While recessions are often associated with small business decline and bankruptcies, for some, a recession can be the best time to start or expand a small business. Instead of cutting back, small businesses that increase their investments during periods of recession –by expanding their business scope, strengthening their existing resources and acquiring weaker competitors – can position themselves for long-term gains when the economy starts to recover. See the following article from The Street for more on this.
King Remodeling had been in the business of helping New Jersey families fix up their homes for more than 50 years by the time Richard Brody decided to buy up the store in 2005. At the time, King Remodeling’s business was a little sluggish, but Brody, who had previously run a small food services company, felt confident the company had a bright future.
Less than two years later, the recession hit.
“We purchased the company at absolutely the wrong time, right at the end of a period where the economy as a whole looked great,” said Alex Brody, Richard’s son and the head of sales and marketing at the company.
During the following few months, the store’s staff watched as similar home supply companies throughout the state suffered from dwindling consumer demand and were forced to cut costs or simply shutter their business altogether.
But rather than view this as a sign to lay low and cut their costs, King Remodeling did what many companies around the country were too scared to do: invested more money in the business.
“The overarching philosophy we had at the time was that a lot of the companies in our industry had gone out of business, and we felt that somebody was going to come along and take that market share,” Alex said. “So why not us?”
In the middle of 2008, the company got its chance to do just that. The Door Gallery, a chain in New Jersey that sold doors for 20 years, was going out of business. Brody decided to take a chance and buy it, expanding operations.
“We took on their rent and their utility costs, and took on all their employees. Our monthly expenses easily doubled,” Alex said. “It was a gamble because we were taking on more costs without knowing what would happen.”
Until that point, King Remodeling operated just one store in a suburb outside Newark, but this purchase provided access to three more stores across the state, which the company hoped would broaden its customer base.
Sure enough, the company has begun to see an improvement in sales. Profits are up by 80% this year compared with 2009 and, according to Alex, it only continues to gain momentum from month to month.
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Why recessions can be good for business
Throughout the recession years, there was a seemingly endless amount of ominous anecdotes and statistics about America’s small businesses. The number of small business declaring bankruptcy shot up between 2007 and 2009, while the nation’s small businesses as a whole lost an astounding $2 trillion in profits during this period.
Yet the economic downturn also proved to be a great opportunity for many business owners who were not afraid to follow King Remodeling’s example and pump more money rather than less into launching or expanding their companies.
“Recessions are traditionally very good times to start or grow a business, primarily because your competition is weaker,” said Rhonda Abrams, a small-business columnist for USA Today and president of the Planning Shop, a publishing company that focuses on putting out resources for business owners.
As companies in a given industry consolidate or go bankrupt during tough economic times, it creates a unique opportunity for ambitious competitors to gain a significant amount of exposure and new customers, simply by continuing to expand their operations and improve their product.
At the same time, according to Beth Schoenfeldt, a serial entrepreneur who has helped launch hundreds of businesses, the cost of rent, advertising and employees typically go down in a tough economy, which makes it all that much cheaper for businesses to expand.
Unfortunately, as Abrams notes, it was particularly difficult for businesses to invest more during this recession than during previous slow periods because this was a “deeper and longer recession, resulting in more personal losses.” Many business owners suffered declining home values, dwindling stock portfolios or dealt with a spouse losing their job, or all three, making it that much harder to take risks.
When the risks pay off
Since the recession officially ended in June of last year, though, and the dust has seemed to settle a bit, it’s become clear that many of the businesses thriving today are the ones who were able to pursue this strategy.
Take the example of GPS insight, a business providing truck companies with GPS tracking devices so they can monitor their vehicles and ensure drivers are being productive. While many competitors focused on simply trying to ride out the recession without bleeding too much money, GPS Insight invested heavily to innovate their product.
“We took every available dollar there was and rather than hoard it, we spent it on development, on inventory, on new customer acquisitions and on advertising,” said Robert Donat, the company’s founder and CEO.
During the recession years, GPS Insight increased its advertising budget tenfold, turned the number of computer servers to 60 from two and doubled the number of product developers working at the company, all while refusing to lay off any employees.
As a result, they were able to market to a wider audience, participate in many more technology conferences and continue to update its product based on feedback from consumers.
Donat says the company’s customer base has expanded significantly, and the budget for 2011 is 10 times what it was the year before. Perhaps most impressive of all, GPS Insight made it onto this year’s Inc Magazine’s list of the 500 fastest-growing companies.
Ultimately, what led Donat to invest more in his business was not a faith in the future of the economy (which he still thinks is in trouble), but rather a belief that customers would continue to need his product in a bad economy, perhaps even more than in a good one.
While this belief worked out for Donat, some experts urge small-business owners to be more cautious with their investing during tough times and avoid putting every dollar on the line, as Donat did.
“I think that in a tough economic period you need to be more careful and do more testing, so maybe you won’t go ‘all in,'” Schoenfeldt said. “It’s about baby steps. As one of my close entrepreneur friends says, ‘You aren’t lost until you run out of gas,’ and in this case, gas is cash, so you need to watch your cash flow.”
Making the risk less risky
The key for any small businesses grappling with a tough economy, whether they are cutting or increasing costs, is to make decisions with a larger plan in mind.
“You don’t want to just cut costs for the sake of cutting costs. You need to also find ways to grow while cutting back, or else it’s just a downward spiral,” said Abrams, the small-business expert.
Mei Zhang found this fact out the hard way. Ten years ago, Zhang started Wild China, a business offering high-end group tours through the country. In the first year her company was in operation, the terrorist attacks of Sept. 11, 2001, severely damaged the demand for tourism. Two years later, the SARS outbreak in China hurt business even more.
Each time, Zhang believed she had no choice but to cut costs, lay off staff and cancel trips.
“We basically just curled up in a fetal position and braced for the worst,” she said, remembering those times. She did nothing to expand or innovate her business, and instead suffered through the loss in revenue and customers.
When the global recession hit in 2007, Zhang knew it was time to take a different approach. Believing China was still a hot place to travel, despite the rocky economy, she decided to seek out more customers. In 2008, Wild China opened a U.S. office, hired additional staff and invested heavily in public relations. The company also took on more trade shows, buffed up its catalogs and social media presence and splurged to redo the backend of its website.
And this time, she is emerging from a crisis period better off than she entered it. Her revenue didn’t drop significantly last year, and it’s up this year by about 30% year over year.
“My previous experiences led me to believe that the bad times would get better,” she said. “It just takes a little bit of time.”
This article has been republished from The Street. You can also view this article at The Street, a site covering financial news, commentary, analysis, ratings, and business and investment content.