Model Family Comebacks

By Connecticut Mutual

How six small businesses overcame a major business problem through a combination of family ingenuity and teamwork.

The high mortality rate of small businesses in America is well known, and in recent times countless family companies have been forced to the brink by stagnant markets, increased competition, and a credit crunch.

Many family firms, however, have responded to crises in positive ways, regaining the entrepreneurial fire of their founders to beat oversees competitors, improve financial discipline, outfox national chains and catalogers, reduce expenditures, and raise quality.

A number of these success stories, 200 to be exact, are told in a new book, Real-World Lessons for America's Small Businesses. The book recounts the shrewd maneuvers made by companies that received the 1993 Blue Chip Enterprise Award, given by Connecticut Mutual Life Insurance Co. and the U.S. Chamber of Commerce. The strategies of six of the numerous family businesses that won the award are described below. In each of these cases, family members teamed up to overcome business problems in ways that are instructive for other small and medium-sized firms.

—The Editors

Fighting Back Against Superstores

Cheshire Pet Supply spent five years preparing for a competitive war. Now that the war has begun, the company believes it is ready to win.

Cheshire had sold pet food and supplies in Atlanta since 1977. But by 1987 owners Jim and Anne Rambo began to see a new kind of competition in other markets that they were sure would reach Atlanta. Chains of large warehouse-type pet supply superstores were springing up, and they offered deep discounts—sometimes lower than wholesale prices—on large sizes of popular brands.

Cheshire operated the three highest-volume stores in Atlanta but lacked similar buying power. The Rambos calculated they had five years to prepare.

The plan was to expand. The first three years the couple would add three more high-volume stores, giving them the size to bypass wholesalers and establish direct accounts with manufacturers. They would use the next two years to recover from the expansion. The Rambos opened their fourth store in 1988 out of cash flow. They obtained a Small Business Administration guaranteed loan to finance the fifth and sixth stores in 1989 and 1990. In 1991, when the business became too large to be covered by the SBA loan program, the Rambos changed banks to obtain further financing without the SBA guarantee. They already had an underused warehouse to handle the inventory.

The Rambos hired a consultant to help plan the expansion. Over the first 22 months their staff grew from 50 employees to 80. (Payroll has since grown to 98.) New positions were created, including personnel director, training director, accountant, bookkeeper, computer programmer, secretary, assistant for the buyer, and maintenance man. Several positions were filled through promotion; the computer programmer had started with the firm as a truck driver, and the training director had advanced from salesclerk. All store managers had worked at other jobs in the company.

Aiming at the lack of product variety and customer service in the superstores, Cheshire increased its range of products and re-emphasized its services, like free outside flea dips for dogs at all stores every Saturday for six months of the year.

With its new buying power, the company now deals directly with more than 300 suppliers. It has gained better prices on almost every product. It has added television and direct mail to its radio and print advertising. It has established media news contacts and promotes itself through community organizations.

From 1987 to 1992 Cheshire Pet Supply's sales volume grew from $2.4 million to $7.9 million. Sales per store increased from $800,000 to $1.3 million. Owners' compensation and profits doubled. The company was able to put nearly $500,000 into the employee retirement fund.

Two pet superstore chains are now moving into Atlanta. The Rambos believe that one chain and several ill-prepared independents will not survive. But they are confident they are well-positioned for the challenges ahead.

Beating Low-Wage Competition

Dozens of importers sell rubber bands in the United States that are made in Thailand, Malaysia, or Sri Lanka by workers who get the equivalent of 30 cents an hour, and no benefits. It is not surprising, then, that price wars have put most American rubber-band manufacturers out of business. Only three survive.

One is Alliance Rubber Co., of Hot Springs, Arkansas. Its workers get $10.09 an hour, on average. Benefits add 40 percent to that. But despite the disparity between its labor costs and those of Asian competitors, Alliance can boast that it makes more rubber bands than any other manufacturer anywhere. Sales in 1990 were up 10 percent over 1989.

How does Alliance do it? The company has several answers. The most striking, perhaps, is its pride in the quality of what it produces. Says president Anna Jean Spencer: “We are 152 Americans who are fanatics about American craftsmanship.”

The company's founder, the late William H. Spencer, emphasized continual product improvement. Under Anna Jean Spencer, his widow, that process continues. Alliance has state-of-the-art quality control equipment, and each “team member” gets intense indoctrination in the “art of Alliance quality.”

Rubber bands are the company's sole product. It uses lightweight crepe rubber, ensuring a high count per pound and, therefore, a low price per band. The bands have maximum strength when stretched, yet they are easy to stretch, too. That makes them particularly attractive to businesses. Alliance keeps prices down with the aid of efficient extrusion equipment and automated packaging machinery. Founded in 1923 in Alliance, Ohio, it has cut costs further by closing a plant there and consolidating operations in Hot Springs. It speeds distribution by warehousing in California and Kentucky. In Kentucky it also makes a product it developed in 1986, the Alliance Ad Band. The Ad Band, the first rubber band to carry printed messages, now accounts for 10 percent of the company's $10 million in revenues.

Alliance has another edge because it offers a wider selection of rubber bands than its competitors do; there are 360 in various sizes, colors, and strengths. And a global marketing plan puts its rubber bands in 24 other countries.

Says President Spencer: “We believe in the future of the American worker and the future of American industry.” All of Alliance's packages carry an emblem with the words: “Proud to Say Made In USA.”

What a Mission Statement Made Possible

To some people, a company mission statement is a nice-sounding collection of words with only marginal relevance to what the company does. But Ann Robins and Bonnie Tornow, sisters who own Central Homes, a retailer of manufactured housing in Woodburn, Oregon, say their company's mission statement has been pivotal.

They bought Central Homes in 1984 from heirs of a partner of their father, who had been one of the company's founders 15 years earlier. Robins had worked at the company. Tornow, a recently divorced housewife, was looking for a career opportunity.

However, the market for manufactured homes was declining, not to hit bottom for 2 1/2 years. There were grave problems with product quality. In a business where retailers' lack of staying power makes banks reluctant to lend, they couldn't get a line of credit, and what cash Central Homes had was dwindling. The sisters took drastic action. Three of the firm's four retail outlets were closed. At one point the company was down to the sisters, a bookkeeper, and two salespeople.

Financial self-discipline enabled the company to stay afloat. But Robins and Tornow say it became secondary in 1987 when they adopted a mission statement, the company's first. The statement pledged the company would “provide quality housing with integrity, honesty, and profitability, giving our customers the best possible value and service for their money, challenging ourselves to be the most exciting and innovative leader in our industry.”

From then on, company actions and policies were weighed against the statement. “We carried products of manufacturers who weren't financially stable,” says Robins. “The quality of their products wasn't what it should have been.” So Central Homes dropped them and switched to Fleetwood Enterprises, a big manufacturer with a reputation for better quality.

As business improved and Central Homes hired salespeople, it often went outside its field in a quest for recruits with the integrity its mission statement called for. Not only that, it set up a commission system that increases fairness to customers. Manufactured-housing salespeople commonly are paid a percentage of gross profit on a sale. If a salesman talks a customer into paying $39,000 for a home the retailer expects will fetch $35,000, his commission jumps. Central Homes' prices—from $18,000 to $95,000—are on a computerized list, and salespeople are forbidden to ask more. They are paid a flat 3 percent of the sales price.

The mission statement promises employees a growth-oriented environment, and they certainly have seen that. Instead of one store, the company now has three. Instead of five people on the payroll, there are 34. Net worth, once down to $43,000, is now $425,000. The most recent annual sales figure: $8 million.

Sales, say the sisters, are boosted by customers' knowledge of what Central Homes stands for. All they have to do is read the mission statement.

A Page from the Catalogers

George Watts, chairman of George Watts & Son Inc., often mentions a remark he heard from a leading discount catalog merchant. Asked how many stores he had, the catalog merchant replied, “We have 300 of the finest stores in the best locations in the country.” Says Watts: “We were one of the stores he was referring to.”

But not by choice. Shoppers would come into Watts' store, examine merchandise, and pick the brains of his trained sales force. Then they would place their orders with the catalog merchant, who offered lower prices.

Watts' firm—a retailer of china, silver, crystal, and objets d'art—has had other problems. Since 1870 it has been in the same location in downtown Milwaukee. “Our customers move farther from us every year,” Watts laments. “Parking is tough, and there is fear crime.”

But the biggest challenge has been a rising tide of discount catalog merchants. Some mail out five million catalogs every 60 to 90 days. By early 1992 Watts's business had been flat for 10 years, and margins were declining. Store traffic and orders from bridal registries were down 50 percent. “We feared we could be on our way out after 123 years,” Watts recalls. “So we fought back.”

Watts determined that the only enticement discounters offered was price. He decided to use the discounters' prices on any product his store carried that appeared in the catalogs. “Our customers don't have to ask,” Watts says. “They automatically get the lower price. And we offer so much more: idea-rich table settings, a store they can trust, and the joy of keeping their money in Wisconsin.”

The firm announced its new policy with advertisements in the Milwaukee Journal and Milwaukee Sentinel. It also developed its own television advertising campaign, paid for in part by Watts's vendors. To overcome customers' concerns about downtown, Watts offered free valet parking. Traffic at the 53-employee store has shot up 50 percent. Bridal registrations have increased 26 percent. Profits have risen 40 percent.

“At last,” Watts says, “instead of the discounters selling out of our stores, we are selling out of their catalogs.”

When Less Means More

Encouraging your customers to use less of what you sell may not be the conventional path to profits, but it is certainly helping the Artesian Water Co. of Newark, Delaware. The small, investor-owned public utility supplies water to 52,000 customers in New Castle County. Artesian's president, Dian C. Taylor, is a great-granddaughter of Aaron K. Taylor, who founded the company in 1905.

Two years ago Artesian was in hot water. Citing dissatisfaction with several company practices, the state Public Service Commission had responded to a 20 percent rate-increase request with a grant of an embarrassing 8.52 percent.

That was a heavy blow to the company, which had lost 29 cents per common share in 1990 and faced extraordinary spending needs. Rapid growth in its service area had forced Artesian to accelerate upgrading of its system. It couldn't keep up with heavy lawn-sprinkling in 1988, which caused a water shortage in one area. Customers were outraged, and there was an outpouring of bad publicity.

There was no comfort at the bank, and Artesian's credit line was insufficient. Drastic action was called for.

The seven-member board of directors was reduced to five and reorganized, with only two former directors remaining (one of the two who stayed was Taylor). Substantial sums were saved by downsizing top management and suspending dividends. A productivity study was launched to seek ways of cutting costs. Departments were reorganized to promote efficiency. Managers were required to explain, on a monthly basis, variations between budgeted and actual costs.

Employee evaluations were improved, and employees were offered a chance to train for advancement. Customer service was enhanced. A department was set up to improve communications.

Artesian also became an industry leader in promoting water conservation. It won a $132,000 grant from Delaware's natural resources department that enabled it to offer water-saving devices free to 2,000 customers and half-price to 2,000 others. It offered homeowners rebates for buying ultra-low flush toilets, and it began water-saving education for schoolchildren. In addition, it offered training for apartment-house maintenance people.

The conservation program, which may eventually reduce Artesian's financing requirements, has already had major impact. Last year the Public Service Commission approved a rate increase that gave Artesian a 12.84 percent return on equity, more than 1 percent above the industry average. The head of the commission publicly praised Artesian's conservation efforts. Artesian is profitable again and has a new line of credit. Saving water has helped save it from disaster.

From Pariah to Paradigm

Rice Aircraft Inc., of Hauppauge, New York, is still in business, thanks to a comeback that rivals any second-half performance by the Buffalo Bills.

In August, 1989, Rice officials pleaded guilty to the sale of aircraft fasteners without completing the required government paperwork. Although prosecutors conceded there appeared to be no threat to air safety as a result, the court case's impact devastated the firm, a distributor of aerospace fasteners and hardware.

The Defense Department debarred the company from government contracting for five years. Prime contractors to the federal government disapproved Rice as a supplier. Virtually every large airline in the world did the same. In one month Rice lost nearly all its big customers. For the year, sales plummeted from $15 million to less than $7 million. Customers angrily canceled hundreds of contracts. Fastener manufacturers annulled large agreements for authorized distributorships. Shipments of products were returned unopened. With legal costs draining the company's financial resources, its bank threatened to call a loan of more than $6 million. Rice had to pare its staff by 30 percent.

How does a family enterprise recover from that? President Bruce J. Rice pondered the question day and night. At the end of 1989 he began the first steps of a program to regain respectability.

With the help of his wife, Paula, Bruce set up a total quality management system aimed at making sweeping changes. “What needed fixing was not just the economics of the company, but the value system as well,” says Paula. “Material wealth had to be matched with moral principles and sound social aims.”

Paula, a former history teacher and high school counselor, joined the firm as executive vice-president. She immediately began self-training in total quality management. Within six months all Rice employees had either become advocates of the Rice TQM program or had left the company. The firm received three state grants to help defray the cost of training employees in TQM. All attended classes on their own time.

And when the Rices learned about a new international quality standard—the so-called ISO 9000 standard that the European Community was embracing—they decided to adopt it to attract foreign customers. They created a vice-presidency for quality assurance, and hired William Brunet, a man with a strong background in that field. Nine months later the firm became the first aircraft-parts stocking distributor in the United States to receive ISO 9000 certification. Giant companies around the world contacted 36-employee Rice Aircraft to find out how it had accomplished that.

Rice Aircraft continues to participate in standards-setting organizations. It regularly surveys customers to make sure they are satisfied. Nearly every major nondefense customer that Rice lost in 1989 has reapproved business with the company. The firm expects many defense contractors will follow suit in 1994 when Rice is removed from the Pentagon's debarment list.

There is now a saying at Rice Aircraft: Not long ago it was a pariah, but it now is a paradigm of quality assurance.


Reprinted with permission. �(c) 1993 by Connecticut Mutual Life Insurance Co.


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Autumn 1993

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