Confidence is down, and the feeling of an impending slowdown has many SMEs spooked. MIKE PRESTON gleans six survival strategies from entrepreneurs who have prospered through a recession.
By Mike Preston, economics editor
Australian business owners are starting to get nervous, and with good reason – there are some dark clouds on the economic horizon.
Business confidence has fallen every month since the sub-prime meltdown emerged in October last year, a crisis that has sent the Australian sharemarket plunging at a rate not seen since the 1987 crash – an event that ushered in Australia’s last recession.
At the same time, highly indebted Australian consumers are coming to grips with interest rates that are at 11-year highs and rising prices for staples such as food, rent and petrol.
Of course, there is also a good news story to tell about the Australian economy – consumer demand is at high levels and China’s demand for our commodities is showing no sign of fading.
But there is little question SME owners have good reason to start thinking about what they can do to ensure their business is able to survive and prosper if the economy starts to slow.
The good news is that there is no need to reinvent the wheel. Some entrepreneurs have seen it all before. Here are six strategies for success in economic down times from Andrew Kelly, founder of Strathfield Group, Olivier Group’s Bob Olivier, and the entrepreneur behind Intrepid Travel, Darrell Wade.
1. Don’t get caught in the headlights
When Darrell Wade founded his adventure travel business in Melbourne in 1991, more than one person questioned his timing – Australia was in the very midst of a severe recession at the time.
Wade spent the next decade proving the nay-sayers wrong, guiding Intrepid to annual growth of 50% throughout the 1990s.
The lesson, Wade says, is that in tough times you’ve got to put trust in your entrepreneurial judgement, even if others don’t.
“Some might call it keeping a cool head or courage, but mostly I think it’s about not worrying about things,” he says. “I take the attitude that business is fun and let’s have a crack at it – often those people who worry so much forget about growing their business.”
Wade says in his experience the business owners who do the worst in tough times are those who get so paralysed by economic gloom that they stop making decisions for the businesses.
The biggest test of Wade’s own entrepreneurial stuff came in 2001-02 when the 11 September terrorist attacks and SARS crisis in Asia punished the travel market and brought Intrepid’s revenue growth to a standstill.
Wade chose that moment to try and persuade his management board to expand the business into Europe, a costly and potentially risky endeavour that the board had already rejected on a previous occasion.
“At the time we were only in Asia, but when SARS hit I said ‘stuff this guys, we’re going to Europe because we’ve got to diversify’. Some people said this is not a time to do that, let’s not spend the money, but it just seemed a no-brainer to me, and it ended up helping us pull though.”
2. Make changes – but don’t bring the recession into your business
While Wade argues entrepreneurs must trust their judgement, even in the face of prevailing wisdom, he cautions business owners that this does not mean adopting a head in the sand approach.
Businesses need to consider how they can change their product or service offering to suit changing economic conditions. During the “travel recession” of 2001-02 for example, Intrepid sought to cut costs and tailor their products to fit the more modest consumer mood.
By focusing its product offerings on closer, cheaper destinations and including accommodation options to fit limited budgets, Intrepid was able to bring in some additional revenue despite the general downturn in travel.
But, Wade says, he was careful not to portray the changes as a response to desperate times or allow worries about the industry to affect the business.
“There was some panic in the beginning, but we kept it totally under control,” Wade says. “Things like recessions can become a self-fulfilling prophecy. If you pull back spending and don’t do anything, you can quickly find you have an ‘internal recession’ on your hands.”
3. Can’t go forward? Why not grow sideways
Between 1987 and 1994, when the recession we had to have was running its course, Andrew Kelly led consumer electronics business Strathfield through its most rapid growth period.
After founding Strathfield with one store in 1980, Kelly took the business to 49 stores by 1994, with much of that in the years after the sharemarket crash of 1987.
Kelly – who is no longer involved with Strathfield – says he was able to succeed those lean economic times by thinking differently about how to get customers through the door.
“We saw that there was a lot of demand for what we were offering, even though people didn’t have a lot of money,” he says. “So while it was going to be hard to grow in a traditional way, we saw there was an opportunity to grow quickly if we could think differently.”
Kelly describes the strategy he adopted during that time as “growing sideways”. In short, it involved offering a wider range of products to tap into the demand that was there, but keeping costs under control by only holding a relatively limited stock of each item.
“We had a very clear idea about what we wanted to sell, and expanding the product range in those categories worked for us. We got more people in the door and we just kept growing through that period,” Kelly says.
Focused cost cutting was also an important aspect of the strategy. For example, Strathfield needed to keep staffing costs low, but rather than putting customer service at risk by reducing staff numbers, Kelly realised a better cost/benefit ratio would be achieved by opening later and closing earlier.
“We looked closely at the trade-off in terms of losing sales or cutting costs, but when you’ve got all those staff in all those stores, just reducing opening hours by half an hour can save a huge amount of money, and it worked for us,” Kelly says.
4. In down times, your niche is even more valuable
Another key to Strathfield’s success was Kelly’s conviction in pushing what was then a relatively edgy niche item; the mobile phone.
Kelly says at the time some of his managers perceived mobile phones as a sideline or a distraction from Strathfield’s core offering, and urged him to drop them from the product range.
In 1987 Strathfield commanded 50% of the entire Australian mobile phone market, a market share it was able to use in the years ahead to create a point of difference with competitors. Even better, the growing hype surrounding mobile phones kept demand high despite the recession.
“Mobile phones were bringing different people into the store than we’d usually get – on one occasion Kerry Packer walked in and bought a phone. And when that happened it really resonated through the business that the phones were tapping into a whole new market,” Kelly says.
5. During the boom, prepare for the bust
From its foundation during the dark economic days of 1991, Bob Olivier has built Olivier Group to one of the most high profile and successful recruitment firms in the country.
Olivier says his ability to foster his business through hard times is based on his appreciation of two principles: First, no one is invulnerable to a downturn; and second, if you wait until the downturn comes to prepare your business you will already be too late.
Olivier says he has always adopted a conservative approach to his finances, ploughing profits back into the business to keep working capital at healthy levels.
“It just means you don’t draw every spare cent out of the company when things are good,” Olivier says. “Businesses can insulate themselves to some degree, but if you’ve built a plan around maximising everything in good times and have loaded your business with debt then of course you’ll be in trouble if things go bad.”
Olivier believes some business owners, especially those who have only experienced the good times over the last few years, feel comfortable drawing too much money out of their business because they feel economically bullet proof.
“If you think you’re immune to these things, forget it,” Olivier says. “You see people buying the boat and a big house and they’re drawing everything out of the business to do it. It’s just naivety really.”
6. Avoid a scorched earth policy
Extravagance isn’t the only danger, however. Entrepreneurs who respond to the prospect of an economic downturn by shedding staff and cutting costs to the bone can also fall into difficulty.
Olivier says even in times when work has dried up – he says the whole recruiting industry ground to a halt for almost a year after 11 September 2001 – he has not sought to shed staff from the business.
“You’ve got to leave your capacity in there,” he says. “If you tear up the roots of what you are trying to achieve, then you either precipitate your own demise or you never quite recover even when things turn up again.”
In fact, Olivier says, businesses that are well prepared to survive economic hard ties may find themselves presented with golden expansion opportunities.
“You want to position yourself to bounce back better than the next guy. It can be the perfect time to pounce when you see a few of the flash Harrys who enjoyed the boom feeling the bust and getting overextended,” he says.
And where other forms of cost disciplines, such as wage cuts, are required, Olivier says it is a good thing for the business owner to always take the initial blow before passing on the pain to staff.
“We quietly took the hit and only if things got bad did we ask it of others. Otherwise you start affecting your staff and undermine the culture of the business,” he says. “If you destroy feelings of optimism then you can create a downturn in your business even if it wasn’t there.”