Pass or Fail?

2001 was a fickle beast, reserving a different attitude for each business that faced it, but whether it was a banner year or a bust, it did share its wisdom-and we're here to pass those lessons on.
Magazine Contributor
11 min read

This story appears in the December 2001 issue of Entrepreneur. Subscribe »

Any idiot can make money in a boom economy. It takes savvy, quick thinking and a bit of luck to prosper in a down market.

Business had been harrowing before terrorists struck the World Trade Center and the Pentagon in September. It has become even more difficult in the months since. We may not fully understand the economic impact of these attacks for years to come.

Still, business goes on. Shopkeepers are selling sandwiches to bond traders on Wall Street. Designers are creating Web sites for small businesses. And contractors are helping homeowners build additions.

As you move forward into 2002, draw on the vital lessons of 2001. What follows are case studies of the year's important business trends and events. They offer a mini-education on everything from missed clues and miscues to burgeoning opportunities. By avoiding others' mistakes and tapping the keys to success, you will survive the tough times and prosper in the years ahead.

Mind the Consumer
As we headed into 2001, there was a big warning sign flashing for anyone who cared to look. Consumer confidence, as measured by The Conference Board, had begun a steady downturn from its peak in September 2000.

"There's a big debate whether [consumer confidence] is a leading indicator or a lagging indicator," says Todd McCracken, president of National Small Business United, a small-business advocacy group. "But the small-business owner should pay attention and prepare themselves if a slowdown is on the way."

A YEAR LATER:WHOOPS! "For 2001, consumer spending will be excellent. Right now there is really no weakness in the country."

-Delos Smith, The Conference Board, Entrepreneur, December 2000

Unfortunately, many business owners don't take the time. "Most entrepreneurs don't even pay attention to [economic indicators]," says David Minor, the William M. Dickey Entrepreneur-in-Residence at Texas Christian University (TCU) in Fort Worth. Entrepreneurs are usually too busy building their businesses and need to make a mental mind shift-and perhaps some tweaking of their business operations.

When the consumer begins getting conservative, says McCracken, start eyeing your investment plans carefully. One way to do that without derailing them completely is to lease rather than purchase equipment, suggests Minor.

The same solution works for your staff. Minor advises outsourcing operations or hiring temporary workers instead of hiring new employees. At the same time, he says, rely on your employees to find solutions that keep growth rolling. You need to share your concerns that swooning consumer confidence portends bad days ahead for your business.

"If [employees] are involved in how the problems are addressed, then you get buy-in from these folks," he says. "They're more willing to do what it takes to fight through these tough times." Your workers may exchange pay raises for bonuses tied to business goals, but they won't do it willingly unless you bring them into your business decisions.

A Silver Lining in Layoffs?

Just before September's terrorist attacks, announced layoffs for 2001 in corporate America already totaled more than 1 million. The sum by year-end will be much higher.

For entrepreneurs, the news is not all bad. Seasoned execs who are laid off may bring their experience and knowledge to your business. "This is one of those good opportunities to get really good people," says William B. Gartner, the Henry W. Simonsen Chair in Entrepreneurship at the University of Southern California in Los Angeles.

Those laid-off employees who don't mind a smaller organization along with reduced pay and benefits may decide to join you. Or they may become your competition. "You'll see a tremendous start-up of businesses from these people," says Sharon Hadary, executive director of the Center for Women's Business Research in Washington, DC. She sees recently expanded support services-from Small Business Development Centers to targeted bank programs-helping all these would-be entrepreneurs get started. If these companies aren't competing with you, however, they'll represent a gold mine for B2B sales.

Closer to home, layoffs at other companies may improve some of your existing employees' commitment to your business, says Gordon Miller, an executive coach and CEO of Denver's Delta Road Inc. You may also find some employees becoming skittish. Your challenge is to instill confidence, build morale, and to position the company to take advantage of the eventual upturn.

Crisis in Toyland
If your industry is just getting around to a slowdown, companies in the toy market say welcome to the wake. After years of skyrocketing growth, the toy industry contracted by 1 percent in 2000, according to the Toy Industry Association (TIA). This year looks to be worse. Much worse.

"Expect to see more reality series with Web connections, even an all-reality cable channel."(OK, so the all-reality channels are CBS and Fox, not cable.)
-Tommi Lewis, editor of Teen magazine, Entrepreneur, December 2000

Is it any wonder, then, that retailers Zany Brainy and Store of Knowledge Inc. filed for Chapter 11? Before 2000, the stores appeared to be surefire winners. At a time of rising parental concern about education, they focused on "smart toys"-products the increasing number of tykes in our country could learn from as well as play with.

Maybe retailers should have paid attention to the howling coming from toy product manufacturers-as should entrepreneurs everywhere. "We are living in an age where technology, age compression [children adopting toys younger and for shorter time periods] and overabundance of media are working together to give young people a much broader array of entertainment choices than ever before," says Elie Dekel, president of Los Angeles-based Saban Consumer Products, producer of the Power Rangers action toys. Beware: Every business competing for customers' time will also be competing for their business.

Zany Brainy and Store of Knowledge were battling aggressive competitors. "There are four major accounts that dominate the business," says Thomas G. Murdough Jr., chairman and CEO of The Step2 Company, which makes large outdoor toys. "Toys 'R' Us, Kmart, Target, and Wal-Mart represent 60 percent of [toy] sales."

Such a narrow consolidation among so few stores is causing a fight for shelf space at the remaining retailers, he says, while the monster retailers can cherry-pick the most popular products-"smart" or not-and sell them at a discount that makes niche retail strategies like Zany Brainy extremely difficult. Of course, if it picks the right products, a smaller retailer can triumph. But lately the pickings have been slim, even though the TIA estimates manufacturers introduce approximately 5,000 toys each year.

No recent introduction has had success like we saw with Pok�mon. "There were no breakaway new toy categories in the last 18 months," says Dekel. "There are almost always copies of an idea, variations on a theme until you saturate the market. The toy business has been in that cycle for some time." Too little product differentiation can smother the most lucrative markets-and doom other parts of the economic food chain that rely on that differentiation.

At a Discount

In recent years, Target Corp. has been something of a Wunderkind among budget retailers, consistently winning praise for catering to a slightly more upscale clientele than the equally well-performing Wal-Mart or consistent laggards like Kmart.

"[Target is] a discount store, but a step above other discount stores," says Kurt Barnard, president of Barnard's Retail Consulting Group in Upper Montclair, New Jersey. "The interior is a little more what you'd expect to see in a department store. No wonder it's called chez Target."

In part, credit Target's success to stability, says Eric Beder, retailing analyst at New York City brokerage Ladenburg Thalmann & Co. "Target has significant continuity in their management," he says. "Every five years or so a new person comes in to try to change Kmart." Although he's impressed by Kmart's new CEO, Chuck Conaway, Beder feels it's too soon to call his efforts a turnaround, though they mimic Target's success by improving the shopping experience and focusing on brand names.

"An overdue recession should start sometime in 2001, possibly during the second quarter. This will be the death knell for various dotcoms that have been burning through cash on hand with no earnings in sight."
-Ken and Daria Dolan, hosts of nationally syndicated radio show The Dolans, Entrepreneur, December 2000

Target has succeeded by differentiating itself in marketing and buying-a lesson applicable to any entrepreneur. Buying the right products allows Target to present them in an attractive light, justifying slightly higher prices. By making purchasing its focus, Target has a jump on its competitors in knowing what those right products are.

So why, experts are wondering, with all its successes, did Target sue Kmart over the latter's in-store "Dare to Compare" price comparisons? "Target over-reacted," says Beder, noting that the main competitor Kmart was comparing itself to was Wal-Mart. Consider it a major slip-up by an otherwise top-notch competitor. Target's flub helped shine light on Conaway's efforts to turn around Kmart. Keep that in mind next time you feel like rapping a competitor in the courts.

Shop Around

Online grocer WebVan has become exhibit A for what was wrong with the dotcom boom. Its collapse reaffirmed some of the basic truths that all businesses should be heeding in the days ahead.

First, be realistic about your market. "[WebVan] vastly overestimated the demand for online grocery shopping," says David Kathman, a stock analyst at Morningstar Inc.

Everybody has to buy groceries, says Jupiter Media Metrix senior analyst Ken Cassar, but few people are willing to pay for delivery and wait for the food to show up. "Regardless of how small or profitable a niche you may target, you're never going to make money selling cement online," he says.

"E-books will be free."
-Seth Godin, author ofUnleashing the Ideavirus(Hyperion), Entrepreneur, December 2000

WebVan also forgot to focus. It decided to be both a grocery store and a delivery company. To do so, WebVan sunk money into warehouses and delivery vans. While other online companies, such as, could achieve profitability by simply cutting back on their marketing expenses, WebVan's expenses weren't cuttable.

In short, WebVan didn't start small and build on its success. It had to build everything, including a customer base. "Smart companies think about who their customers are and how to sell more stuff to them," says Gartner. "Getting new customers is very expensive."

Entrepreneurs are already launching version 2.0 of online grocery shopping. Aliso Viejo, California-based WhyRunOut is partnering with the Stater Bros. Stores grocery chain in Southern California. It provides Stater's existing customers with added value by delivering groceries for $6.99 per delivery. That division of responsibilities sounds familiar to Kathman. "Amazon doesn't deliver [their products]," he says. "They rely on UPS and FedEx."

Bucking a Trend

Want inspiration? Look no further than your local Starbucks. The coffee retailer has managed to keep its growth strategy intact during these trying times.

"They're cheap entertainment," says TCU's Minor. "Why not go to the Starbucks with your friends rather than go to the movies?"

The company's keeps its image in pace with society by providing wireless Internet access. "Every third [Starbucks] is a technology store now," says Scott Van Winkle, an analyst at Boston-based investment firm Adams Harkness & Hill. "Anytime you get ahead of a trend and create a new form of retailing, there's success."

Still, the main ingredient in Starbucks' success is its java. "A dollar fifty for a cup of drip-although 50 percent above other cups of coffee-is still only a 50 cent differential, which most people can afford," says Mitchell Speiser, senior restaurant analyst at Lehman Brothers in New York City.

"I think that in life's simple pleasures, there's opportunity," Speiser says. "Even in tough times, certain products do well."

Chris Sandlund writes about business from Cold Spring, New York.

Contact Sources

  • National Small Business United
    (202) 293-8830,
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