Falling in Love With Growth
One of the newspapers I read every day is The New York Times, and an article in its business section recently caught my eye. It concerned the attempt of Starbucks (NASDAQ:SBUX) to return to the practices that had fueled its initial expansion. Apparently, the company, seduced by growth opportunities, had abandoned the standards for selecting locations that had once been its hallmark. As a result, it wound up with hundreds of underperforming stores it is now planning to close, and founder Howard Schultz has had to return to day-to-day operations in an effort to get the company back on track.
As I read the article, I couldn't help thinking about my friend Ernie Graham, who went through something similar with his real estate business in Telluride, Colorado. I met Ernie in 2002, on one of my early visits to Telluride, where I was learning how to ski. My wife, Elaine, and I were thinking about renting a place or buying a small time-share in the area, and I decided to check out the market. I walked into one of the real estate businesses in town and asked for the person in charge, as is my custom. He came out and introduced himself, but when he discovered I wasn't planning to spend much money, he sent me upstairs to see the new guy in the office, Ernie. We chatted for a while, and I learned that he had been a salesman for one of those 10-second Internet sensations, but the stock had tanked before he was able to cash out. He moved to Telluride with his wife and their two young children to get his life back together. Although I didn't wind up renting or buying a time-share from him, we became fast friends. I could see that he was an entrepreneur at heart.
And, sure enough, a year and a half later, he and a partner left to open their own real estate business. When I began to buy and sell real estate, Ernie was the person I used. He had a little office in Mountain Village, located high above the town of Telluride, the center of commercial activity in the area (you take a gondola to get from one place to the other). The office didn't get much walk-in traffic, and the agents had no privacy, jammed together as they were in a small space. Still, the atmosphere was warm and collegial, and the location -- near one of the major ski lifts -- was good for people like me. I would come off the slopes and join Ernie in his office, where we would look at stock-market reports together on his giant flat-screen television and talk about business.
Then, three years ago, Ernie told me that he was moving his office to a new location in the center of Telluride, on one of the busiest corners in town. I went to the opening party and was impressed. The space was spectacular. There was a huge reception area, where he had put the flat-screen TV, and beyond that a large conference room and a hallway lined with private offices. In the windows, Ernie displayed photographs of properties he was representing, including one of the largest developments ever undertaken in the area. That had been a major reason he had moved. The developer felt he needed a bigger, fancier, more centrally located office to represent its properties well. Ernie was willing to oblige.
Although I could no longer walk straight from the ski lift into Ernie's office, we continued to see a lot of each other, especially as I bought and sold more property. To all appearances, his business was booming. So I was taken aback when he told me this spring that he was planning to move back to Mountain Village, this time to a much smaller office on the ground floor of an apartment building. "They're giving me a great deal," he said. The space, which was off the beaten path, had previously been occupied by two real estate agents who abandoned it because they couldn't make money there. When I asked him why he was leaving his beautiful offices in town, he mentioned rising taxes and an impending rent increase.
Now, I understand the importance of cost control, but Ernie's decision came as a shock nonetheless. The Telluride space had so many advantages that I couldn't see why he would ever let go of it. It looked to me as though he was making a mistake. Elaine agreed. "You have to talk to him," she said. "This could ruin his business."
The next opportunity I had, I took him aside. "Listen, Ernie," I said, "I have to ask you something. I'm an outsider, but are you sure you're making the right move? There's no foot traffic where you're going, and the offices are small. Are the savings really worth it?"
"Well, let me explain what happened," he said. It turned out that the tax and rent increases had simply been prods pushing him to take a good, hard look at his business. Things were not going as well as he had hoped. To begin with, the big development project had been delayed for two years, forcing him to scramble to make ends meet. Worse, the move to a prime location had led him and his partner to abandon the innovative business model they had pioneered at the old location. Having made a significant investment in expensive new space, they naturally wanted to get the most bang for their buck, and so they had begun spending their money and time the way established real estate agents did -- on print advertising, office décor, staffing to handle walk-in traffic -- rather than relying on the Internet tools that had served them well in the past.
Along the way, the business had lost something: its mojo, he said. The sheer size of the new place turned out to be a liability. "At the old office, we were a close, tight-knit group," he said. "We didn't have enough space to spread out. So we would sit around and talk about ideas, and we would come up with new ways to do things. Here we say, 'Good morning,' and then we don't see each other all day long. We're ships passing in the night, even my partner and me."
True, they were getting a lot of walk-ins, but those turned out to be a lot less important than Ernie had imagined. Most of the walk-ins had already established a relationship with an agent. They came to look, not to buy. In the new real estate marketplace, Ernie realized, you could sign up more customers by building a strong online presence or by socializing in the community than by waiting for people to walk through the door. So location was less important than in the past. "I could be a mile outside of town," Ernie said. "Our customers are going to come see us no matter what. On top of that, the costs of staying here are astronomical."
"Were the costs the main consideration?" I asked.
"No, they were the last thing," he said. "Don't get me wrong. I'm making a good living here, but we could be doing a lot better. I know what got us where we are. When I sat down and thought about it, I realized I had taken a left turn when I should have stayed straight."
So his decision to move made sense after all. Like Starbucks, he had been tricked by what he thought was a big growth opportunity, and it had led him astray. I understood perfectly how that could happen. I had once fallen into the same trap.
The temptation arose after I had achieved considerable success with my first company, Perfect Courier. It had been on the Inc. 500 list for three years running and was still growing. Part of that success came from a decision I had made early on to go after city and state government contracts. The gross margins on them weren't the greatest, but they were good enough, and the cash flow was totally reliable because the customers always paid. Accordingly, government contracts became an important part of the foundation on which I built my company.
Then I discovered the magic of acquisitions. I learned how to buy other companies, which allowed me to expand Perfect Courier much faster. As a confirmed growth addict, I cared only about increasing the top line. I decided that government work was a waste of time and that I should concentrate instead on making acquisitions. And that's what I did -- until I made the one, fateful acquisition that eventually pushed me into Chapter 11. (See "Groundhog Day," July 2001.)
It took five months from the filing for the lesson to sink in. By then, my company was a shadow of its former self. I had been wracking my brain to figure out how I could hold on to what was left. One morning in the shower, it suddenly hit me: I had to return to my roots and start doing again the things that had made the business successful -- like going after government contracts. We began focusing on them, and Perfect Courier survived. When I later went into the records-storage business, I made sure that I didn't make the same mistake. As the business grew and growth opportunities emerged, I never forgot the roots of our success. I remained loyal to the customers, and types of customers, who had gotten us where we were.
Fortunately, Ernie didn't have to learn his lesson the way I learned mine. I suppose that's why he's able to take a more philosophical view of his detour into downtown Telluride. "I'm not sorry I did it," he told me. "I've made a lot of contacts here that are going to help me in the future. And you know what? I don't think I need a splashy office with big display windows in the center of town to convince the developers of these giant projects that they should do business with me. I believe I'm in a position now to sell on my reputation."
I have to hand it to Ernie for getting the full benefit of his experience without having to go through Chapter 11. For that matter, he didn't have to lose the kind of money that Starbucks squandered when it got away from its roots. I guess that makes him a lot smarter than Howard Schultz and I are.
Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, will be published by Portfolio in October.
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