May 10, 2009
Forged in Fire: BE 100s Overview
Downturns happen. The U.S. has experienced 32 in the last 150 years or so, according to the National Bureau of Economic Research in Cambridge, Massachusetts. And they all eventually ended. While it’s a given that our current downturn will someday be just a bad memory, the impact it’s having on all business sectors is catastrophic. In this environment, you either use the situation to your advantage or get consumed by it. The important question is, how can you steer your company away from a moribund sector, evaluate your business’ core competencies, and morph them into a growth industry? (See also:Â New Rules of Doing Business)
Here’s a look at what some BE100s CEOs are doing to survive while the recession is in session:
INDUSTRIAL/SERVICE: IS THE GLASS HALF FULL?
The U.S. labor force lost 2.6 million jobs in 2008–the greatest employment shrinkage since World War II–and unemployment is projected to rise throughout the year. This is not good news for industrial and service companies.
Economists and politicians debate whether President Barack Obama’s economic stimulus will fulfill its promise of saving or creating a workforce of 3.5 million jobs and lead to long-term economic growth. Many be industrial/service companies, however, have adopted a glass-is-half-full philosophy to managing their operations, and some view retrenchment as an opportunity to pursue and invest in growth initiatives. “The way I look at it, the downturn economy helps to level the playing field for black-owned businesses,â€ says Michael V. Roberts, of the Roberts Hotels Group (No. 51 on the BE Industrial/Service Companies list with $91 million in revenues) and Roberts Brothers Properties (No. 59 on the BE Industrial/Service Companies list with $79 million in revenues). “The normal competition that you would be up against, the old-boy network, which had been dominant and so dependent on Easy Street, is having a tougher time. They’re at the point where they’re shrinking their operations so much that they’re out of sync and out of balance.â€ Adds Roberts, who co-founded the businesses with his brother Steven, the president and COO, “True, we are feeling the pain. But as the recovery takes place we must be vigilant and take advantage of the opportunities that come from this.â€
John F. Carter and his brother Cris are two entrepreneurs who have found opportunities despite the economy. Atlanta-based Carter Brothers L.L.C. (No. 57 on the BE Industrial/Service Companies list with $80 million in revenues) acquired Edwards Service last year from General Electric for an undisclosed sum. At the time of acquisition, Edwards Service revenues exceeded $30 million. The potential synergy between Carter Brothers, which sells, installs, and repairs commercial electronic security systems, and Edwards Service, which sells, installs, and services fire alarm systems, was obvious. “We’re always seeking new ways to expand,â€ says John. “However, our decision with any acquisition will follow the same model as the Edwards Service acquisition. We’ll be just as thorough and strategic.â€
Jon E. Barfield, chairman and president of The Bartech Group Inc. (No. 19 on the BE Industrial/Service Companies list with $235 million in revenues), a Livonia, Michigan, talent management and acquisition company, is also on the offensive. “Because of the recession many of our competitors could go out of business, or become less influential in certain markets that we compete in,â€ Barfield says. “On the other hand, we are executing strategies aimed at expanding our influence and market reach, such as adding sales and marketing resources, branding initiatives, and expansion into regions that are hiring and growing, relative to the economy as a whole. While our professional staffing business is down, our contingent workforce management, process consulting, and direct recruitment businesses are up appreciably.â€
AUTO DEALERS: ON THE SKIDS
Perhaps no industry has witnessed more wreckage from the economic crisis than the automotive sector. From manufacturing to media, millions of jobs are tied to this beleaguered industry. Auto sales realized their worst performance since 1992 because of the sales reversal of light vehicles, from 16.1 million units in 2007 to only 13.2 million in 2008. General Motors alone lost $30.9 billion. According to the Economic Policy Institute, a nonprofit Washington, D.C.-based think tank, approximately 19,000 fewer African Americans were employed in the auto industry in November 2008 than in December 2007, when the recession began.
Black-owned automotive dealers, whose success is closely tied to consumer spending habits, had such a dismal year that Black Enterprise has opted not to name a 2009 Auto Dealer of the Year. “The year 2008 was a disaster for both the dealerships and the manufacturers, if you look at it from the perspective of Detroit,â€ says George Magliano, director of auto industry research, North America at IHS Global Insight (USA) Inc. “Detroit closed about 900 dealerships, most of which went through bankruptcy.â€
Tony March of March Hodge Automotive Group (No. 2 on the BE Auto Dealers list with $481 million in revenues) restructured his business into a smaller, leaner operation, selling his three Connecticut-based GM outlets but retaining his more profitable franchises, including Infiniti and Jaguar. March was among the lucky ones. Several be auto dealers were forced to sell: Fred Poe (who ranked No. 21 last year), sold his Southgate, Michigan, Pontiac-GMC dealership; Raymond Wilkinson III, No. 90 last year, sold his Poughkeepsie, New York, GM dealership; and Alan Young, (ranked No. 79 last year) in business since 1983, was forced to close his North Richland Hills, Texas, GM store.
While not losing market share, Toyota sales were down 14.9%; Lexus was down 21.2%. Though most Toyota/Lexus dealers remained profitable in 2008, says Perry Watson III, president of Toyota Lexus Minority Dealer Association, their profits dropped at least 25%. In Florida, S. Woods Enterprises (ranked No. 7 last year) sold its Toyota of Stuart, while keeping its new Treasure Coast Lexus store. In Atlanta, Emanuel Jones of Legacy Automotive (No. 9 on the BE Auto Dealers list with $158 million in revenues) sold Legacy Toyota to a non-minority buyer. But in the Dallas Metroplex, Steve Jackson opened Toyota of Rockwall, the nation’s first dealership to be certified gold LEED (Leadership in Energy and Environmental Design), a benchmark for environmental building design. Before selling his Folsom Buick Pontiac GMC dealerships to another black owner in December 2007, Jackson was listed No. 52 on the 2007 be auto dealer 100 list .
However, John F. Stelly, CEO of Louisiana-based Paramount Nissan (No. 28 on the BE Auto Dealers list with $54.6 million in revenues), remains optimistic and has even rejected offers to buy his dealership, which he’s considering expanding. He’s currently negotiating the purchase of a Nissan dealership in Jackson, Mississippi, and summer’s end will see a new Nissan store in Silsbee, Texas, that Stelly is building from the ground up. Even as a retailer of import cars (whose sales haven’t fallen as precipitously as the domestic brands), Stelly saw sales drop 12% in 2008. His profits, which had been 2.2% of sales, shrank 10%. New-car volume was lower but was partially offset by an 8% sales increase in the service department. In response to the credit crunch, the 42-year-old Stelly altered his advertising to attract a higher income buyer with more disposable cash and better credit.
ADVERTISING: THINKING OUTSIDE THE BLACK BOX
The economic downturn led to a 2.6% decline in advertising spending in 2008 from the previous year, according to The Nielsen Co., as advertisers tightened their purse strings. Some ad shops were caught off guard, but wooing skills and talent helped the St. Louis-based ad agency FUSE (No. 8 on the BE Advertising Agencies list with $71.6 million in billings) land Barack Obama‘s presidential campaign, which contributed to a 28% increase in billings last year. FUSE was the agency of record for all of the African American-targeted media for the Obama campaign along with the Democratic senatorial campaign committee and the Democratic congressional campaign committee. The agency also handled marketing for CNN’s “Black In Americaâ€ mobile tour and the CNN Election Express Yourself tour according to FUSE CEO Clifford Franklin.
These days, ad agencies need to go beyond their traditional methods of operation. “We have to address the fact that both our customers and the industry have changed dramatically. Because of the recession, clients want to find, frankly, cheaper, more effective, and more efficient ways of engaging their most important customers,â€ says Byron E. Lewis, founder and CEO of UniWorld Group Inc. (No. 3 on the BE Advertising Agencies list with $234 million in billings). Translation: Embracing digital technology is a necessity for black-owned ad firms to successfully compete, especially in light of the decline in print media advertising.
Expanding beyond clients that target only African Americans also is a must for black-owned agencies. Firms such as GlobalHue (No. 1 on the BE Advertising Agencies with $379.5 million in billings) and UniWorld, which have targeted a broader market for some time, have been able to offset some of the pain of the recession. As with finances, black-owned ad agencies should diversify and not limit themselves to the “black box.â€
However, reaching broader markets doesn’t mean moving completely away from your niche–especially if it’s at the expense of the black audience and its significant buying power. Lewis advises black-owned agencies to maintain a strong complement of talented ethnic staff in order to compete with general market firms for African American assignments and multicultural presence. General market agencies know that the African American market is the engine of this nation’s culture, Lewis points out, noting that many in the mainstream already follow our cultural trends.
The black-owned advertising agencies were dealt a one-two punch in 2008. Billings for the industry, which have been trending downward in recent years, were pummeled by the near collapse of the American automotive industry. Mounting losses at General Motors, one of the largest advertisers in the U.S., forced the auto giant to significantly scale back its advertising budget. Agencies on the BE list were confronted with their toughest assignment by the fourth quarter of 2008: to motivate consumers to spend when they’re clutching their pocketbooks for dear life. Personal consumption, which accounts for 70% of the U.S. economy, decreased more in the fourth quarter of 2008 than in the third quarter. This was the largest decline since the second quarter of 1980 and lowered real gross domestic product by nearly three percentage points.
These factors, among others, sent a ripple through the ad industry. Agencies, whether they were behemoths or Lilliputians, were not immune to the unmerciful environment. Among the results is a reduction in the number of black advertising agencies qualifying for our list, from 15 agencies to 10. A number of the be perennials such as GlobalHue, Burrell Communications Group L.L.C., and UniWorld Group Inc. remained on the list, but they had to seriously batten down the hatches and develop new strategic plans. While there’s little doubt that advertising will continue to be a means to reach consumers, the sluggishness of the down cycle combined with fundamental shifts in the industry have presented perhaps the greatest challenge that most of the agencies have ever seen.
FINANCIAL SERVICES: MANAGING AFTER THE MARKET MELTDOWN
In what many called the biggest selloff since the Great Depression, the stock market lost nearly 33% of its value. Despite this environment, some be 100s financial services firms are managing to grow. “Everyone will be looking at the government’s new stimulus package over the next year to see what’s going to happen to the country and the economy,â€ says John Foff, a senior analyst at SNL Financial in Charlottesville, Virginia. Raising capital and restoring consumer and investor confidence will be among the big challenges for financial services firms going forward, he says.
Suzanne Shank is one of those executives who see opportunities others don’t. The president and CEO of Detroit-based Siebert Brandford Shank & Co. L.L.C. (No. 6 in taxable securities with $21 million in lead issues and No. 1 in tax-exempt securities with $5.3 billion in lead issues on the BE Investment Banks list), Shank expanded her firm and hired 18 experts to focus on new municipal bond clients in two new specialty groups that target transportation and healthcare. The hope, Shank says, is that the firm will grab customers from big-time players such as Lehman Bros. and UBS that have left the business because of mergers, acquisitions, or bankruptcies. “None of the regional minority-owned investment banking firms has traditionally had specialty groups in public finance, so this will allow us to compete in the transportation and healthcare sectors.â€
One of the toughest arenas that brought some challenges–and even some opportunities–was the bond and capital markets for investment banks and private equity firms. For instance, Cleveland-based SBK-Brooks Investment Corp.’s CEO Eric L. Small says the recession stalled his firm’s growth in the municipal bond business, because many municipalities could not get transactions into the market. But Small, whose firm is No. 3 in taxable securities with $1.2 billion in lead issues on the BE Investment Banks list, remains optimistic. “We hope to pick up new business from the stimulus package related to programs that facilitate capital expenditures for municipalities and state governments.â€
The crucial need to increase capital, reach more customers, and continue to grow prompted a number of banks to seek help from the federal government. At least six black-owned banks received nearly $60 million in new capital from the U.S. Treasury Department’s Troubled Asset Relief Program. At New Orleans-based Liberty Bank and Trust Co. (No. 5 on the BE Banks list with $372.7 million in assets), the bank’s president, Alden McDonald Jr., says his bank plans to use $5.6 million in TARP capital to boost lending. Though his bank’s assets grew 16% in 2008, profits plunged 24%. Liberty won a bid last year to take over Kansas City, Missouri-based Douglass National Bank; the deal added about $50 million in assets but cut profits, largely because of expenses tied to the purchase.
For CEOs in the private equity space, 2008 was bruising on many fronts. Last year, there was $986.5 million in mergers and acquisitions in the U.S., down 37.2% from $1.57 billion the previous year, according to Sandy Anglin, a research analyst at Thomson Reuters. She says a lack of financing has reduced the number of deals. But some firms grew in spite of the tight market.
For some black-owned asset managers, 2008 was one of the most turbulent years ever. No. 4 on the BE Asset Managers list, Chicago-based Ariel Investments L.L.C. saw its assets under management drop a staggering 66% to $4.4 billion and revenues fall 41% to $53.9 million. The 40% drop in the stock market–combined with investors running for the exits–contributed to the decline, says Mellody Hobson, Ariel’s president. She also disclosed that Ariel laid off 18 people in August to help cut expenses. “Clearly, we’ve been in a once-in-a-70-year economic crisis in this country,â€ Hobson says, “and that has significantly affected money management firms and mutual fund companies.â€
With the deterioration of several of Wall Street’s most venerable institutions– Lehman Bros. and Merrill Lynch among them–and the freezing of credit markets, investors panicked with each trading session. Part of the story could be told on the be asset managers list, which has had some of the biggest shifts in its nine-year history. Most of the list’s returning firms realized significant declines, including last year’s list leader EARNEST Partners L.L.C., which saw its assets under management fall nearly 37%. However, there was one bright spot: Houston-based Smith Graham & Co. Investment Advisors L.P. produced a 5.3% gain in assets under management, while Chairman and CEO Gerald B. Smith positioned the firm to acquire the fixed-income and small- and midcap-value equity assets of New York-based Ark Asset Management Co. The acquisition is expected to add $2.8 billion in assets to Smith Graham’s portfolio. When the deal was announced in March, Smith said, “I don’t see any major upside to the market any time soon. So I think firms are just going to have to operate at a different level and focus on their cost structures and managing their business in a very difficult environment for the next year or so.â€ In other words, think differently.
In spite of the recession, many be 100s CEOs are breaking out of traditional ways of doing business. They understand that entrepreneurs need to be creative to move from low growth or low profit to places where real money can be made. Once the fires of this recession have died down, the new face of black business will rise triumphant from its ashes.
–Additional reporting by Carolyn M. Brown, Aisha I. Jefferson, Jeffrey McKinney, and Cliff Hocker