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."

Domnitz emerged as a budgeter whose emphasis on cost cutting represented a distinct break from the company's old way of doing business. Previously, employees could spend when they felt they needed to; now they had to run expenditures by him first.

Of course, maintaining financial control meant much more than simply holding down costs. It meant keeping control in a larger sense; Domnitz and Schwartz knew they could no longer operate in the statistical dark. They could no longer make intuitive decisions about ordering, hiring, and spending. Domnitz, who had taught himself the basics of a bookstore's numbers by growing his own bookstore business, realized now was the time for him to master the process. He describes the balance of 1986 as the period "when we really started doing structured, formal financial planning."

Before the warning signs, says Eklund, "store managers never really had access to raw numbers, though we were made to feel responsible for them." Eklund's monthly meetings with David Schwartz had been occasions to chat about philosophy and books and, by the way, business matters. Now Eklund and his colleagues sat in the small, cluttered office and reviewed line-by-line accountings of which items were moving and how fast. Domnitz demanded that managers run their stores adhering to basic formulas: What were they spending on payroll as a percentage of expenses? How much inventory were they turning over? What was their cash flow? "Suddenly, we were obsessed with numbers," Eklund recalls. "We were talking about inventory turnover; before, we didn't know what it was."

The improved understanding of the cash-to-operations relationship enabled Domnitz and Schwartz to make decisions based on cash flow. "This is rather shameful, but as we began to look at inventory we came to recognize that inventory meant cash. Before that it meant books," says Schwartz, whose habit was simply to order the books he "knew" would sell.

Schwartz began to change how he ordered. Pattenson had pointed out that the stores turned their inventory over less than twice a year -- poor by industry standards. "I was the macho buyer who bought for the life of the book," says Schwartz. If he thought he would sell 10 copies of a book, he would order 10 copies up front and carry them until they sold. Now, assisted by a computerized inventory system, Schwartz orders in small batches, tracks the numbers, and reorders only when necessary. That's paid off: in 1987 the company's inventory turnover rose to 2.8; in 1988, to 3.2; and in 1989, to 3.7.

Cumulatively, those practices bolstered cash flow. But Schwartz and Domnitz still had one major problem: they had doubled in size without increasing the company's capitalization. "We had zero working capital -- we had no line of credit," says Domnitz today, still sounding awed. "How can you operate any type of business that depends on an ebb and flow of inventory without an operating line of credit?"

Very carefully. Schwartz and Domnitz's cash was tied up in books on the shelf, and, with no available working capital, they stretched accounts payable to the end of each publisher's cycle. Those who wouldn't deliver once their bills were 60 days overdue, Schwartz and Domnitz paid on day 59; those who'd cut them off at 120, they paid on day 119. Publishers put the company on hold. "I spent my days -- every single day -- talking to creditors about extending our terms," Domnitz says.

Schwartz, Domnitz, and their silent partner, Bill Orenstein, ponied up $25,000 each in the spring of 1987. And after another year of seeking capital, Schwartz persuaded his college friend Allen Samson, a local businessman who had made good when he sold his nursing-home company to Transamerica, to buy one-fourth of the business for $220,000. "That was a true second wind," says Schwartz. "With that we could become totally current with our publishers, expand our Iron Block store, and expand Brookfield."

The controls and the capital helped bring them back above water. For fiscal year 1987 Schwartz Bookshops boosted sales to $3.2 million, with a profit margin of nearly 5%. Though they hired no additional employees, that year Schwartz and Domnitz did reinstate full health benefits. In 1988 the stores hit $3.7 million in revenues; in 1989 they reached $4.4 million. And 1990 sales surpassed $5 million for the first time. The ghost of the Pattenson meeting was put to rest.

* * *

Quick Study:
Be an Expert on Your Market and How to Compete in It
By the time Schwartz and Domnitz had learned to run their company by the numbers, their entire market had changed -- radically. The growth in chains was over; the next big thing was superstores.

In the summer of 1990 Schwartz made his first trip to Denver's Tattered Cover bookstore, a 40,000-square-foot store stocking more than 400,000 titles. "I spent two days there," he says. "It was the first time I saw the superstore concept as a bookstore.

"I walked up to a man and almost attacked him for reading a newspaper. It turned out that it was a statue of someone sitting in a chair reading a newspaper. And I thought to myself, 'This store is actually encouraging people to loiter by putting out this statue. There must be something about this sitting-down stuff that works." And, Schwartz reasoned, Barnes & Noble had already opened superstores in Minneapolis and Chicago, and "it was only a matter of time before the superstores came to Milwaukee."

Upon Schwartz's return, he and Domnitz set out to learn everything about bookselling and other, comparable retail industries. Domnitz, too, visited the Tattered Cover, and he describes it as an "overwhelming retail experience. I walked in and thought, 'This is all the books in the world."

Fired up by what they had seen, Schwartz and Domnitz undertook a massive benchmarking campaign. They traveled the country, conducted focus groups, and read extensively to discover how people decided where to shop. They spoke with fellow booksellers, from Frank Kramer in Boston to Michael Powell in Portland. In Chicago they spent a day studying Crate & Barrel's use of light and space to create shopping ambience. At office-supplies superstores, they watched price-driven customers shop. "That, in my opinion, is when David and I became retailers," says Domnitz.

The pair identified five shopper rationales: ambience, convenience, selection, service, and price. And then they set about remaking Schwartz Bookshops.

Their earlier expansion had already improved convenience and selection. Buoyed by the 1988 capital infusion and the improving financial picture, Schwartz and Domnitz launched a plan to continually upgrade both the location and the size of the stores. In Brookfield, an affluent edge city, they had opened a 3,200-square-foot store in 1985. They went on to expand it twice, developing 9,000 square feet, including a children's store-within-a-store. Last fall they opened two stores, an 8,000-square-footer in Shorewood and a 10,000-square-footer in Mequon, and they closed two locations that were less promising. In the Milwaukee area, that brought the total to four stores, averaging 8,500 square feet. They held on to two other stores, in Kenosha and Gurnee.

Schwartz and Domnitz focused on service, extending store hours. Though Schwartz feared his customers would rip him off by buying books, reading them, and then returning them, in 1992 he adjusted customer-service guidelines, adopting a no-questions-asked return policy. Customers who special-ordered a book no longer paid for it up front.

Schwartz and Domnitz realized that a large independent was best positioned to offer a satisfying shopping experience. In Denver they'd discovered "the bookstore as a community place." For customers, book buying occasionally was incidental to the experience of, say, an author's reading or a children's puppet show.

The company's 1990 ad campaign identified Schwartz Bookshops as "Milwaukee's Independent Bookseller Since 1927," and newspaper ads have included such touches as a letter from Domnitz to Schwartz's mother, profiles of longtime store employees, and messages from Schwartz to the public. The Writers to Readers series brings authors to town to read from their works, and the stores have initiated tie-ins with such community institutions as the zoo and the library. John Eklund and a third-grade class produced a book together. The mailing list has grown to more than 27,000 people who receive an annual catalog, a biannual children's newsletter, and notices of authors' readings.

* * *

Satisfaction:
Please Customers in an Age of Rising Expectations
At one time David Schwartz had only grudgingly carried best-sellers. His parents, the store's founders, had considered anything that wasn't literature or serious nonfiction a "nonbook." Today such books account for 80% of sales. The 1986 hit Iacocca brought hordes of new customers to his store. "There was a new type of buyer out there," he says. "We had to respond to that customer's need: price." Trained by the larger players, those new customers expected to pay $12 for a book the publisher marked at $19.95 -- a discount of 40% on books Schwartz himself was getting for just 44% off.

Though Schwartz quickly got over his reluctance to stock blockbusters, it took him and Domnitz years to master competitive pricing. "If we hadn't," says Schwartz, "we'd have abandoned the fastest-growing segment of the market -- people in search of the brand-name best-seller." For years they had been discounting best-sellers, but "we were teasing ourselves," says Schwartz, "because we didn't do enough volume for the discounting to have an impact." Less than 2% of the company's sales were at a discount, primarily because it applied to so few titles: only the top 10 New York Times best-sellers, which were marked 30% off.

"We had to equate price with value," Schwartz says. He and Domnitz spent months hatching and rejecting discount plans. They considered a dozen schemes, but they all shared one problem: "The more books we sold, the more money we lost."

Finally, in the fall of 1992 they launched an ambitious discounting strategy called 40-30-20-10. They discounted the top 35 New York Times best-selling hardcovers by 40% and the top 35 paperbacks by 30%. Then, because "we wanted to show that we had not only value but also culture," says Schwartz, the company discounted by 20% the "Schwartz 100," a selection of 100 books of merit picked by store employees. And every month, the stores selected one category -- mysteries, say -- to sell at 10% off. Schwartz and Domnitz made a full commitment to the program by supporting it with $185,000 in advertising. "We have given away about 2.6 points of gross margin in discounting," says Schwartz, "but we increased the volume by about 35%."

* * *

Differentiate:
Hit 'Em Where They Ain't
Schwartz and Domnitz focused on the five retail keys, and they designated an employee to develop a new niche that would differentiate Schwartz Bookshops from its rich but generic competitors: business books for business buyers. Today, in his small office over the Iron Block store, Jack Covert operates a business that is approaching $2 million in annual sales. "Once, we thought of Jack as a salesperson. Then we thought of him as a supersalesperson. Now we think of him as a marketing person marketing Schwartz Bookshops," says Schwartz.

Schwartz hired Covert to sell directly to businesses. "David took me to the back of the old store at Fifth and Wisconsin. The entire back wall was computer books. The left-hand wall was medical books. And there was a gondola of business books. And David said to me, 'This is your store. You will buy and you will sell. And you will make mistakes. And I will never tell you you are wrong." Covert used to fill his car trunk with business books and make cold calls on local businesses. He phoned companies listed in the Hoover Handbook, a compendium of more than 500 major corporations. As he grew his business he fought for resources to handle growing demand.

Reaching his faraway customers in Hong Kong and Egypt via fax, EDI, or on-line communiquÉ, Covert and his staff of 10 employees, each at a workstation in the downtown store, offer delivery of any business book anywhere overnight.

Covert himself is known in the world of business-book publishing. His championship of obscure works has helped turn such books as The Goal into national best-sellers, and his monthly top-15 list is a frequently cited standard. He publishes a 20-page glossy quarterly newsletter touting new picks to an audience of 60,000 book buyers, and the publishers themselves heed his suggestions. "Jack is not simply a bookseller -- he's a tracker and a prophet," says Doubleday/Currency editor Harriet Rubin.

* * *

Endgame:
There Isn't Any (Unless the End Is Yours)
On a Sunday afternoon at the Brookfield Harry W. Schwartz Bookshop, David Schwartz walks through the store straightening books on shelves, turning titles face out in a gesture as unconscious as shifting a car. He asks the "booksellers" (Wal-Mart has associates, Schwartz has booksellers) about coming events and the daily gross. He hails a loyal customer. In the midst of his attractive store, Schwartz is a fussy host -- the happy genius of his household.

Customers help themselves to free, freshly brewed coffee. A butcher-block table in the cookbook section holds pencils and scraps of paper so browsers can copy recipes. In the business section, customers have left business cards for a drawing to win a $20 book. And there are comfortable reading chairs everywhere.

The merchandise is no longer limited to books; there are blank journals, slogan-laden T-shirts, audiotapes, dolls, and toys. Schwartz knows customers respond to the "command to buy." Near the front door, a table with toy dinosaurs and stacks of Stephen Jay Gould's The Panda's Thumb and Dinotopia, a pop-up book from James Gurney, is part of a promotion with the Milwaukee County Zoo. During this Schwartz Digs Dinosaurs month, 15% of proceeds go to the Milwaukee Zoological Society.

The Shorewood store, which Schwartz visits later in the day, has a different look and feel from the first: visitors sip caffÈ latte and peruse foreign journals at the gem"tlich coffee bar to the left, or they proceed straight to painstakingly selected displays of books. Thirty percent of store sales come from the first 50 feet: the Schwartz 100; handsome editions of fiction by Grace Paley and Vikram Seth; business titles like Quality Wars and Competitive Advantage Through People; and displays of Sandra Cisneros's Loose Woman, accompanied by stiff cards announcing her reading that Wednesday.

For all they've learned and done, have Schwartz and Domnitz earned a just reward? Last July Barnes & Noble opened a 37,000-square-foot superstore on the south side of Milwaukee. This year it intends to open two more local stores, including a 26,000-square-foot store half a mile from Schwartz's Brookfield location.

"I think the thing that all small-business owners need to know is that retail -- never mind bookselling -- is a Darwinian business," says Barnes & Noble CEO Len Riggio. "It's almost a rule that if any retailer makes a substantially high return in his business, then somebody will come in to compete. If you have a great store, you are rewarded with another store next door."

Why should Schwartz escape? Barnes & Noble, Borders, Books-a-Million, and Crown Books have been rolling out superstores at a furious rate, terrifying independents, and raising the stakes. In just three years the huge stores have come to dominate the industry. Barnes & Noble now has more than 250 locations, Borders more than 60. Both plan to double in the next five years.

"The superstores are moving into locations where independents have developed the market. Booksellers may have grown the market for 20 years -- and here comes a superstore of 30,000 square feet, saying, 'OK, thank you very much, we'll take some of your market," says Vicki Worthers, national account manager for Simon & Schuster. "It looks very predatory."

In Denver Joyce Meskis's renowned Tattered Cover battles four Barnes & Noble superstores that ring the city like wolves. In Minneapolis, home to several strong independents, Barnes & Noble has plunked down 25,000 square feet within two blocks of Baxter's, a local favorite.

Moreover, "Waldenbooks has as much trouble with the superstores as the independents do," says Waldenbooks CEO Charlie Cumello. Kmart, which purchased Waldenbooks in 1984, took a $140-million restructuring reserve last year, in part to cover the cost of closing 187 poorly performing mall stores. The retail giant also purchased Borders Books in 1992 and has pumped it full of expansion money. Today the average Borders, which also sells music, exceeds 40,000 square feet -- including the espresso bar. The bigger the market grows, it seems, the bigger the new stores are. Whereas a store of 10,000 square feet was once considered large, most superstores now cover close to 30,000 and carry commensurately deep inventory. "The growth in malls is over," Cumello says. "It's the size of your stores that has become the major issue today."

Schwartz and Domnitz have no illusions. They know they are threatened by the Barnes & Noble store. The Brookfield store's budget projects a 10% to 25% hit to sales. But that store is expected to recover, partly on account of a 6,200-square-foot expansion that brought its size up to 15,000 feet.

Domnitz argues that independents should compete with superstores only up to a point. "The issue is what books you have, how well you know your market, and what people are looking for when they walk into your store. We have the right 60,000 titles. What good does it do to have 200,000 titles when no one wants those books?"

The view of Waldenbooks' Cumello betrays less emotion: "You'll find instances where superstores go in right next door to independents and do three times the revenue. That tells me that the customer wasn't being served in the market."

Domnitz considers the evidence. "We have to be the best retailers in the marketplace. We have to know our systems, our numbers, everything there is to know about this business, and we have to work on those five factors that bring people to our stores. We need this to be the most attractive, most well-stocked, best-serviced, most value-oriented, most selection-driven experience that anyone could possibly have."

In other words, he and Schwartz -- like company builders of every size everywhere -- have to be pros. "Today," Domnitz says, "each of our stores is well capitalized and perfectly located. Our help is trained to the teeth. And sales from 40-30-20-10 have been tremendous.

"Last year we had our best year ever," he continues, sounding not a little like a general itemizing reasons to enter a battle with hope. "So now that Barnes & Noble is coming to town, we say, 'Come on. Let's go to war."


BEFORE AND AFTER

The Five Attributes That Set Professionalized Small Businesses Apart

They're Automated

"About half of all small businesses are now computerized," says Jay O'Connor, product manager of Intuit Software, in Menlo Park, Calif. More than 500,000 businesses use Intuit's QuickBooks, a business-accounting software program, and roughly 30% of the 6 million customers who have bought Quicken, the company's best-selling personal-accounting software, use it in their small businesses.

With such resources, "the quality of the information we get on our businesses has improved dramatically over the last 10 years," says Robert Worrell, president of the Bank of Grays Harbor, in Grays Harbor, Wash. "Instead of keeping the information in their hip pockets, people use their personal computers to help them get out their monthly statements -- whether they are in manufacturing, logging, or fishing."

Until recent years only the very large players could automate administration of health benefits, legal programs, inventory control, and a slew of other functions. "Today," says retail consultant Gary Wright, president of G. A. Wright Inc., in Denver, "many small firms electronically maintain their inventory and keep track of their customers."

"Both large companies and small are asking for heavy office-automation skills today, whereas five years ago there was a distinction. Today small companies expect the same sort of computer skills in their workers," says spokesperson Sharon Canter of Manpower Inc., the nation's largest temporary-help supplier.

They're Competitive

Once upon a time, small meant unchallenged. Geographic isolation, narrow product niches, and unique distribution channels provided entrepreneurs with virgin territory. Now everybody is trying to harvest the same turf.

"All that attention to Wal-Mart and other mass merchandisers has been a wake-up call to small retailers," says Iowa State University professor Kenneth E. Stone, who has studied the impact of Wal-Mart stores. Wal-Mart's siting more than 100 "supercenters" in small and medium-size towns in the past five years' expansion has eliminated the regional advantage of the neighborhood ma-and-pa. The smart small retailers have responded by adopting a flexible merchandise mix, variable pricing, and quality customer service.

"Small manufacturers used to compete on quality, cost, and delivery," says Bob Winrow of the New York Manufacturing Extension Partnership program. "In today's marketplace, it's delivery, delivery, and delivery, because it is assumed that your cost is competitive and your quality is up."

Nevertheless, "people are more aware than ever that you are judged on the quality of your product above all," maintains certified public accountant Paul Hense, based in Grand Rapids. His clients are primarily regional small businesses. Hense says one client has even grown his dental business by implementing a quality program that measures customer satisfaction, employee morale, compensation, and the effectiveness of his billing practices.

They're Resourceful

It doesn't matter whether some parts of the assembly kit are homemade or subcontracted; more businesses appear to be fully capable from the get-go. "They are more balanced," says Susan Davis, executive director of Investors' Circle, a network of socially responsible private investors who consider start-ups. "If they don't have the expertise themselves, they go out and get it." A huge array of services for start-ups and small businesses are enabling entrepreneurs to find, acquire, or absorb the skills and intellectual tools they lack.

Those newly available services and tools include those offered by National Institute of Standards and Technology field agents and Small Business Development Center counselors, as well as the Committee on Economic Development's annual report card and a range of publications geared to entrepreneurs. Small Business Development Center counselor and incubator manager Kim S. Pierce in Macomb, Ill., notes, "People come in today much more aware of business because of all the workshops and agencies out there."

Many of those agents help would-be entrepreneurs with such tasks as writing business plans to qualify for bank loans. Or they provide turnkey tools like Pierce's "One-Stop Shopping Kit" from the State of Illinois, which consolidates all the permits and forms needed from a new company.

Higher up the food chain, agencies help emerging businesses link up with complementary talent. "You don't see solitary individuals starting companies -- you see teams of two to five people," says John Freyhof of the Enterprise Corp. of Pittsburgh, which was formed in 1983 to help entrepreneurs find venture capital and technical support.

Even beyond the start-up phase businesses tap into networks that enable them to solve problems they couldn't tackle solo. "We are seeing more clustering of companies around one problem, such as ISO 9000," says Joseph A. Holroyd, a manager at Industrial Technology Extension Services, a New York State agency. Spurred by that agency, for instance, a group of ceramics companies recently banded together to discuss joint disposal of their hazardous waste.

They're Planned

A direct result of the new information market is that many small companies know where they fit in their market and where they want to go. "Ten years ago Sears could get very sophisticated demographics about potential customers. Today I can, too, at a reasonable price," Hense says, referring to a client of his who provides small businesses with crystalline data on market niches. "Even businesses that never had market plans -- like plumbers or CPAs -- have them today," Hense says. His clients now ask him for comparative statistics on how they stack up in such areas as labor costs or cost of goods sold. "I can answer questions like 'Should I lease or should I buy?' I have all those computations at my fingertips," he says.

Market Mapping Plus president David Fant provides the services Hense describes. Fant uses a demographic database that he customizes for small businesses. Recently, he completed a site analysis for an entrepreneur looking to open a bar and restaurant. First Fant took a set of criteria and generated locations that correlated to the owner's specs; then, once he'd found a site, Fant gave the owner a detailed plan. "When he went in for a loan, he had demographics and traffic counts -- even the exact location," says Fant. "He had a complete picture of what the market potential was at that site."

They're Experienced

As corporate refugees apply their business skills and experience to start-ups, they are creating baby companies with far better links to big business, access to partners and capital, and knowledge of a particular market or product.

"So many entrepreneurs are 'glass-ceilinged' out of the corporate world, and they take with them incredibly high standards," says Susan Davis. She says those high-caliber pros bring full Rolodexes with them, and they're "more inclined toward strategic partnering." Davis formed her company in 1990 with three crucial alliances. She hooked up with entrepreneurs to manage her company's conferences, to run the investment committee, and to make sure that members did network.

IBM alone, over the past couple of years, has released tens of thousands of experienced businesspeople into the economy. According to Alexander Auerbach, publisher of Out of the Blue, the newsletter for former IBM employees, many IBM cast-offs emerge with several advantages. First, he says, "there was a high ambient level of skills and training" at a company that already had high selection standards. Second, many employees went through rigorous internal planning ventures at IBM, which demands full (and perhaps excessive) forecasts and projections for its own projects. And third, many of those who left the company did so with capital to invest in a venture -- either a large nest egg from the stock IBM encouraged its employees to buy, or IBM retirement income.


THE DEMISE OF MOM AND POP?

Like Harry W. Schwartz Bookshops, mom-and-pop businesses throughout the economy are struggling to transform themselves in the face of invading big competitors. Here's a look at five industries where the battle has already taken a toll

Toy Stores
Market share of top 5 retailers: 51.7% in 1993; 42.3% in 1990.

Status of mom-and-pops: Still players.

Massive growth by massive merchants like Toys "R" Us and general retailers like Wal-Mart has all but obliterated the middle-tier player. "Our industry has been polarized -- there's Toys 'R' Us and there's the mom-and-pops. Everyone else has been decimated," laments Christopher Wass, founder of the American Specialty Toy Retailers Association and owner of three independent Alphabet Soup toy stores in Iowa. "The people who got cleaned out were the ones selling mass-market products in a mom-and-pop setting."

Wass estimates that independent toy retailers now claim just 5% to 10% of the market. "But," he adds, "if we work together to educate the consumer, we can grow that to 15% or 20%."

How? Wass says that surviving independents should promote their stores as distinct alternatives to mass marketers. They can stock educational products, sell toys that are not advertised on television, and offer a higher-priced, higher-quality line of goods. And independents can stage community events that emphasize their intimate setting.

David Kresge, senior vice-president of analytical services at Dun & Bradstreet Information Services, concurs that small retailers succeed by "focusing on the specialty end of the market. If you compete on a commodity basis, you are doomed."

Peter Reynolds, president of Milwaukee-based Brio America, a $25-million division of a $150-million Swedish toy company, says he distributes solely through specialty toy stores because "they sell toys based on what is in the package rather than what is on the package. Specialty stores get the product into the hands of the consumers and explain to them what the value is," he says.

Funeral Homes
Market share of top 3 operators (Service Corp. International, Loewen Group, and Stewart Enterprises): 12% in 1993; 2% in 1984.

Status of mom-and-pops: Very much alive.

Sweeping consolidation is taking place in this historically family-held profession, but you can't really see it. That's because, notes William Barrett, director of corporate communications for Service Corp. International (SCI), "when we buy a funeral home, we don't make any changes that are visible to the public." SCI comprises about 5% of funeral homes and conducts about one out of 10 funerals. It has grown from one Houston location in 1962 to a $1-billion international corporation with 1,431 locations. SCI purchases groups of high-volume funeral homes in urban areas and consolidates their back-office operations.

"Doing anything that interrupts the relationship with a funeral home's community is a mistake," explains Barrett. So each acquisition retains its name and, ideally, its director, but behind the scenes all functions are centralized.

Most independent funeral homes have high fixed costs because they're always ready to handle peak volume. SCI is more efficient. In Houston, for instance, SCI's limousine service has 13 hearses and 12 limos for its 17 funeral homes. If all 17 operated independently, they would need 24 hearses and 19 limos to accommodate their funerals. SCI's preparation centers embalm bodies around the clock. And member funeral homes get good prices on caskets -- the single-largest funeral cost -- because SCI buys in volume.

For most unaffiliated independents, little has changed. The majority are family-owned businesses at least one generation old. Ruth Anne Ohde owns Ohde Funeral Homes, in Manning, Iowa, with her father and brother. She believes they run their business (founded by her grandfather in 1905) as efficiently as the big players do. They handle 100 to 120 deaths a year and, with the help of their three employees, provide "old-fashioned personal service to families."

Hardware
Market share of top 25 home-center chains: 32.9% in 1993; 24.9% in 1988.

Status of mom-and-pops: Hammering away at niches.

Although most of the 22,000 hardware dealers in this country remain independent, the hypergrowth of warehouse retailers like Home Depot ($433 million in revenues in 1984, to $9.23 billion in 1994) has forced small players to huddle into voluntary chains. Purchasing collectives like Cotter & Co. and Ace Hardware Corp., whose member stores carry names such as Ace and True Value, buy wholesale goods almost as cheaply as the big players do, enabling them to price competitively. And they share other costs like TV advertising to enhance their brand.

Such arrangements have helped independents to deliver value -- or at least the perception of it -- to customers leaning toward superstores. "All independents have learned to be skilled at variable pricing," says Ellen Hackney, spokesperson for the National Retail Hardware Association, in Indianapolis. "They know which items are price sensitive."

But no matter how closely independents shave prices, they compete against the superstores' unbeatable selection. Small stores offer no more than 15,000 items, while Home Depot carries more than five times that number. In response, clever independents build up a specific strength like garden supplies, rental operations, or woodworking tools.

Bill Griffin, owner of Griffin Ace Hardware, in Santa Ana, Calif., says his plumbing department offers more hard-to-find fittings than a nearby Home Depot does. He expanded that section because local homeowners were asking for it, and he has modernized his merchandising, implemented a mandatory 40-hour training program for new employees, and extended his hours.

Independent stores like Griffin's still offer the advantages of convenience and personal service. "Our stores are at least 100,000 square feet, so we can't put them on every corner," admits Lonnie Fogel, a spokesperson for Home Depot.

Plumbing
Average size of plumbing business: 20 employees.

Average gross sales: $2.3 million in 1991.

Status of mom-and-pops: Sinking the giants.

Plumbing, as well as heating and contracting, remains a highly fragmented "son-and-pop" industry without large national operators. Market leader Roto-Rooter, based in Cincinnati, estimates that its share of the market is "in the low single digits," according to Robert Boettger, vice-president of marketing.

Larry Harmon of De Mar Plumbing, in Clovis, Calif., likes it that way. His company has grown from $200,000 in 1985 to $3.2 million in 1993 by solving customers' problems beyond their clogged drains.

That meant polling his customers to learn that their two biggest complaints were not knowing when help would arrive and receiving bills unrelated to job estimates. He resolved those issues by introducing guaranteed one-day service and a flat-rate pricing system that covers more than 85% of De Mar's jobs. He has added a one-year guarantee on all work and requires that his employees be thoroughly trained in such areas as customer satisfaction. He insists that they wear uniforms and that they follow service calls up with customer surveys.

"If we could raise the capital to expand, we would start franchising," says Harmon. "I think the nation is ready for a national franchised plumbing company -- as long as it is of high quality."

Office Supplies
Percentage of office supplies shipped from manufacturers --

To the mass market (Wal-Mart, Kmart, and so on): 11.4% in 1992; 5.9% in 1986.

To the superstores: 11.2% in 1992; 0.3% in 1986.

To small or midsize dealers: 8.8% in 1992; 19.9% in 1986. Number of independent dealers: 6,000 in 1992; 13,300 in 1986.

Status of mom-and-pops: Folded.

Industries that sell commodity products -- which are as diverse as drugstores and lumber retailing -- have been quick to fall to superstores, notes Dun & Bradstreet's David Kresge.

And nowhere is the phenomenon starker than in office supplies. Chains like Staples, Office Depot, and OfficeMax have grown in just seven years to erase small dealers. Now the big players are consolidating their lead by rolling out private-label brands.

Many experts see the next five years' growth coming from superstores. A recent report by Patrick McCormack, senior vice-president at Dean Witter Reynolds, projects that office superstores will continue to proliferate -- doubling from 775 outlets today to 1,600 in 1997.

"Long-term, we think there's not going to be anybody left but 20 big players," says Peter Costello, spokesperson for the Business Products Industry Association, in Alexandria, Va. "You are not going to be in this business without a strategic alliance." Like the voluntary chains that have sprung up in the hardware industry, the remaining independents are tapping into collective-purchasing groups that allow them to slash prices.

The leaders of those groups advise independents to mimic the look and feel of big stores rather than highlight the independents' personal nature. With customers now accustomed to buying almost exclusively on price, independents need to create the perception that they are competitive, according to Larry Ehmen, co-owner of Fishers Office Plus, in Quincy, Ill. "You have got to change the box you sell out of and make your place look like a discount place."

With the support of Independent Stationers, a 220-member purchasing group that wants its members to bear the Office Plus name much as hardware wholesalers use the Ace and True Value names, Ehmen and his partner, Randy Krutmeier, recently upgraded their retail operation. They moved from a 1,600-square-foot store into 2,500 square feet of retail space and replaced the old-fashioned freestanding display gondolas with shelves of merchandise.

"We even painted the ceiling white to make it look less fancy," Ehmen notes. "Now people come into our store and say, 'Finally, an office discount store.' Well, our prices were the same at the old store. Mom-and-pop stores used to be fancy -- carpets and so forth. Now they look like Kmart or Office Depot -- well-lit, with merchandise stacked real high."

-- Tom Ehrenfeld