new mall with one or two stores -- bringing books to the 'burbs -- Schwartz mustered the courage and the capital to open a mall store in 1982. And, finally, believing that larger companies could buy more cheaply and spread overhead more efficiently, Schwartz attempted to achieve economies of scale by merging with his competitor Avin Domnitz in 1984.
In the month that followed his caning at the bank, Schwartz examined more coldly the business his father had opened in 1927. And he could see that Pattenson was right. "I was totally unlettered in the business part of my profession. I knew how to buy books from the sales reps, and I knew how to sell them to people. And I knew nothing about the business in between."
Domnitz and Schwartz realized they had to change. Hundreds of small independents had been squeezed out during the previous decade. The two partners suddenly understood that they would have to become as professional -- as competitively competent and disciplined -- as the big companies that were reinventing their industry. In the Wal-Mart economy, there is no other way to survive.
Trouble was, they didn't know then what "becoming professional" meant.
In the nine years since, they've learned.
* * *
The New Math:
Controls, Cash Flow, and Capital
Within a month Schwartz and Domnitz had dropped a bomb of their own. The 20 managers and other key employees of the company gathered at Schwartz's house to hear about the meeting with the bank. Schwartz could no longer afford business as usual. "The way the company was operating, if there had been an overrun in payroll or an unexpected capital expense, there would have been no way to pay for it," Domnitz explains. "We would have been out of business."
The two would impose true financial controls for the first time ever. Not only would Schwartz and Domnitz take 10% salary cuts, but also every employee would pay 50% of his or her health-insurance costs. The company would not replace employees who left, and it would pinch pennies like never before.
"It was very grim," says John Eklund, who at the time was the manager of the Iron Block store. Ellie Gore, then manager of another of the stores, went home and told her husband, "You're going to have to start making more money."
