Over the Hump
Are happy days here again? Most Twin Cities businesspeople would probably answer yes. But pardon them if they’re not kicking up their heels just yet. The recession has left them much more cautious than they were a few short years ago. They spend soberly and hire guardedly, hoping that the hair-raising economic experience has left them smarter and stronger.
For the past two years, we’ve been interviewing small-business leaders as they’ve struggled through the downturn. Now, we’re checking in to see how they’re doing as the economy begins to recover.
Quality Bicycle Products, Bloomington
When Twin Cities Business spoke with Steve Flagg, president of Quality Bicycle Products, in early 2009, the Bloomington-based parts and accessories distributor had just experienced its first recession-related downturn. After two years of 20 percent growth, its growth rate dropped to 1.5 percent. The predictive software it used to estimate its purchasing needs was temporarily hamstrung by the sudden change. To make matters worse, the company’s model of shipping parts anywhere around the country for free from a central distribution warehouse suddenly became extremely costly when gasoline prices started to skyrocket.
Flagg stanched the bleeding with hiring and wage freezes. That way, he hoped, he could offer his employees what was really important to them during the downturn: job security.
Luckily, the bicycle biz isn’t a bad place to be when the economy hits the skids and gas prices rise. In 2008, Flagg says he began to see upward momentum in certain segments of the market, as Americans increasingly used bikes for commuting as well as recreation. QBP had addressed this shift by launching a line of commuter bicycles called Civia in 2006.
At the same time, the company experienced challenges with its other bicycle lines. “People became much more cost conscious, and we realized we could not be competitive,” Flagg says. “Our bikes appeared to be slightly overpriced. So we went back and reexamined our supply chain. Now we have some different and new sourcing, and a better sense of what it is the customer wants. So we really retooled our consumer brand side of the company.”
People who already owned bicycles tended to repair them rather than buy new ones. But here, too, QBP benefited, since it supplies parts to shops as well.
To solve the shipping problem caused by high gas prices, the company started charging for shipping and opened a regional distribution center in Utah. It plans to open an East Coast center in 2012.
After hiring only two people in 2009, the company was able to bring on 117 new workers in 2010. Slowly, growth began to approach normal again.
“We’re acting on the assumption of a growth rate of 10 to 16 percent for 2011, and we’re hiring with that in mind,” Flagg says. “We feel that’s a relatively safe estimate. It’s not particularly ‘out there.’ We’re pretty optimistic, actually, going forward.” As of late March, QBP had hired 40 more people in 2011.
Davenport Group, Shoreview
In early 2010, at a time when Davenport Group needed the best margins possible to combat slumping sales, it found itself cutting prices instead. Sonia St. Charles, CEO of the Shoreview-based storage area network provider, told us that some of her larger, more cash-wealthy competitors were using the opportunity of the recession to undersell smaller companies and gain market share.
St. Charles had already laid off a couple of staffers in 2009, so drastic measures were required. Everything that wasn’t customer facing went on the chopping block. Davenport Group decreased the amount of office space it leased by 50 percent and renegotiated with some of its vendors, from payroll processing to printing to accounting services.
It worked. Sales started to improve toward the end of 2010, and so far 2011 is coming back even stronger. New clients have signed on, and pricing has stabilized.
St. Charles’s only regret now is that she was slow to realize the impact the recession would have. “I think that if I was truly honest with myself, the signs were there in late 2008,” she says. “I should have been paying more attention to the market conditions at that time and predicting that some of this was coming. I think we made the right decisions when we realized the type of situation that we were in, but from this point forward, I’m going to be watching things more carefully so I can catch it earlier next time, if there is a next time.”
She never wants to go through another downturn like that, she says. But some good did come of it: When she had to call vendors about late payments, some treated her as a colleague and some treated her as an adversary. She knows now, she says, which of her vendors are truly partners.
“After trying to reach a local company by phone, I sent my contact an e-mail saying ‘Give me a call—this is what I want to talk about,’” she recalls. “She immediately responded, ‘I get it. I’m running a small business too. As far as I’m concerned, we’re all in this together, so this is what I’m proposing.’ It was just huge, and it was very humbling as well. I’m going to remember that going forward.”
Innovatech Labs, LLC, Plymouth
2009 wasn’t a great year for Innovatech Labs, LLC, an analytical chemistry lab in Plymouth. But it wasn’t catastrophic, either. When we talked with CEO Gary Smith in early 2010, he hadn’t had to lay off any of his six employees or cut back hours. He had, however, frozen wages as a precautionary measure. He told his employees that if the economy started to pick back up, he’d reimburse them through bonuses.
He’s already been able to make good on that promise. Innovatech awarded two rounds of bonuses during 2010. “Last year, I’d say we probably went 15 or 20 percent over 2009,” Smith says. “We’re not quite back to where revenues were at one time, but on the other hand, I made money both years of the great recession, so I’m a pretty happy camper.”
Smith attributes the company’s rebound to the slow recovery of the overall economy: Clients in the electronics and medical device fields couldn’t wait any longer to resume projects they had put on hold, and gradually they began to order lab services again. Despite this, Smith hasn’t been able to add any new employees yet. But he’s watching carefully to make sure his workers don’t get burnt out as their workloads ramp back up.
Smith’s use of search engine optimization continues to be his primary marketing tool. His SEO vendor is not cheap, but its results are easily trackable, so he knows it’s more than paying for itself.
“One nice thing about the Internet marketing is that I can keep track of how many new customers we are getting through the Internet,” he says. “From the experience I’ve had with doing other kinds of marketing, it’s sometimes hard to tell. If you go to a trade show, for example, at least for a service like ours, you don’t always come back with a project in hand.”
Big Ink Display Graphics, Eagan
Tom Trutna, president of Big Ink Display Graphics in Eagan, was one of the businesspeople we interviewed in early 2009, just when the hammer was falling on many Twin Cities companies. At that time, Big Ink was experiencing near double-digit growth. Trutna attributed his company’s success in part to a recycling and waste-reduction effort that both helped the bottom line and was a strong differentiator in the signage market.
How have things gone since then? “Well, miserably,” Trutna says. “But I don’t think it had anything to do with our sustainability efforts. We’re kind of a trailing indicator industry. In the spring of 2009, the full effect of the recession hadn’t yet set in for us.”
In the months that followed, Big Ink received the same number of orders as usual, but all of them were smaller than normal. Sales dropped almost 30 percent as a result. In 2010, the company rebounded 15 percent, but margins continued to be tighter, and clients’ commitments became increasingly tentative.
“We would lose deals for pennies,” he says. “Or we would be moving down the line with a customer on a project, and at the last minute, for whatever reason, they would freeze budgets or just cancel the event. Fairly sizable projects would just kind of go away at the last minute. It was, needless to say, a frustrating time for us.”
But the market continues to improve, and he’s more optimistic now than he has been in the last 18 months. After a year of pay freezes and uncertainty, the company is now comfortable enough to hire a couple of new employees.
Big Ink is also starting to reap the benefits of a bold real estate move it made during the dark days of 2009. Using SBA financing that was available through the federal stimulus package, the company purchased a building that allowed it to expand its production floor by 50 percent. In 2010, it bought two significant pieces of equipment that will increase efficiency and expand capacity.
“Because of, unfortunately, a downsizing of another company in our industry, we were able to get those two pieces of equipment for probably 50 percent of what it would have cost a year or two prior,” he says. “We’re poised for success now. We’re coming out of this thing better than we’ve ever been.”
Permac Industries, Inc., Burnsville
Burnsville-based precision machining company Permac Industries, Inc., felt the impact of the recession almost immediately after the market crashed. After the first quarter of 2010, its sales had slowly started to ramp back up, although they remained far below 2007 levels.
When Twin Cities Business interviewed president and CEO Darlene Miller in early 2010, she was still trying to save money to make up the ground the company had lost. She had laid off two groups of workers in 2009, and had brought only a fraction of them back. She implemented a wage freeze, cut 401k benefits, increased the deductible on the employee health plan, and banned overtime unless customers were willing to pay extra for it. She cut back purchases, too: Machinists were encouraged to use alternative tooling rather than automatically ordering new parts.
In the year since, sales have increased another 38 percent, and Miller has hired back a few more workers. She’d hire more, but there is an acute shortage of skilled programmer machinists; there is no one on the job market who is qualified for the open positions. So she has had to revoke the overtime ban. As more jobs roll in, the current work force must absorb the extra hours.
The wage freeze is still in effect as Permac tries to recover from past debt. Unfortunately, the company had doubled its space before the market crashed, and it has been saddled with the extra real estate ever since. Miller doesn’t foresee needing all that room in the near future, but moving is cost prohibitive because of all the heavy equipment. Luckily, the bank extended an extra line of credit and helped the company refinance its equipment loans at a much more favorable rate and payment plan.
Despite the debt, Miller is extremely confident about the company’s future. She has hedged her bets in the market by diversifying into new industries, such as aerospace and medical. “We are out of survival mode, and now we’re in thrival mode—and yes, I know there’s no such word,” she laughs. “It’s still going to be bumpy out there, because people are ordering only what they need, when they need it. They don’t want any extra inventory. But it’s just little bumps now, not big dips.”
GateKeeper Systems, Inc., Eagan
The RFID industry took a big hit in the recession, and Eagan-based GateKeeper Systems, Inc., was no exception. Its customers are airports, and in 2009, all of them canceled their proposal activity. The company went a full year with no new projects.
Fortunately, CEO Lynn Richardson saw it coming and put together a plan to conserve cash and reduce expenses. He let two of his nine employees go, slashed spending, and renegotiated lines of credit with his bank. By making these cuts sooner rather than later, he bought the company a little bit of time.
When we spoke with him in early 2010, the outcome was still uncertain. But the airports could only go so long without improving their facilities, so eventually they reactivated the plans they had shelved. Stimulus money also delivered some funding to the airports for projects. As a result, GateKeeper Systems received new contracts, and it has been able to hire one person. Richardson describes himself as “still a little gun-shy,” but says things have definitely turned around.
“There was no doubt that we had to do what we did,” he says. “We would not have survived if we had not reduced our expenditures and reacted as quickly as we did. I have to say that I was nervous that we didn’t know how bad it was going to get. But I think the good news is, we made the decision in time, and we made the decision at about the right level. We’ve survived.”
Richardson believes his company will rebound to 2008 levels by the end of this year. Still, the recession has made a lasting mark on his business strategies. He has launched new marketing efforts in the U. S., and is looking at serving overseas airports as a new source of revenue. And he won’t loosen his grip on the purse strings any time soon.
“We’re conscious of not going back immediately to our prior level of expenses,” he says. “Our spending now is aimed at software tools that will help us save on labor and do our job more efficiently.”
Consolidated Container Company, LLC, Minneapolis
In early 2009, when we last interviewed William Dworsky, president of Consolidated Container Company, LLC, in Minneapolis, the company was holding steady. As a reconditioner of used industrial containers, it represented an economical alternative to companies selling new products.
The business was running lean and mean, too. Dworsky had long endorsed a policy of “cutting anywhere and everywhere.” Being vigilant with expense controls in good times meant that a company didn’t have to make as many adjustments during down cycles, he felt.
Apparently, the strategy worked. 2009 was a tough year for the company, but sales were only off by 7 percent—a pittance compared to the 25 to 30 percent drops many of its competitors experienced. By 2010, the company had picked up new customers and posted a record year.
Now Dworsky finds himself responding to changes the recession made in the container market. During the downturn, larger drum-container companies acquired smaller ones, consolidating and centralizing production. In doing so, however, they handicapped themselves: The centralized plants serve larger geographic areas and incur higher shipping costs. With gas prices still high, drums are expensive and unwieldy to ship over long distances.
“If there’s only one place to purchase something and the price just keeps going up, people tend to seek out alternatives,” Dworsky says. He decided that Consolidated would start selling new—in addition to reconditioned—products. “We feel that there’s enough of a market in the five-state region that we can make a run at it. So we’re in the process of manufacturing new drums.”
Consolidated Container needed new equipment to manufacture the drums, but a federal tax incentive program, put in place to aid recovery from the recession, helped offset the cost by allowing the company to write off the expenditure during the same fiscal year. Dworsky says it helped a lot.
“My father went through the Depression, and I think his life was changed forever from that,” Dworsky says. “And as I talk with other business owners, I think we’re all a little shellshocked today. Once you’ve experienced that kind of catastrophic change in the marketplace, it changes how you do things. You’re optimistic, but you’re always wondering, ‘What if it happens again?’