Open to Change

Fluctuation is a natural part of every industry: highs and lows, booms and busts, fads and fallouts. For three of America's largest economic sectors, monumental shifts have been in teh workds for some times, creating opportunities for savvy small business owners willing to adapt.

Take U.S. manufacturing, a $1.6 trillion sector that has suffered from increased competition overseas and rising costs at home. In the last decade, tens of thousands of manufacturers have shut their doors, shedding millions of American jobs. Yet many industry observers believe U.S. manufacturing is on the brink of a renaissance: Firms are handing over the thin-margin, mass-production market to overseas competitors in favor of producing high-margin, specialized products that require a highly skilled work force and superior technology.

Construction is also changing. For the first time in decades, Americans are opting for smaller homes. And the fallout from one of the biggest bubble bursts in history has created an airtight credit market, leaving a large portion of hopeful homeowners in the rental market. Local construction firms that are adapting to these trends are faring well; those waiting for housing starts to rebound are not.

Retail, which declined since the Great Recession, also seems to be on the precipice of a transformation. While sales figures perked up for many U.S. retailers last holiday season, the recession’s lingering effects—consuming less—has created uncharted territory for stores that are used to selling to spend-happy consumers. Still, independent retailers that provide products or services consumers can’t find elsewhere are finding measurable success.

These trends are not only reshaping the manufacturing, construction and retail industries, they’re reshaping the U.S. economy. And this fast-changing landscape is forcing small businesses to be more innovative and agile—and in a hurry. 

Just ask Denny Pool.

Manufacturing: Finding New Ways to Compete
NFIB member Denny Pool owns a small manufacturing firm in Michigan—the epicenter of devastation for the manufacturing industry. (The state lost 348,600 manufacturing jobs in the last decade.) His business in Hopkins, Mich., SP Industries Inc., makes industrial trash compactors that remove as much air as possible from waste to minimize a customer’s garbage-hauling bill.

Before 2005, most of SP Industries’ clients were big-box stores, which produce a lot of waste. But the intense competition from cheaper overseas manufacturers ultimately became insurmountable for the 42-employee business. “Those people want to buy cheap,” says Pool of large retailers. “I couldn’t even purchase the components of my machines for the price that [China and Korea] were selling theirs, let alone add labor and insurance.”

Instead of trying to compete with the overseas manufacturers, Pool, who took over as president of the company in 2002, made significant changes to the business. First, he decided to stop making standard compactors for customers that bargain-shopped, and started designing his own specialty compactors to fulfill needs of specific markets. Between 2003 and 2005, for example, the company designed and built a compactor that loads up to 40,000 pounds of scrap newsprint directly from a printing press onto a semi trailer, saving newspaper companies time and money normally spent on manual labor. The $83,000 product was first purchased by The Cincinnati Enquirer and has since been sold to 14 printing presses across the country. SP Industries also tailors compactors for scrap metal recycling, food waste and apartment buildings.

Second, Pool wanted to speak directly to his customers to control the sales process and close more deals. SP Industries was used to selling its line through industrial equipment dealers, but Pool felt that over time those dealers had turned into merely “order takers,” not salespeople. He decided to start selling his products directly to end users, creating more opportunities for his in-house team to interact with potential customers.

“The Internet made a world of difference with this,” Pool says. “Our salespeople don’t have to travel as much because we can host meetings online and do educational webcasts through social media. It’s allowed us to concentrate on key customers that we know have an interest in our products—and the money to spend on them.” Now, about half of the company’s revenue comes from direct sales.

Sure, SP Industries has struggled like other small manufacturers: In the last decade, the company shrank to 26 employees, has felt the effects of ballooning insurance costs and revenue dropped nearly 50 percent. But after these changes, production is ramping up and Pool is optimistic about the future. “We’ve lost a half-dozen American manufacturers in [the industrial trash compactor] industry because of the economy and what’s happening overseas, and even more have sold out to larger corporations or started co-ops,” he says. “If I hadn’t made these decisions, we’d be in the same spot.”

SP Industries is a prime example of manufacturers that are making more specialized products, and this renewed focus is precisely what other small manufacturers need to find, says Simon Ellis, an analyst at IDC Manufacturing Insights in New York City. Ellis says small business owners need to ask themselves a series of questions to adapt to a changing industry, such as: What do I stand for? Am I about producing the best product, do I have the best service, or am I the lowest cost? Ultimately, it’s about finding differentiation. “More than anything else, small businesses need to be clear about their priorities,” Ellis says.

Ellis points to two distinct opportunities for small manufacturers: innovation and technology. “A lot of big manufacturers don’t corner the market on innovation—much of that comes from small manufacturers,” he says. Additionally, technology has become an important part of manufacturing operations, and the consumption model is tipping toward small business’ favor: Firms no longer have to invest significant money in technological tools; they can “rent” those capabilities through the cloud, Ellis says.

Construction: Working Hard to Be Consistent
The construction industry is changing for different reasons. In much of the United States, demand for new construction is down, and it appears to be staying that way for the foreseeable future.

“I don’t think we’ll see 2006-level housing starts anytime soon, and we shouldn’t,” says Scott Hazelton, director of construction services with the Lexington, Mass., research firm IHS Global Insight. “There’s a reason for this mess: We built too many houses, and we don’t really want that back again.”

For subcontractors of big developers, that has meant making severe cutbacks or closing their doors altogether. But NFIB member John McCoy has been around long enough to know that in construction, responding to change is not about reinventing the wheel. It’s about preparing for major market shifts well before they happen.
His suburban Cincinnati business, Exteriors Unlimited, completes a variety of jobs in the residential sector including gutter, window and siding installation. McCoy says he’s insulated his business by focusing on remodeling clients.

“Remodeling is popular when people buy new houses—because they sell their old house to someone who wants to change things—as well as when people aren’t buying new homes, because then they want to renovate their own,” he says.

McCoy has also weathered market shifts by hiring good employees who create a consistent stream of repeat or referral customers, no matter the market condition.
“When you have people out there doing quality work, customers are thrilled to recommend you to their family, friends and neighbors,” says McCoy, owner of the 37-year-old business. To maintain a quality work force, Exteriors Unlimited never uses subcontractors and is extremely picky about who it hires. Prospective employees are given several tests, including identifying and using certain construction tools as a “tryout,” and must have a personable demeanor to work at the company.

McCoy says he’s having difficulty replacing long-time employees who have retired. There simply aren’t enough quality craftsmen in the area willing to work more than 40 hours a week, he says, even in this job market. But it’s important not to settle because without quality employees, the company wouldn’t get 85 percent of its sales, which originate from referrals and repeat clients.

NFIB member Kerry Price shares McCoy’s philosophy of keeping good employees around. Price co-owns Carolina Green Corp., an athletic field construction firm, with her husband in Indian Trail, N.C. When the housing bubble burst and recession set in, demand dropped from colleges, universities, municipalities and professional teams. But she vowed not to sacrifice any of her 25 employees.

“Keeping really good people has helped us keep our quality high, which is hugely important in our line of work,” she says. “It may be expensive and hard to do, but [doing that] put us in a better position once demand bounced back.”

To make payroll during that time, Price tightened the belt on expenses and cut profit margins. The specialty contractor also pursued a highly touted industry certification, which put Carolina Green on a short list of high-quality vendors. “That has definitely helped us win some projects,” she says. “Customers can only cut back so long before they risk the quality and safety of their fields.”

The company did face unprecedented new competition from both regional and national landscapers looking to diversify, and ended up losing several smaller jobs to their severely discounted bids. Still, Price decided not to join them in their race to the bottom.

“Lowering prices below our cost was not a viable long-term option, and it’s a reason many construction firms eventually go out of business,” she says.

Retail: Finding the Sweet Spot
Manufacturing and construction have faced tough times before, but the retail industry has generally enjoyed continual success. Since 1960, consumption has grown sixfold, and U.S. household consumption now clocks in at 72 percent of national GDP.

Yet the recession taught a significant group of American consumers—mostly those who haven’t experienced tough economic times before—the danger of buying more than they can afford. Economists at the International Monetary Fund predict U.S. consumption will continue to slump well beyond the current economic crisis, as American consumers spend more carefully.

This doesn’t mean all retailers should expect sales to decline, nor does it mean they should rush to discount. Independent retailers’ survival and success in the coming years will largely hinge on what they’re selling and how they’re selling it, says James Dion, president of retail consulting firm Dionco Inc. in Chicago. “It’s no doubt that some independent retailers are on life support,” Dion says. “Small bookstores and music stores, for example, are just becoming extinct. But there is room for stores that know what they’re doing and carry products that are in demand.”

One small retailer hoping for success is Steve Maki, an NFIB member who owns an independent pharmacy and healthcare products store in Jay, Maine. In the last decade, hundreds of family-owned, rural pharmacies have closed. But Maki, who opened Spruce Mountain Pharmacy just three years ago, is prospering.

“We’ve had four independent pharmacies, including my own, open in Western Maine in the last three years,” he says. “In Maine, where we’re a little more relaxed than other Northeasterners, there was a need for pharmacies that are less about convenience and more about personal service. Plus, I think we’re seeing a new breed of pharmacists who don’t subscribe to the mega-consumption chain mentality.”

A new breed of customers, too. Maki says his first five questions for customers are never about making a sale. Instead, he asks about their family and discusses local news. He also emphasizes healthy living, forgoing inventory that contradicts this philosophy such as cigarettes, candy and alcohol.

Maki tries to offer services that the local chain stores do not, including prescription mail delivery, onsite prescription services at a rural health center and compounding services. (For example, he creates liquid forms of prescription medication for children who have trouble swallowing pills.) But mostly, he aims to become the person locals can trust for their medication and medical product needs.

There are huge opportunities in filling the customer service gaps where big-box stores and chains are ill-suited for success, Dion says. Independent stores that cater to avid runners, for example, have been wildly successful in recent years, he says.

That’s good news for Dewayne Burgess, an NFIB member who owns Roy Frey Western Lifestyles, a Western-themed apparel, houseware and accessories shop in Topeka, Kan. Burgess says his store fills a niche that no other store in the area does by offering the largest and latest selection of Western wear and boots. The store is the last in the area to provide hat cleaning and fitting, boot stretching and awards merchandise for 4-H competitions. “A lot of my competitors stopped those services because they don’t make money off of them,” says Burgess, a retired Air Force pilot. “I don’t make much money from them either, but [the word of mouth about the services] brings customers into my store.”

Burgess also believes that exceptional customer service is key to success.

“I strongly feel that customers go back to the businesses where they feel they’re acknowledged and appreciated,” Burgess says. “The ones who don’t will lose out on customer traffic.”

To exceed customers’ expectations, his wife, Jo, phones regular shoppers when the store receives new clothing or boot styles. They offer full refunds for returns, a policy that most independent retailers think they can’t afford. And Dewayne calls suppliers and searches the Internet to help customers find items they’re looking for, even if it means pointing them toward competitors. These efforts have paid off: Since 2003, when the Burgesses purchased the business from its previous owner, the store has increased sales every year.

“I’ve helped older customers look on competitor websites for a product they enjoyed 35 years ago, and they appreciate it,” he says. “You don’t make any money at the time, but down the road they’ll say to their friends, ‘Those are pretty good folks. You ought to go shop with them.’”

Listen to MyBusiness’ interview with two NFIB members about their success in the retail sector at www.NFIB.com/retail_sales.