When Joseph M. Fortunato took over as CEO of General Nutrition Centers Inc. in 2005, conditions at the nutritional supplement company were not ideal. During rapid growth in the 1990s, Fortunato says everyone got a little fat and happy watching the money roll in.
Then the company took a hit in the early 2000s because of a downturn in the diet supplement and low-carb markets. Revenue starting falling, and then in early 2003, GNC instructed its stores to stop selling products containing ephedra, which resulted in $225 million in lost revenue.
“That’s really when we had to go back and just re-evaluate GNC in general — what our goals would be in the short term and the long term and then how would we accomplish those things,” Fortunato says.
On top of those troubles, the company saw five CEOs in 50 months come and go before Fortunato took over. That meant Fortunato, who was chief operating officer before becoming CEO, was essentially doing two jobs.
“We had quite a few changes at the CEO level,” he says. “A lot of what I was doing at that time was partially CEO work at times, because as CEOs came in and out, it was very hard for them to come in right away and assess the business and try to move the business forward because, once again, we are a fairly complex business for a retailer.
“So, I really had to take a point of view that there were things I was going to do to drive the business forward. As CEOs came in, obviously, I was trying to get buy-in from them, but I couldn’t wait until CEOs got up to speed with everything and decided what strategy they wanted to move forward with. Usually, they never got to the point where they were able to implement any of the strategies.”
Eventually, Fortunato became CEO and made his lone mission getting the business back on track by focusing on the core of the business and making the company’s foundation solid.
“Every business has a core component to it,” he says. “When you look and go through all the muddle of everything else that is going on around the business, there are a couple things — the core components of the business — that really, fundamentally drive the business no matter what.”
Grow your core business
When Fortunato took over, he put his sights on the present and ignored anything that wasn’t in the immediate future.
“At that point and time, I put off looking at strategies three, four, five years out,” he says. “What I said was, for the next two years, our focus was going to be on getting our core businesses shored up, playing to our strengths of brand, market penetration, vendor relations, product innovation, and revitalizing and taking advantage of those core category strengths we had, which were vitamin and sports.”
To get everyone focused on accentuating the core positives of thecompany, Fortunato had to simplify things across the board.
“When I started talking to everybody and getting people together, we basically had meetings every morning with the senior management team, and we talked about each area of the business and what needed to be focused on in each area of the business,” he says.
The company also had to simplify things for stores across thecountry by going to a one-pricing scheme.
“At that time, we were zone pricing, so we had about 25 or 30 different pricing schemes throughout the country,” he says. “One of the key things we did back then was we went to one pricing plan. Then, we were able to take advantage of our scale and market penetration and store base by advertising nationally, which we hadn’t been doing much of because the pricing strategy was different all over the country. That was a significant change in strategy that I think really was getting the business on the upswing again.”
You then have to drive that message of simplification from the top all the way down, which Fortunato did through business reviews once a month with every business unit in the company.
“So, people were not getting caught up in ... what I call the details and complexities of the business, but really digging down deep and understanding what was driving their businesses and what they needed to focus their attention on,” he says. “That has to come from the top.”
Fortunato also used the business reviews to monitor if the message was getting through.
“We would have very clear, concise direction as to where we wanted to take those businesses,” he says. “Every month, the leaders of those businesses had to come back with the progress they were making on the focus, on those core components of their business, and then we would do another review and try to keep that momentum moving along. The momentum is what is important. You’ll run into problem situations that you have to resolve as you move through those processes. But, staying very hands on at that point and time, although it’s not what you want to do as a CEO for the long term, is very important to coming through those more difficult times.”
When you are trying to focus back on fundamentals, it can be a challenge because employees naturally want to look at bigger and better things for their department. While that type of thought process is needed when growing a company, the opposite is required when focusing on the core strategies. You have to keep an eye out for employees looking at other opportunities within their department and get them focused back on the core drivers of the organization.
“People have a tendency to get scattered in their thoughts and scattered in their approaches to their business and trying to take too many things on at one time and nothing gets done right,” he says. “So, when you focus back on the core business and you set that thought process from the top that says, ‘Here is what I want you to focus on in your business for the next year. This is all you should bethinking about.’ That’s how you do it. You just take everything else off the table.”
While it may be easy to recognize this, oftentimes it’s hard to implement because you get into meetings and thoughts just start scattering before you know what’s happening.
“You have to keep reining it back in, because people’s normal mentality is, ‘Well, here’s an opportunity we should be looking at,’ and that’s great at the right time. ‘Here’s something we should be doing, and let’s try to do this and let’s try to take on this additional component for the business,’” he says.
To be successful, you have to continually reinforce that you want employees to focus on the core.
“You have to keep reining them back in and say, ‘No, here’s what you need to be focused on for the next 24 months, and that takes you away from a strategic approach at that time,’” he says. “The strategy becomes the core business, and you get more away from a visionary approach as, ‘OK, how do we grow the business three, four, five years out? The focus has to be, ‘If we’re going to get this business healthy and really get a foundation we can build upon, this is all we need to be focusing on for the next 24 months.’”
When facing a situation like Fortunato was, it’s important to start from scratch and communicate that everyone needs to focus on the core.
“We had to get a turnaround in the business, and we had to get back to fundamentals, which we did,” he says. “We had to change our marketing approach. We had to get product development kind of kicked in the behind, and that’s from our
vendors and internally. We had to grow that core business to replace that diet business that had fallen off dramatically. That, to me, was the turning point with the company.”
Make your move
By getting back to basics, GNC eventually started heading in the right direction. Halfway through 2005, the company started to show a turnaround, and 2006 ended up being a good year with the company posting revenue of $1.49 billion.
Yet, Fortunato still had to wrestle with the dilemma of when it’s time to start thinking more strategically and growing for the future. Even during the first six months of 2007, he was reluctant to divert people’s attention away from the core business.
“Now, it’s not that you’re not paying attention and thinking about what you could do to enhance the business during that time frame,” he says. “You’re getting your ducks in a row, but you don’t start executing against those strategies and take the risk of driving focus away from the core business again and then going back to a situation where you’re thrown back two years again.”
Fortunato also decided to keep the focus on the core because he didn’t feel he had the talent pool to take the company to the next level.
“That’s nothing against the people that were here,” he says.
“They’re fantastic people. They’re still here. They fill their roles very effectively at what they’re very good at. But the talent level you need, it really comes down to a decision — are you satisfied the core business is stable and a foundation is strong enough to move on and that we can grow upon this base?
“Sometimes you tend to be a little cautionary about that. Eighteen months sounds great, and looking back, (we) probably could have pulled the trigger at 18 months, but in conjunction with that, you’ve got to make sure you have the right talent.”
The talent that was responsible for the growth in the 1990s was not the same type of people GNC needed today. Back then, GNC needed people who would be able to come in and drive a fast-paced environment and who had passion and knowledge of the industry and the business.
“You’re just looking for people who take direction very well, who can think within the constraints of their area and execute,” he says. “It’s really a different mindset than somebody who comes in and you are looking for a strength in a merchandising area or a strength in marketing and a more of a creative culture and a mindset that is more visionary and strategic. That’s a different approach.”
Now, Fortunato wants people who think outside the box to complement the people who were able to drive the core.
“The talent from the outside cannot come in and replace that talent, because that talent is very specialized to this business and this industry,” he says. “But, the talent from the outside can bring new thoughts and processes into the business that that core individual does not have in regards to what else exists in the world and what else can we go after.
“We basically just beefed up our infrastructure to keep the core business momentum there and the core business talent pool there, and then bring in a new level of talent to really develop a world-class organization that would be able to deliver our objectives for the nex three or four or five years.”
GNC’s revenue has continued to grow. Its 2007 numbers were $1.55billion — a 4.4 percent increase over consolidated revenue for the same period the year before. Revenue increased in each of the company’s business segments, and Fortunato credits having that mixture of old and new leadership as a key to successful growth.
“My advice would be, look to your organization, make sure that the talent pool you’ll need to drive that organization forward is there and the senior management leadership is there as you have to back away from the core business,” he says. “Because, you can’t focus your energies on the strategic needs of the business and growing the core, adding onto those core assets the business has and still be involved as much as you were before on the core business. You need people that are going to be able to take that over, and you have a confidence level that they are going to be able to continue to drive that business because, once again, without that, you can’t do the strategic part.”
HOW TO REACH: General Nutrition Centers Inc., (412) 288-4600 or www.gnc.com
When Jim Carpenter first told people that he wanted to sell bird seed for a living, he heard quite a bit of laughter. It was 1981 and Carpenter had just opened his first small bird-feeding hobby store in Indianapolis. “Very quickly, I found that the few people who came in really liked having a hobby store for bird feeding,” Carpenter says. “I was the first business they had ever been into that respected the hobby and knew anything about it. That gave me a lot of encouragement that I was doing something right.”
As more people began to frequent his store, Carpenter began to wonder if there might be a bigger opportunity than just running a single store in Indianapolis.
His only problem was he was a bird lover, not a business tycoon. Turning Wild Birds Unlimited Inc. into the company that now spans more than 300 franchise locations across North America was not going to be easy.
“I had no business background, so I was making it up as I went along,” says Carpenter, the company’s founder, president and CEO. “I had some advice here and there from a few people, and I went to a few seminars, but for the most part, I didn’t have a serious relationship with anybody who could really give me good advice.”
What he did have was an idea. He also had a sense of what he would need to take his business to the next level. And whether you’re fulfilling a lifelong dream of being an entrepreneur or coming at it from a different place, you need others to make it happen.
“I’ve never met anyone who innately knew how to grow a company,” Carpenter says. “There is a time at which you have to go from being the technician of your product, maybe you’re good at writing software or making pizzas or selling bird seed, to a different skill. Growing a company is a different skill. You have to go back to school. Not to college, but you have to go to seminars. You need to ask people for advice. You need to become a student of growing a company.”
Wild Birds Unlimited has grown and took in $120 million in 2007 and has about 1,000 employees. That growth has been possible, Carpenter says, because of his willingness to accept the things he didn’t know and fill in the gaps in his own leadership abilities.
“You cannot just keep winging it,” Carpenter says. “There are too many things to learn and too many people are depending on you to do it right. You have to take the responsibility upon yourself to become a better-educated leader.”
Here’s how Carpenter tapped into the expertise of those around him and slowly applied that knowledge to his own management style to help Wild Birds take flight.
Check your ego
As a person lacking formal business training, Carpenter had to reach outside his circle to gain the skills he needed to run his company.
“It’s really hard to only have people inside your organization talk about all your strategies,” Carpenter says.
“That’s a good place to start, but you really do need some people who are not your employees. Employees are obviously excellent and part of the whole process, but they sometimes do have a hard time saying exactly what they think.”
Over time, as you and your employees get to know each other, it becomes easier to have open and honest conversations.
“But it’s still good to get an outsider’s view because then they are filtering it through their experience with the dozens or hundreds of companies they have been involved with,” Carpenter says.
He uses a group called The Alliance, which is affiliated with Indiana University-Purdue University Indianapolis. It brings together leaders of midsized companies to talk about the different skills needed to grow and manage a business.
“About every three years, you kind of go through the same topics, which is pretty good because you forget about them,” Carpenter says. “That’s been valuable, and there are business owners in that group who have been peers and people I talk to.”
That step of reaching out to others and admitting that you can’t do it all on your own is a difficult one to take for many CEOs.
“You have to get over the ego part of thinking that you should be able to figure this out,” Carpenter says. “That’s the in-the-head thing: ‘I don’t know how to do this.’ That’s really big for most people. You are really good at your product. But you have to recognize, ‘I’m not good at this, and I can’t just innately wing this.’”
It also helps to have a confidant that isn’t afraid to tell you when he or she thinks you are making a mistake.
Carpenter’s wife, Nancy, filled that role for him in the early years.
“We were able to talk about the company and make plans,” Carpenter says. “I would get a little wild and crazy with my ideas, and she would be a great person to bring me back down to earth. It can be very lonely trying to start and grow a company if you don’t have somebody close to, to talk about it.”
Set clear standards
One of the most challenging aspects of taking a business from one level to the next is being able to cut loose those who don’t fit in anymore.
“It’s hard often to be the leader you need to be,” Carpenter says. “You have to set expectations for the people in your
organization. You have to make sure that everybody is meeting those. That can be hard for people to go from a small group where you’re all friends.”
You need to be clear about your vision for the company and what your strategy is to fulfill that vision in order to give employees the best chance to succeed and thrive in your organization.
“Figure out, ‘What do I need and does my current organization match those skill sets?’” Carpenter says. “Everybody that matches those, if you have to let anybody go, that’s part of it. If you have to hire some people, that’s part of it. You create a culture of high performance where everybody understands what everybody else’s job is so things don’t get lost in the cracks.”
The idea is that you’re running a business and things need to get done. By laying out the strategy for how you want things done, you give your people every opportunity to be a valuable employee.
“There’s really clear communication of who does what when and who has the responsibility to get the job done and who has the responsibility to approve the final project and veto it,” Carpenter says. “There is clarity of expectation and clarity of process. To achieve that, you need to figure out if you are the person to oversee that kind of communication.”
About three years ago, Carpenter realized he was not the person to make those decisions.
“I did have a person on staff who was capable of doing that,” Carpenter says. “I eventually promoted her to be a vice president, and she is in charge of doing that.”
While Carpenter focuses on positioning the company in the marketplace and interacting with customers, he does recognize the importance of giving employees a clear idea of where they stand in his company.
“You have to get to a point where an annual review is open on all accounts, good jobs and bad jobs,” Carpenter says. “It shouldn’t just be an annual review. It should be at least two or three times a year in between the big annual review so people have regular feedback on how they are doing according to expectations.”
Find your role
As Carpenter gathered more leadership skills and weeded out the people who couldn’t grow with his business, he began to see his own role in the company more clearly.
“Being a store owner/operator, I’m actually a franchisee of my own company,” Carpenter says. “One of my main jobs is positioning our organization to enhance our retail customers’ lives. That way, it all flows from our ultimate customer, our retail customer.”
Carpenter believes there are two types of businesses. A mission-driven organization and one that is driven more by economics.
“It doesn’t mean in a mission-driven organization, you’re not thinking about the bottom line,” Carpenter says. “In our mind, that is the way to the bottom line. ... You have to figure out what kind of organization you are.
“There may be businesses where it’s not a hobby or not as much fun. But I think you can have passion for working in a high-performance organization. I think most people really want to work and most people in an organization are very motivated to do a good job. It could be selling anything or providing any kind of service. Maybe it’s not their hobby. But they can take pride in the way they do their business, the way they treat each other and in the satisfaction of their customers. That can happen in any business.”
Carpenter decided his role would be to communicate his passion for his hobby to his employees and to the customers in order to engage them in it for the betterment of his business.
“Be positive about your own abilities and the ability of your people to pull it off,” Carpenter says. “From giving them loose leashes to do their work and enjoy their successes and experience a few failures. They need to be able to experience both. Both are recognized and used for lessons for further growth. They need to believe in your strategic direction. They should have a way to give input to a strategic direction. Once you have picked what way you’re going, they have to buy in to it.”
Loyalty to your leadership and your strategic direction for the company also relies on your ability to be consistent and focused in your decision-making.
“I used to be what some would call a zig-zag manager,” Carpenter says. “I would change the plan way too often based on new information. That would undermine people’s confidence in what you’re doing. They would spend a month working on something and then you would change directions and that all became wasted.”
If you’re consistent with your message and you show that you really believe in your plan and will stick with it, your people will be willing to invest themselves in it and work to make it happen.
“You’ve got to be able to set the foundation of the organization, the mission, vision and values,” Carpenter says. “You need to then be able to communicate your strategies and then the expectations to all the participants.”
By maintaining open lines of communication, welcoming input and using others to fill in his own gaps, Carpenter has been able to share his hobby with the masses through his stores.
“I just created a company and tried to work with people in the way that I would want to work in a company,” Carpenter says. “That means I would have a chance for having my input and that I would feel that it was valued, even if it wasn’t used. ... Everybody is expected to tell their true thoughts about things and that helps us all improve our organization.”
HOW TO REACH: Wild Birds Unlimited Inc., (317) 571-7100 or www.wbu.com
When CEO Peter Clarkson founded AC Lens in 1996, he ran it from the back of an optometrist’s office.
The Columbus-based online contact lens supply company had no overhead, no backing from venture capitalists and no expectations.
While other late ’90s Internet companies worked hard to raise capital, Clarkson chose to grow AC Lens organically through its own cash flow.
“We’ve been profitable in every year of our existence,” he says. “We started with one employee, and we’ll probably be over 30 employees by the end of the year.”
AC Lens has grown revenue about 116 percent since 2004, and Clarkson expects 2007 revenue to hit $20 million.
Smart Business spoke with Clarkson about how he retains customers through service and employees through incentives.
Q: How can other CEOs grow their companies the way you’ve grown yours?
We learned early on that the Internet is a business like any other. We wanted to grow, and we were willing to invest part of our profits in marketing and infrastructure to support our growth.
We started with a view that the company should be incremental income to the optometrist’s practice, and then it outgrew the practice, so we had to move out. Now, we have about 19,000 square feet of integrated call center/warehouse that supports that.
I’ve always been able to sleep at night because I’ve never been worried that we wouldn’t have the cash to pay our employees at the end of the week.
Q: How important is customer service to succeeding in business?
We actually spend a little bit more acquiring each customer than we make from their first order, but we know from experience and from focusing on customer service that we have a very high retention rate.
It’s particularly important in the Internet because customers could not be more mobile. It’s something of a cliché, but your competition is literally a click away.
We recognized that our product is somewhat specialized, and we needed experts who are trained in-house and experienced in dealing with that particular product to give good service to the customers. Our average call center and contact center agent has been with us more than two years, and that’s much higher than industry averages. That kind of experience has been invaluable.
Q: How do you retain employees?
We’ve worked hard to incentivize our staff based on things that matter to the company overall, not so much on sales. For example, every customer who orders from us receives an e-mail survey about two weeks after they order. We ask them questions about how happy they are with the purchase.
The key question is, ‘Will you purchase from us again?’ A response of ‘No. 1’ means definitely not, and ‘No. 5’ means absolutely yes. We average all of the responses, and all of our customer service people get a bonus based on that average. The higher the number, the happier the customer is and the more bonuses the customer service people get.
We call it a team incentive. Everybody gets it, or everybody doesn’t. We started it in 2001. Prior to that, we had very few employees, and it was very hands-on. As we’ve gotten bigger, we’ve had to try to become more objective in our measures.
You have to incentivize your employees throughout the building based on how the company does, and it has to be relevant to their job. Every person has to have a stake, from the CEO to everyone else on down.
Q: How do you manage customer complaints?
For every 20 people who are unhappy, you only hear from one of them. You should take every customer complaint as a blessing because the customer’s actually telling you about it. At some level, we’re almost happy when we hear about some problem because at least it’s something we can work on and fix.
Bottom line is, everybody makes mistakes. Obviously, if the mistake is repeated, that’s bad. Sometimes when someone’s made a mistake, we realize that the process in our technology was wrong.
Of course, sometimes it was just bad luck. If the post office or FedEx loses a package, there’s nothing much we can do about it, but if they lose enough of them, we would start looking at another shipping company.
Q: What one thing can prevent a company from growing?
If you don’t take care of your customers, they’ll walk. There’s plenty of competition; it’s one of the great things about our system. If you don’t take care of your customers, it doesn’t matter how much money and energy you spend on marketing to get new ones, you won’t succeed.
The No. 1 piece of advice for anybody is, love what you’re doing, get real pleasure out of it, and then it won’t be like work. You’ll be providing jobs for people and building something worthwhile for the community.
HOW TO REACH: AC Lens, www.aclens.com or (614) 921-9892
Just do it. You have to have confidence in yourself and trust yourself and know that you can learn how to do different things.
Selling is so much about people. You have to like other people. You have to like yourself. You have to have good communication skills. Selling is so much about relationships and liking other people. You have to learn specific sales skills as you get going.
Empower people. People tend to be afraid to make decisions, and they want to come to their boss and ask, ‘What should I do, what about this or what about that?’ Our approach is if they don’t have enough information to make the decision, lead them in the direction of what else they need to learn to be able to make the decision and sort of mentor or guide them.
For them to really be responsible, they have to be able to make the decisions pertaining to what they are doing. You effectively remove them from being the person in charge of that area if you come and make decisions for them.
It’s really just a matter of communication, sitting down and discussing the issues and trying to broaden the perspective enough so they are looking at it from enough angles. You’re providing them with a primer on areas that they are not that familiar with. It’s definitely a two-way communication.
Don’t make rash decisions. You’re trying to get enough information to sort out what’s going on while things are changing around you.
You hit a stretch where there are a lot more moving parts. You’re trying to get a hold of them to resolve the confusion of what you’re faced with. That’s a matter of getting good data and having good investigatory skills.
Develop an ability to not take data or reports you’re presented with at face value. You can’t just act on them. Look at them and then go out and verify the validity of what you’re presented with before you try to make decisions or act on it. A report you would get from an employee about a situation or about other employees, especially if it’s something that’s negative or critical, you can’t act on that.
You have to find out what’s true for yourself. That’s a matter of integrity. If you hang on to that, you can generally get to the bottom of it. When you do that, you can make a good decision.
Never stop learning. I just had to develop a skill of knowing how to spot-check information. You don’t have to go over every single bit of data.
You have to be able to pick out certain things that you know you can easily validate. You find things you can easily validate and then based on that, you either feel confident or see that things are not what they appear to be, and then you start digging deeper.
We’re always paying attention to the market. We get various market intelligence reports. We get sell-through reports that tell us what products are selling in the marketplace. I can get a sense of who has what market share. You get a snapshot.
Be open to change. Markets mature and develop and splinter. There’s a danger of hitting a winning formula and then going with that and riding it for a while. It’s not going to last forever.
You really have to have your finger on the pulse of the market. Have good people in the company who can go out and take readings on the market. Be willing to change and take a little risk and start heading in another direction.
Embrace diversity. I noticed something back 15 years ago when I had a couple Harleys. You can go riding with people, and being on the Harley was like the great equalizer.
You didn’t know if some guy was a welder or if he was a brain surgeon, but everyone was at the same level when they were on their Harley. I try to make it that way here.
Bob [Taylor] and I own the company. We’re here every day and we run the company. But we are all here working together, working on the same thing.
We’re working on the company’s goals and purposes and making the company’s product, and we’re each doing our own part. We have a very diverse group of people working every day.
I like that part of it way better than the opposite of, ‘Here I am, Mr. Important, in my office.’
Make employees feel appreciated. I know my feeling, and Bob’s, too, is that the management and executives can really determine the fate of the company better than anyone, and they should be paid for it.
But it’s the rank-and-file that do 90 percent of the work in the company, and they are all good people, too. Maybe they don’t have the same level of ability as a vice president, or maybe that’s just not their purpose to have a job like that. But they are decent people and they all have families, and they are the people you need to reach your hand out to and make sure you take care of them and help them.
It’s kind of a fraternal thing. Everybody gets a year-end bonus. The rank-and-file isn’t as much as the executive. But if we had a lousy year, I would make sure the rank-and-file had a year-end bonus before I would make sure the managers did.
HOW TO REACH: Taylor Guitars, www.taylorguitars.com
Steve Tsengas learned about strategic planning on the job.
The founder, president and CEO of OurPet’s Co. started out in the mid-1960s as a 24-year-old industrial engineer for Eastman Kodak, where he started to wonder why the company paid employees based on how many rejects they found when the goal was to supply a quality product.
One day, he asked a co-worker what about her job excited her. The middle-aged lady considered his question and told him about the time the department head personally thanked the employees after a successful production push. That incident, she said, had happened 17 years ago.
That incident has helped shape how Tsengas has grown his pet product company to 2006 revenue of about $10 million.
Smart Business spoke with Tsengas about how entrepreneurs can reshape a company to ready it for growth.
Q: How do you achieve business growth?
An example I use is a biplane. It’s great for low speeds, it’s highly maneuverable and you can do all kinds of things with it. That kind of a small company has its advantages. But in about the fifth year, when you reach about $5 million to $6 million, you get to a phase where you are becoming a mid-sized company. You’re dealing with the Wal-Marts and the PetSmarts. The organization continues growing and you need to hire higher caliber people.
Then your growth develops exponentially in the takeoff stage. This is where you need to come out like you’re going through the sound barrier. If you’re still maintaining a biplane, it’s going to start shaking apart.
So you have to change the shape into a plane that looks like a jet. Our goal is to maintain about a 40 percent growth rate over the next three to five years.
You need to go through that phase, then my role keeps changing, becoming more and more administrative and financial and shareholder-related.
Q: What is a major pitfall business owners should avoid?
If you look at the entrepreneur’s personality, your classical hard-driving entrepreneur wants to stay in the decision role. He does not want to let go, has not very high confidence in other people, feels he’s the one who can do it the best which is great in the beginning, but you get to $5 million to $7 million and that’s no good.
The biggest problem occurs when entrepreneurs cannot make this transition. They cannot let go. They still want to be flying the little biplane instead of understanding that the more you let go, the more control you have.
Q: How can a CEO take that step?
It goes back to having participation and involvement of people in your business plan.
The legitimacy of involvement is because it affects the decisions in the organization. They can make a contribution, they can help with the implementation and they can make it work.
That’s a legitimate situation to involve the people, subordinates. The heavy emphasis should be on preparation of a business plan, the development of goals. My role goes from controlling to monitoring and coaching.
At the beginning, you may spend 90 percent of your time on technical and manufacturing problems. By the fifth year, it becomes more and more administrative and financial.
It becomes more about putting systems together for controlling the organization and interfacing with customers. Now my emphasis is measuring the output, through the business plan. As long as the variances are under control, the organization is in control.
Q: How do you develop a vision for a company?
Strategic planning is important not only as a tool for management but as a tremendous tool for team-building in an organization. It draws all the various functions together, to focus and plan a road map on how to get from point A to point B, so everybody understands their role.
And it provides, just like if you’re going on a trip, a road map, you measure at critical points, time points, instances if you need to take corrective action.
So you combine strategic planning along with creating an environment in an organization that involves participation and commitment, those two tied together. You can create some very highly productive organizations.
We get away for one day and open up and start putting together the next three-year business plan. There’s agreement on goals; there’s consensus on how to get from point A to point B.
These goals are kept in front of everybody throughout the year. For example, we get together and look at what we forecast for revenue. Then we look at where we are and adjust.
Everybody knows how we’re doing. It’s all published on a bulletin board so people can see it daily. It’s the development of goals, the feedback of people in the creation of these goals and discussion of performance.
HOW TO REACH: OurPet’s Co., (440) 354-6500 or www.our-pets.com
Craig Young will never forget the Sunday he called his management team in to discuss how Young Truck Sales Inc. would survive. After extremely strong sales in 1998 and 1999, the truck dealership market was heading for a crash. On that Sunday, Young and his team hammered out a plan that would allow the company to weather the storm. The plan included wage cuts 5 percent for hourly workers, 10 percent for management staff and 15 percent for the owners. It was a risky move, because none of Young’s competitors had made cuts yet. Many of those dealers aren’t around anymore, and Young says his company wouldn’t be, either, if he hadn’t acted when he did. Young’s ability to see market changes coming and having the guts to make the necessary, tough changes have led Young Truck Sales through the lean times to 2006 revenue of $34 million. Smart Business spoke with Young about how to bring out hidden talents in your employees.
Focus on what makes you successful. You need to remember why you’re getting into the business. For me, I want to have a decent living and all that, but really, it is to serve our customers. Don’t lose focus on that.
It’s easy to get sidetracked in operational details or spending too much time looking at the financials. But what you’re really there for is to serve your customer base, whoever it is, and to make those people successful and yourselves successful.
As you grow, it’s easy to get sidetracked and not do that.
That’s where my cousin helps me get back on track. My cousin, Bob Young, is my partner. We have very different styles. I tend to be a bit more goal-oriented, he’s more customer focused. It gives us a nice balance. He reins me in, and I drag him forward.
HOW TO REACH: Young Truck Sales Inc., (800) 362-0495 or www.youngtrucks.com
Show your employees the importance of communication. I’m hard-pressed to come up with any problems we’ve had with customers that didn’t revolve around communications. It’s the hardest thing to do right.
In trying to get managers, employees and myself better at communicating, I find ways to show the cost of poor communications on an individual basis. One story was about a guy who was working on his boat. He went to the parts department to pick up the parts he’d asked for. But they didn’t tell him the rest of the story, like the other parts he’d need, so he broke down in the middle of the lake.
Just try to provide some examples to make them stop and say, ‘Yeah, that sucks when it happens. I don’t want to do that to our customers.’
I can’t think of anything harder in a business than keeping communications going.
Communications are really what it’s all about. Besides having meetings, I try to wander through our dealerships every day. It just helps me keep the feel for what’s going on and say good morning to all our mechanics and parts people.
Don’t try to cover up a bad decision. A bad decision can have at least two causes. If it’s a bad decision that’s made for the right reasons, you can live with those. We try to sit down and go through what happened to cause that decision. Every single time, it comes down to poor communications.
A lot of times when things go bad, people’s natural reaction is to cover it up and hope the problem will go away. That never works; at least it never worked for me. When a bad decision is made, you have to find out why and learn from it.
Occasionally, a bad decision is made by someone who is looking to enrich themselves personally at the expense of somebody else, or out of mean-spiritedness even. That’s the time
when I have to sit back and say, ‘Is this the right person for our company?’ That doesn’t happen often, thankfully.
Think before hitting the ‘send’ button. I use e-mail a fair amount, but that’s a very dangerous tool. Particularly when I’m angry, I’ve learned for whatever I write, don’t send it for at least a couple hours.
It’s too easy to say the wrong thing and hit the send button, and then it’s too late. Still, it’s an excellent tool to keep constant communication. It’s a great sword but it’s a sharp one.
Allow employees to take ownership of their ideas. I always encourage managers to come up with new ideas or products or opportunities. When they do, they’re given control of it, it becomes their baby to foster and help grow.
The latest example of this is a project with UPS Freight. The service manager at my Volvo store found out about it and said, ‘I think we should go after this business.’ We talked about how we could do it, it looked feasible, so we said, ‘Let’s go for it.’
He set up meetings and landed that business. He runs it all; he hired the guys to do the work. He’s taken total ownership of it, and it has become a very successful program for us. It’s given us three years of solid work, and in our business which is very cyclical that’s welcome.
Also, it gives the managers the opportunity to become entrepreneurs. So if they have that within them, they don’t have to take the total risk to do it. Plus, it keeps them from leaving to do it on their own, too.
Not all managers have that, and that’s OK it’s not a requirement to be a manager. But those that do have it, I want them to be able to exercise it, and bring those qualities into their daily job.
If you happen to be wandering the aisles of one of Dixieline Lumber Co.’s 11 home center stores, don’t be surprised if the person who offers to help you is Joe Lawrence, president of the company.
When Lawrence says that he likes to lead by example, he can point to numerous instances of doing just that. That’s because at one time, he’s held most of the positions in the firm since starting as a lumber handler 23 years ago. “I have personally worked a lot of the positions, so I have a great understanding of the business,” says Lawrence. “Our management team has an open-door policy with our people and our customers. We expect each other to be in the field interacting with our people and exchanging ideas and gathering feedback. I see myself as one of the guys.”
His affinity for people makes him a likeable leader, but it’s Lawrence’s skill in managing employees, his hands-on involvement in their growth and development, and his passion for customer service excellence that have been the underlying reasons for his success in helping to guide the organization even before assuming his current role in March 2005.
Lawrence says that much of the credit for his success lies in his management structure, and his style of management transparency and empowerment that has enabled his team to stay focused and productive, and to grow.
Command and control doesn’t live here
Lawrence involves seven of his key executives in a management committee that authors and executes the business plan for the company. He considers one of the additional benefits of the system to be staff development. “I’m not a micromanager,” says Lawrence. “I prefer an open-forum style of management, so we meet as an executive leadership group formally once a month and then individually on an informal basis throughout the work week.”
The agenda typically includes a review of the financial results and projections, as well as preparing the annual presentation of the business plan to the rest of the management team. The most significant outcome from the committee has been much of the strategy for expansion and diversification of the business model, but it’s Lawrence’s leadership that sets the tone.
“The plus of having an open discussion is that we can reach a general consensus,” says Lawrence. “We have a debate if need be, but there are ground rules. The comments have to be professional, not personal, and I don’t allow generalities for comments; they have to be specific.”
Lawrence also acts as referee, and in the case of an impasse, final arbiter.
“I will let the debate go on, because first of all, I want them to own the result, and second, I want them to come to a consensus,” says Lawrence. “I think that some disagreement is healthy. For example, I don’t expect the sales folks and credit [department] to always agree as to what is an appropriate level of risk. The group has to be trusting and a bit thick-skinned at times and sometimes opinions are expressed that may not be consistent with the thoughts or expectations of others.”
With a major corporate goal of expansion of the firm’s footprint outside of San Diego, the committee reviews the demographics of the expansion, identifies the targeted customer base and sets the sales strategy. That formula resulted in success when Dixieline initially broke into the San Bernardino market by expanding into Colton. Later in 2006, Lawrence took advantage of his weekly one-on-one meetings to provide some staff development related to the expansion. “I like to teach my managers that they have to be adaptable,” says Lawrence. “Many people want things in black and white, but that’s not the way things in leadership usually are. I try to get my managers to play out the ‘what ifs’ in advance. As an example, after our Colton expansion, there was a downturn in the local housing market, and the business slowed. “Some members of the committee wanted to diversify the business model. In one-on-one sessions with them, I asked what message that move might send to our customers or competitors. We have since found other business to bolster that location.”
Success through people
Dixieline has more than 1,100 employees, and historically, most of the talent needed for the firm’s expansion has come through internal promotions and a highly structured employee development system. That strategy is still a large part of the culture, and because it is so important to the human capital plan, it is overseen by Lawrence. “I like to be able to dangle the opportunity for upward mobility in front of new hires and, of course, I use myself as an example,” says Lawrence.
All employees have a formal development plan, and the pipeline of internal candidates is reviewed each month at the management committee meetings. Each location has a separate turnover target based on the line of business and each position.
Turnover for the lumber and home center industry for 2005 was 35.7 percent, while Dixieline had a turnover rate of 23.5 percent. For just the retail side of the business, the industry average in 2005 was 57.2 percent, while Dixieline posted 32.3 percent turnover.
The goal is to achieve less than 30 percent turnover in the business centers and to average no more than 30 to 35 percent turnover on the retail side. By doing so, the company keeps a consistent employee base that is more knowledgeable and spends less money on recruiting and development.
Lawrence says a command-and-control environment hampers people’s growth, and continuing to develop good people means letting them learn and think on their own without overseeing their every move. He says his deliberate choice of management style enables internal promotion and the people development system that has gotten Dixieline to its present status. “I believe people want to be involved in building the business and contribute to the overall success,” says Lawrence. “If we are always told what to do, not only will we not grow the business, but we will stagnate the growth of individuals.”
Shopping for attitude
“Today’s builder wants a one-stop shop,” says Lawrence. “That has necessitated the need to make acquisitions outside of our core competency, so now we are looking at and evaluating building materials distributors, and shops that manufacture doors and trim.”
In addition to looking at the numbers, Lawrence visits every prospective acquisition to assess its philosophy on customer service and quality, because it is here where he finds the true fit. “I look for acquisitions where their business has a synergy with our core business and their executives share our core beliefs about customer service,” says Lawrence. “We want to retain many of their people, and I often find that if they don’t have a strong sense of customer service ingrained as a philosophy, it’s hard to teach.”
Success for Dixieline on the consumer side of the business has come through positioning the firm as an alternative to big-box retailers such as Lowe’s and Home Depot, something Lawrence also credits to strong customer service. “Having roots as a family-run company helped to create our culture of customer service,” says Lawrence. “I believe that consumers like to have choices. We have more people out on the floor so we run a more expensive model, but we also run at a higher margin. I believe in the ‘Moments of truth’ philosophy in customer service because every transaction is important to us.”
Lawrence is referring to the popular customer service mantra that espouses that each interaction between a customer and the company’s frontline personnel creates an opportunity for the customer to leave with either a negative or positive perception of the company’s service, based on his or her experience.
To begin the process of dedication to excellence, all new staff members begin customer-service training on their first day of employment, followed by product-knowledge training accomplished through vendor presentations.
The results speak for themselves.
“Since 1980, there have probably been close to 20 big-box locations that have opened in San Diego,” says Lawrence. “In spite of their growth, we’ve been able to more than triple our business during that same time. I think it’s a misnomer that you can’t run at higher cost and be successful just based on the financials. It’s all about the throughput analysis.” On the retail side, Lawrence measures transactions per labor hour, using a different target for each location, as well as staff turnover, because that affects a customer’s experience. And the firm has achieved a reputation as a preferred employer with dedicated employees who have been promoted through the ranks.
While many firms have gotten out of the retail hardware business, Lawrence has jumped in, adding the consumer market to counterbalance homebuilding, as well as adding solutions for the remodeling, custom homebuilding and repair markets. In 2005, the firm had record sales of just over $400 million, led by the home-building segment.
Lawrence was a visionary and an initiator of a diversified business model long before he became president of the organization. Initially, Dixieline was solely dedicated to supplying lumber and materials to builders. As he moved up in the organization, Lawrence watched the economic cycles take a toll on the company, its customers and employees.
In convincing the owners to diversify, Lawrence established himself as a future leader and set the company on a course of economic stability. His takeaway from those experiences includes lessons in persuasion and persistence. “I was persistent about my beliefs,” says Lawrence. “I found others internally who shared my vision, and together, we created a nucleus of the same vision to diversify and grow outside of San Diego and become a regional player in the entire Southwest area.”
Dixieline’s success attracted attention, and the company was bought in 2003 by Lanoga Corp., which was, in turn, bought last year by Pro-Build Holdings Inc., a subsidiary of Fidelity Capital.
The experience of being acquired twice after so many years as a family-owned company has had its advantages and its learning moments. While there is additional support for the vision of becoming a regional player, Lawrence sees the education process as having benefits for both sides. “What I have learned from this is to be open to listening to new ideas and new ways of doing things,” says Lawrence. “However, what we bring is knowledge of the local marketplace and how to be successful here, and that’s a competitive advantage. I think we will thrive by learning from each other. “Day-to-day, we are still a local company, and the burden is on us to grow our strategic plan. I am always an optimist. There is always a way to make something work; you just have to work harder than the next guy.”
HOW TO REACH: Dixieline Lumber Co., www.dixieline.com
Alan Gladstone stood at his father’s gravesite in October 1993, looking for guidance and wisdom to help him through the bankruptcy that his company, Anna’s Linens Inc., was about to enter. Whatever role supernatural intervention might or might not have played, Gladstone says he walked away with a different attitude toward his troubled situation.
“I had a very personal moment there, and I tried to understand how I could get myself in this position because I had known nothing but success,” says Gladstone, president and CEO of Anna’s Linens. “Chapter 11 to me in those days was like a scarlet letter. How could I put myself and my company in such a horrific state? I think I cleansed my soul and stopped feeling sorry for myself and went about getting the company to thrive and prosper.”
That was the first step to leading the company out of bankruptcy, which ended in December 1994. Today, the discount home furnishings company operates 250 stores 10 times more than it had when it reorganized and sells more household textiles than some of the biggest retailers in the country. The privately held company, named after Gladstone’s mother, posted $290 million in 2005 revenue.
Gladstone had built Anna’s Linens from one store in 1987 to 44 at the time of the bankruptcy. The chain was doing well until El Nino rains and deep cutbacks in the aerospace and defense industries decimated the Southern California economy. The economic collapse left 25 of Gladstone’s stores holding their own, but the other 19 most of them in what Gladstone calls the company’s “inner empire” in towns including Riverside and San Bernardino losing enough to drag the rest of the business down.
Gladstone figured that he could save the company by negotiating his way out of the leases he held at the failing stores.
“We went to every developer and said, ‘This store is hemorrhaging, you can see it from our sales figures, you know what’s going on in the entire center,” says Gladstone. “If you do not help us work out a termination right and pay you some money, we’re going to have no recourse but to file Chapter 11.”
The landlords weren’t unsympathetic to Gladstone’s predicament, but their situation wasn’t much better and might have gotten worse had they cut a deal to let Anna’s Linens out of the leases. “They were all having their own difficulties, and as much as they heard our story and wanted to help, they were worried that it would trigger other people coming to them for the same reason, and they couldn’t move,” says Gladstone. “So we had to do what we needed to do to protect the assets of our company and our people.”
Left with no alternative that he could see, Gladstone filed a Chapter 11 petition to reorganize. He says the hardest part was facing the prospect of losing his company and failing, something that he hadn’t experienced since he began working in retail in 1970. “I looked myself in the mirror that first day and said, ‘Mr. Successful Guy, look where you are now, how did this happen?’” says Gladstone. “And I put down on paper the mistakes that I made. It was easy to blame the economy and the geography and the tough business climate. Those were easy cop-outs. But I hired the wrong real estate person, I hired a wrong merchandise person. There were some decisions that were made that just weren’t correct.”
And Gladstone acknowledges that he took his eye off the ball when it came to some key aspects of the business. He had hired people to handle real estate and merchandising, gave them too much autonomy and didn’t follow up the way he should have. “I think I started to read my press clippings,” says Gladstone. “I think I thought that maybe I didn’t have to work six days, that maybe I could take an afternoon off and play golf. I thought maybe if I let them make decisions, they would grow as managers, and I wouldn’t have to be involved in those areas. The areas I backed off from were the ones that bit me, real estate and merchandising.”
The first thing Gladstone did after the filing was to hold a town hall meeting with employees to explain what was happening and what the company’s plans were to emerge from bankruptcy. “I had a town hall meeting and talked to every district manager and person in the office and told them, ‘I need you more than ever,’” says Gladstone. “I can’t give you any raises because we don’t have the money. But if you stay with me, I promise you that we will emerge from this a much better company.”
Gladstone extended that candor to all parties involved: vendors, bankers, the bankruptcy court.
“I was very honest to everybody,” says Gladstone. “‘Here’s where we are, here’s where we’re going to be if we do the following.’ We let everyone know every month our sales, our earnings, our inventory levels, our borrowings.
“Everyone knew where we were. There was no guesswork. I remember telling the attorneys that we had to give the financial information by the end of the month to the creditors, but we had it to them by the 15th. We underpromised and overdelivered, and that developed a sense of confidence in our management and our company.”
Taking decisive action
Gladstone says one of the most important factors in helping Anna’s Linens work through its bankruptcy was engaging good legal counsel with deep experience in bankruptcy law.
“We hired an expert counsel to guide us through this because I had never been involved in a bankruptcy,” says Gladstone. “We did what they recommended in almost every instance.” Gladstone acted quickly and decisively to prune the people who had been responsible for some of the company’s troubles.
“We terminated a few people that were unproductive and helped cause the problem, and I take full responsibility for that,” says Gladstone. “They were under my watch and I hired them. In some cases, I delegated too much and they weren’t prepared. We terminated the people that needed to be terminated up front; nobody after the Chapter 11 filing.” Gladstone managed to hold onto key vendors and employees throughout the bankruptcy. He says consistent overperformance inspired confidence in the company.
Only two vendors out of approximately 100 backed away and refused to ship product. And the company didn’t lose any of its management during the bankruptcy, even though raises and bonuses had to be deferred. “We underpromised and overdelivered from the moment we entered Chapter 11,” says Gladstone. “If we thought we were going to do $1 million in a month, we said we were going to do $900,000. If we said we were going to spend $1 million in expenses, we spent $900,000. If we said we were going to be at a certain point with inventory levels, we always had a little cushion. People trusted the fact that we could continuously beat the projections we gave to the court. “Our vendors saw that we said that we were going to do $100,000 that month and we did $120,000,” says Gladstone. “If the vendors said ‘You’ve got to pay us in 30 days, we’d try to pay them in 25 days. How do you build trust? Well, you’ve got to show that what you say is going to happen. I think one of the most important things is to put together a plan that you don’t need a Herculean effort to exceed. When you do exceed it, it builds credibility.”
Gladstone learned that his easygoing manner was at times misinterpreted by some as softness.
“Sometimes I’m too nice, and people mistake that for weakness,” says Gladstone. “We now know that we have budgets, we have plans, we have pro formas that we must beat.” After he terminated two senior employees who had been responsible for some of the company’s problems, Gladstone found that employees treated him differently.
“I think when they saw that I was serious about addressing the problems, people knew that you couldn’t push me too far,” he says.
And, Gladstone says, holding people accountable to meet performance goals was essential. He instituted a regular meeting where the managers reviewed key performance measures and set targets for subsequent months. “We had monthly management meetings to discuss the previous month’s performance on sales, margins, controllable expenses by each of their areas,” says Gladstone. “If a merchant said our plan was going to have a 40 percent margin, he knew there was an upside if he improved it and hell to pay if he didn’t. “I think it’s very important that people have a clear understanding of what’s expected. I’ve found that when there’s a gray area, it bites you. It’s got to be crystal clear and black and white.”
Lead by example
Gladstone says setting an example for his managers and employees played a key role in retaining their loyalty and ensuring that they would work to keep the company’s goals on target. “I’m the company cheerleader and keeper of the culture, and that hasn’t changed,” says Gladstone. “If I expected the associates to be at work by 7 a.m., I got there by 6:30. If I expected them to stay until 6, I stayed until 6:30. If my friends were playing golf on Saturday, I went to work. I visited the stores, and I led by example. I’m very proud to say that I never asked anyone to do any more than I did.”
Gladstone shielded his employees, even his senior mangers, from bad news, preferring to put up a happy front so that they wouldn’t worry that the company might fail.
“I never let on when we had some difficult times,” says Gladstone. “Some of the initial meetings with the creditors committee were not pleasant. Some of the projections, if we could-n’t meet them, would have put us in very precarious situations. I had to look myself in the mirror a few times and say, ‘Hey, smart guy, what are you going to do now?’ But I never let on to anyone else. Only my wife saw the real difficulty.”
Gladstone says his best advice is to do whatever you can to avoid bankruptcy, as he attempted to do by first negotiating with his landlords.
“If you blow No. 1, then you’ve got to do the following: First of all, you’ve got to get experienced, trusted bankruptcy attorneys that can help guide you through something you’ve never been through,” Gladstone says. “Have a town hall meeting Day One. Explain the situation so people don’t become afraid. Bankruptcy’s such a scary term.”
You also have to be the leader.
“A leader is not just on an organizational chart,” says Gladstone. “A real leader gets people who have common abilities to create uncommon goals. You get 100 percent of what they have to give.”
Ultimately, Gladstone learned some valuable and lasting lessons from his bankruptcy experience, lessons that have stayed with him and allowed him to grow a bigger, stronger company. Now, instead of the prospect of losing his company, Gladstone is looking forward to the day when Anna’s Linens can go public and to the succession of leadership to his son and daughter, now active in the business. “You’re never as good as people say, or as bad,” says Gladstone. “I certainly learned more from my failures than from my successes. It’s certainly kept me grounded and aware of the value of a good management team and to be very cautious so that we don’t repeat any of those mistakes.”
HOW TO REACH: Anna’s Linens Inc., www.annaslinens.com
Years ago, before Etienne Snollaerts came on board, Smart and Final Inc. was attempting to spread its nationwide presence. The Commerce-based chain, which, among other things, specializes in supplying restaurant owners and caterers with food and cookware, was trying to expand to points east.
Way east, says Snollaerts. Florida, to be exact.
It was an idea big in scale but small on feasibility. In trying such an ambitious expansion plan, Snollaerts says the company was spreading itself too thin, both in terms of geography and its marketing budget. To continue like that would have meant losing ground to big-box retailers like Wal-Mart. “I understand what they were trying to do in the past,” he says. “But it’s very far from your base. Considering the amount of energy you have to put in because the new stores are so far away, it’s a mistake you can make.”
Under Snollaerts, a foodservice industry veteran who joined the company in 2003 and became its president and CEO in 2004, Smart and Final embarked on a new growth strategy, one anchored in building up as much muscle as possible in its main western U.S. markets and carefully choosing new markets to broach.
It is a growth strategy that has allowed the company to build strong, steady growth in recent years. With 250 stores in six Western states and Mexico, the chain exceeded $2 billion in systemwide sales in fiscal 2005 compared to sales of $1.7 billion in 2003. In that same time period, the company posted net income of $21.4 million compared to a net loss of $60.2 million in 2003.
Close to home
Every business in a competitive market or industry needs a value proposition the reason customers should come to it instead of the competition.
Snollaerts says he knew there was no way Smart and Final could jump into a battle royale with the national big boxes and come out standing. So he quickly figured out that the best method for Smart and Final to grow was to play it close to the vest and concentrate on saturating the Los Angeles market.
The strategy had a one-word goal: Convenience. “We’ve found that when you have a competitor that is in a 150,000-square-foot building, it creates an attraction from quite a long distance,” he says. “Smart and Final is just the opposite, a convenience format in which you have to have a store close to your home to really find it attractive.”
Snollaerts steered Smart and Final back toward its roots as a cash-and-carry store. He said the concept has worked well in Los Angeles because of the traffic jams that frequently clog the city’s streets. “The convenience factor of getting in my car, go in the store for two minutes and go home is really a huge advantage over the big boxes,” he says.
With that in mind, Smart and Final’s goal is now to place a store every two to three miles throughout the Los Angeles area.
Snollaerts is also planning the same growth strategy for other large Western cities. At the Smart and Final corporate headquarters, senior managers have constructed a large, detailed map of the West Coast, down to individual streets. The company’s managers frequently refer to the map when plotting the best places for new Smart and Final locations.
They are looking for densely populated, heavily traveled areas. “The West Coast has some huge metropolitan areas like San Diego, San Francisco and Seattle,” he says. “There are some very crowded and jammed areas, and we love that, because it means we can open up a lot of stores.”
But not every Western market is identical. Snollaerts says one of the first things the company has to do when deciding to move into a new market is to tailor an expansion plan to that market. Much of it has to do with the population dispersal and geography of the area.
He points to Phoenix as an example. Smart and Final has been spreading into the area, but it is starkly different from the hills, valleys and traffic snarls Angelinos deal with. Phoenix is a wide metropolitan area, spread across a number of large suburbs. “It’s a flat land, a lot of freeway,” he says. “Exactly the opposite of Los Angeles. You can go from one end of the city to the other in 25 minutes. For that, the convenience factor is a lot less important, and we need fewer stores in the area.”
Snollaerts says correctly calculating the number of stores needed to adequately saturate an area is critical. Oversaturating a market can quickly burden a company’s resources, especially when it comes to marketing the brand to people who might never have heard of it. As it is, Smart and Final’s leaders must commit a large portion of the company’s marketing budget to a new market and accept initial losses. “The buck we spend on advertising in Los Angeles is going to be a lot more effective than in Phoenix or Las Vegas because of the number of stores in the area,” he says. “When you come in to a new market, you start from scratch, you have a huge investment to make to get your new customers ready for this new idea, this strange animal that is Smart and Final. It definitely takes longer than opening new stores in a highly concentrated area.”
Smart and Final divides new stores into three types: fill-in stores, fringe stores and frontier stores. Frontier stores are those that blaze a trail into new markets, and those pose the biggest financial risk.
When opening a frontier store, Snollaerts says the company’s leaders try to assess how much patience they should show with regard to financial losses. “We know how many marketing dollars we’re going to have to overspend and the amount of patience we’re going to need before those stores should become profitable,” he says. “The art of this job is really to balance those three categories of stores and make sure the company is not hit by too much growth in frontier areas.”
Evolving the concept
The heart of Smart and Final’s customer base are commercial entities and organizations. When Smart and Final first arrives in an area, Snollaerts says company representatives make sure they visit frequently with restaurant owners, caterers, churches, concessions managers for Little League baseball organizations and others that will likely need bulk quantities of food and foodservice supplies. “We push very hard in a 3-mile radius” around a new store, he says. “We make frequent visits to restaurants, caterers and leagues in the small radius around the store and begin a very heavy advertising campaign that lasts a year or year-and-a-half.”
In that time, Smart and Final tries to build a reputation among foodservice businesses and organizations in the focused area. Through those channels, it tries to reach household customers, a fast-growing segment that now shops at the stores.
It’s a customer base Smart and Final did not tap originally but which has become increasingly important as the company and the competition grows.
Snollaerts says increased competition from grocery chains has caused Smart and Final to evolve its concept over the years to stay a step ahead.
As much as business leaders want to remain in control of their company’s destiny, sometimes all they can do is adapt and hold on for the ride. “You don’t really have any choice but to evolve,” he says. “Supermarkets are opening club sections for bulk quantities now. Grocery chains are advertising themselves as the place with everything you need for entertaining. Basically, when you have a good idea, everybody is going to jump on it.”
Relying solely on restaurants and organizations as a customer base was not a reliable way to grow the company. Smart and Final’s leaders needed to tap households as a grocery chain would, or risk losing the household market entirely.
Snollaerts says the key was to add a grocery section to the stores. They added perishables, including a selection of meats, followed by a produce section, beverage section and eventually, cook-ware and janitorial supplies.
From the basic concept of supplying restaurants with dry goods, Smart and Final has grown with the goal of becoming a one-stop shop for commercial chefs and kitchen cooks. “If you don’t change and make your concept move, you just get passed by,” Snollaerts says. “That is the essence of business.”
Growth through culture
Evolving a company is dependent on the culture a CEO cultivates. At Smart and Final, Snollaerts tries to foster a culture that emphasizes a desire to learn. “It’s almost a mood in which you have to keep your team,” he says. “We have a strong opinion in our company that we have to be very passionate about food and innovation.”
Snollaerts sends associates around the world to absorb retail and foodservice trends on other continents. “Our buying teams are taking two and three and four trips a year to the Far East and catching new ideas from there,” he says. “I’ll have a meeting with them every three months to see what they’re bringing to the company.”
Snollaerts says he wants employees to feel like they can, within reason, try new things and not fear punishment for making a mistake. In a way, it’s getting back to the roots of the company. “The history of Smart and Final, when they were a cash and carry, was really that the store manager was the entrepreneur of the store,” he says. “You had the freedom to test new things to try and please the customers. They don’t have as much freedom today because there are a lot of regulations now, but you still want to have your store managers being entrepreneurs as much as possible. “Through the ideas they implement, ideas we can observe and optimize and generalize across the chain, that’s where you really see the spirit of innovation.”
Snollaerts has set up an incentive program called “Smart Associates,” through which the company rewards the best ideas. He also creates contests among stores to see which managers can come up with the best display and merchandising ideas.
Employees, both on the store and corporate level, are encouraged to contact Snollaerts himself if they have an idea that could benefit the company. “Each store has a note coming from me telling them that they can contact me through e-mail or voice recording and propose to me ideas that either make economic sense for the company or can bring in customers,” he says. “We record all of them and dispatch those ideas to the executive team, which analyzes them and comes to me with a proposal.”
Ideas are ranked and the best ones rewarded. “It’s just creating all this excitement within the company and making sure people know they are going to be rewarded for their originality and what they do better than others,” he says. “That’s how you communicate an entrepreneurial spirit to your employees, by rewarding what they do.”
HOW TO REACH: Smart and Final Inc., www.smartandfinal.com
Timing is everything. Just ask Donna Salyers, president of Donna Salyers’ Fabulous-Furs.
The faux fur company was set to make a splash when it sent out about a million catalogs to potential customers. The only problem was, those catalogs arrived at their destination between Sept. 11 and Sept. 13, 2001, and the response was less than stellar.
“That was a huge hit to recover from, a mailing of a million,” Salyers says. “You spent the money on the postage, you spent the money to build your inventory, and now you have zero pay-back.”
It took time, but after laying off people, selling items at half price and talking to banks, Fabulous-Furs rebounded and in 2005, generated about $10 million in revenue.
Salyers also credits a Wall Street Journal article about her company with aiding the company’s healing.
“It seems like something always comes along to save you just as your last fingernail is breaking,” she says.
Smart Business spoke with Salyers about how to handle bad decisions, take risks and deal with change.
Q: What is your process when taking risks?
Looking into past numbers and reading into those. Was it product? Was it the way we did the catalog? Was it our mailing? Looking at as many measurable items as possible. Getting lots of opinions.
We all talk about it. Everyone knows the numbers around here. Get lots of feedback from the people that talk to our customers on the phone. I’m out in the public a lot and talk to a lot of people. We all talk to a lot people around here. We take all that back and make decisions based on good information.
We don’t do focus groups as much as we get feedback from the people here who talk to customers all day. I get e-mails all day long saying, ‘A customer said he or she wants this.’ I put it on my list, and if (I) see that item pop up a couple of times, I say, ‘Oh, I think there is something there.’
Q: How do you rebound from failure?
You hope the cut wasn’t too deep, you stop the bleeding and you turn it around. Don’t do it again next year.
You might have to live with a decision for a season, but you will learn from that. Often, something really good comes out of a mistake. You analyze those problems. We spend a lot of time reviewing what we did.
A company will send us this, but we ordered that, or they send us an inferior product. We will call every customer, even if it’s 200, and say, ‘We’re so sorry this happened. Take a 20 percent discount off something else. We want to make it right, and this is not how we want to do business. We are as disappointed as you are. Let us turn it into something good.’
People respect that because everyone knows something will go wrong because that is the way of the world. But, if you correct those missteps, they respect that.
Q: How do you roll with the changes?
We don’t roll with them; we make them happen. We go after change, reinvent ourselves and are always setting higher goals. I don’t think a business can live if it’s not. You will quickly go downhill.
Even staying even is going downhill. I believe in being very aggressive and doing everything better. Every year, we have our best year ever and, even after I’m gone, I hope that continues. I don’t do dumb things like take these ridiculous risks. I would never want venture capital. I like safe, predictable growth.
Watch your numbers and understand them. How did you get here from there, and how can you make more of the good things happen and avoid the pitfalls? Being willing to work and to watch things and react to them.
And we are easy to work with. If you need it, I will sew it myself if we have to.
It’s always looking for opportunities and being willing to be able to change.
Q: How do you avoid those pitfalls?
Many pitfalls will be outside your control, like the hurricanes last season. Those impacted our business. Think of how many parts of the country weren’t even getting mail, and the rest of us were so horrified with watching it all, you felt guilty about indulging and shopping.
You will probably have some inventory issues because you were prepared for business that didn’t happen. You react. You do whatever you have to and get your inventory to where it should be.
Maybe don’t mail so heavy during hurricane season. There are a lot of uncertainties out there like gas prices. You try to be the absolute best, exciting and interesting.
HOW TO REACH: Donna Salyers’ Fabulous-Furs, (800) 848-4650 or www.fabulousfurs.com