The Recession-Proof Business: Chapter 5
More Recession Success Stories
So far, I’ve outlined the four major rules of the recession-proof business formula:
- Rule #1: Adopt the Recession-proof Mind-set
- Rule #2: Solve a Problem That Gets Worse in a Recession
- Rule #3: Make Your Business Competition-proof
- Rule #4: Market More Aggressively, Not Less
In this chapter, I’ll share several other recession success stories. You’ll see how these small-businesses-turned-billion-dollar-giants all followed these four rules in their own way.
You’ll find example after example of companies that were inspired by and later exploited trends that emerged in a recession.
Recession Success Story #6: The Walt Disney Company
In 1928, Walt and Roy Disney started The Walt Disney Company. In that year, they released a cartoon film Steamboat Willie – the first Mickey Mouse cartoon feature with sound. While the Disney brothers’ company was off to a successful first 11 months of operations, in the 12th month it ran straight into the Great Depression.
While you might think that a cartoon company would struggle in an economy where people could only afford the essentials, the opposite proved to be true – at least for Disney.
Historically, entertainment is a recession-resistant industry. When a recession hits, the impact on entertainment is usually delayed. This happens because the demand for escapism from the recession goes up. People get burnt out by all the negativity from a recession and simply need a break. Vacations become difficult to afford, so entertainment often fills that need.
However, the Great Depression was so severe that industrywide box office sales were down. So even though all the companies in the entertainment industry followed Rule #2: Solve a Problem That Gets Worse in a Recession, most suffered because while the need for entertainment went up, it was offset by the lack of discretionary income.
Unlike its competitors, The Walt Disney Company had a unique approach to entertaining its customers (following Rule #3: Make Your Business Competition-proof). The two key things that differentiated Disney during this time were its amazing cartoon characters and cutting-edge usage of audio sound in its cartoon films. These two innovations set Disney apart from the competition quite literally from day one. These differences allowed Disney to “steal” customers from its competitors that had nothing unique to offer this quickly shrinking market.
The result was that Disney actually grew and prospered during the Great Depression. The more that people were depressed by the economic news, the more they went to watch (and listen to) Disney films. Word of mouth spread about the amazing animation and soundtracks in Disney cartoon films, allowing Disney to expand its marketing reach (Rule #4) while also using the uniqueness of its product to lower the costs of sales and marketing.
The combination of these factors allowed Disney to survive and prosper in the Great Depression when most of its competitors failed.
Recession Success Story #7: Hewlett-Packard
In 1935, two aspiring young engineers who had graduated from Stanford University looked to set their market. The Great Depression had been in full swing for six years and opportunities seemed scarce. Bill Hewlett and David Packard saw the emerging importance of electronic test equipment used in many aspects of industry. With an investment of $538, the pair launched a company to take advantage of this emerging market.
Their first product was an audio oscillator used to test audio equipment in the emerging market for audio sound. In fact, one of Hewlett-Packard’s first customers was another recession success story company, The Walt Disney Company.
Walt Disney with its first audio cartoon, Steamboat Willie, had proven the incredible consumer appeal of sound and the relative financial safety it provided to the company.
Disney quickly moved to incorporate sound into all of its film projects and soon had a ton of audio equipment that had to be tested, validated, and calibrated to ensure that it worked properly. Audio equipment was not only used in the recording of films but was also used in displaying them. Hundreds, if not thousands, of movie theaters across the country had to have audio equipment installed and then tested to verify sound fidelity and volume level consistency.
Since the audio equipment was relatively new, the support electronics to maintain this equipment was an emerging market – even during the Great Depression. Hewlett-Packard’s superior engineering skills found a different, radically less expensive method to create an audio oscillator. This technological uniqueness allowed HP to sell its products at a unique price point. Even though HP prices were 75 percent less than its competitors’ prices, it was able to maintain healthy profit margins.
HP piggybacked off the growing demand to support, maintain, and calibrate electronic devices. It served that need in a uniquely engineered way that gave it an enormous advantage. The combination made HP recession proof.
Recession Success Story #8: Domino’s Pizza
In 1960, two brothers by the name of Tom and James Monaghan opened a pizza shop to serve the students of Eastern Michigan University. Within the first eight months of starting the business, James Monaghan wanted out of the business. The country was in the midst of a recession and James thought the chances of the business succeeding were slim.
Tom Monaghan thought differently. He figured that even in a recession college kids still have to eat. So Tom bought his brother’s half of the business in exchange for a used Volkswagen Beetle. Both brothers were thrilled.
Tom Monaghan’s pizza business survived the recession and he spent the next several years mastering two unique aspects of the Domino’s pizza business – pizza delivery and franchising.
Most pizza restaurants at the time were sit-down restaurants. Monaghan thought that turning the restaurant business into a food delivery business was unique. He was right.
In the years that followed, he perfected the operational aspects of the pizza making and delivery business. He got his operations down cold so that his stores were able to deliver a pizza usually within 30 minutes. This was an attractive benefit for the hungry “gotta eat now” college crowd that the early Domino’s locations tended to serve.
At the same time, he slowly began to acquire franchisees to harness their capital and sweat equity to open more locations.
By the time the 1973 oil crisis and recession hit, Monaghan was ready to make his big move. At the start of the economic crisis, Domino’s announced its now famous guarantee, “Hot, fresh pizza in 30 minutes or less … or it’s free!”
Domino’s would keep this unique guarantee for a full 20 years before ultimately canceling it because of rising concerns and legal costs due to drivers speeding and injuring people during their deliveries.
But what’s interesting about this 20-year period is that the company’s sales skyrocketed. The company grew from a handful of franchisees to more than a thousand. While Domino’s spawned a number of competing pizza delivery places, no other company ever had the operational skills, the franchise base, or the guts to offer and deliver on such a unique promise. This simple concept of getting your pizza in 30 minutes or less or it’s free went unmatched by any other competitor for two decades.
Why did Domino’s survive and actually thrive during multiple recessions?
It served a never-ending need – hunger (following Rule #2: Solve a Problem That Gets Worse in a Recession). It provided a unique, fast pizza delivery solution to the “I’m hungry now” problem (following Rule #3: Make Your Business Competition-proof). Finally, it marketed its uniqueness in the most gutsy and aggressive of ways with its “Hot, fresh pizza in 30 minutes or less … or it’s free” guarantee.
Tom Monaghan made Domino’s Pizza recession-proof by following all the rules of the recession-proof business formula. In 1998, he sold the company for more than a billion dollars – of which half came from his brother James’s original share of the business. Sometimes a good plan with the courage to see it through when others are scared pays off in the end. It sure did for Tom Monaghan.
Recession Success Story #9: Charles Schwab
In 1971, Charles Schwab started his first company, First Commander Corp., to create a stock mutual fund. While the young company quickly acquired $20 million in client money to manage, Schwab ran into problems with government regulators. Unaware of the financial security laws, Schwab had inadvertently violated a number of them by failing to register his mutual with the proper government agencies. The US government promptly forced Schwab’s company out of business.
Licking his wounds, Schwab realized his mistake and decided to pay attention to these laws and how they limit or create business opportunities in the world of finance. This hard-learned lesson would stay with him when he opened the company he is now famous for, Charles Schwab & Co., Inc.
The year was 1974, the US stock market had crashed the year before, oil prices had skyrocketed nearly 400 percent, and economic growth was nowhere to be found. This was hardly the ideal time to start a company in the financial sector, but Schwab did so nonetheless. Originally, Charles Schwab & Co., Inc., was intended to be a money management firm where Schwab himself would manage his clients’ money for them. It was supposed to be a legal version of his original First Commander Corp.
In 1975, with the country still in the midst of a recession, the US government passed a law that would deregulate the stock brokerage industry. Up until that time, the New York Stock Exchange had set the specific commission price that its brokerage firm members were allowed to charge. In other words, brokers like Merrill Lynch and its competitors didn’t set commission rates; they all charged the commission rates predetermined by the New York Stock Exchange.
When the price they were required to charge couldn’t be changed up or down, it forced the major brokerage firms to compete on providing more services to clients. This led all the major firms to start investment research divisions that would provide better buy/sell recommendations to clients. The thought was that if you could buy or sell any stock through any brokerage firm for the same price, clients were likely to favor those firms that provided the most comprehensive research for free.
When this new deregulation law was passed, brokerage firms were no longer required to set their prices based on what the New York Stock Exchange requested. They were free to do whatever they pleased.
Initially, all the major firms did nothing. Their business models were working just fine and they were reluctant to rock the boat and make any major changes.
A young Charles Schwab, who had learned his lesson about ignoring the laws regulating finance, studied the new law and the opportunities that might come with it.
The first conclusion he reached was that the brokerage business could now be a much more price-competitive business. While he thought about starting a lower-priced brokerage company, he could not figure out how to lower the operating costs of the business. Merrill Lynch had a huge presence. It had lots of brokers and many research analysts. Schwab could not figure out how he could provide the same or higher quality research for less money than Merrill Lynch could.
He quickly realized that beating Merrill Lynch at its own game was impossible. Merrill Lynch was huge. The cost of a Merrill Lynch analyst coming up with a single buy or sell recommendation could be spread out across millions of clients. For Schwab to match the Merrill Lynch cost efficiency in research, he’d have to start his brokerage business with millions of clients on the first day – clearly not realistic.
So he decided that since he couldn’t possibly beat Merrill Lynch at its own game, he would play an entirely different game. He decided to provide no research whatsoever to his clients.
This was a radical departure from what was the industry norm. But Schwab studied the laws carefully and realized that the practice, although different, was perfectly legal.
While Merrill Lynch had to charge high fees to pay for its very expensive research team, Schwab had no research team at all and could pass along the savings to his customers. Thus the first major discount stock brokerage was created.
Today the idea doesn’t seem all that radical. But at the time it sent shock waves through the industry. It was the total opposite of what everybody in the industry thought the brokerage business was about – research. Even Schwab himself was originally in the research business by managing other people’s money (through research) with First Commander Corp. and the original plan for Charles Schwab & Co., Inc.
But when these new laws were passed, Schwab was willing to ditch conventional wisdom and to essentially throw away a career’s worth of stock research skills to offer investors something radically different.
Schwab clearly had followed Rule #3 of competition-proofing your business by offering something unique. At the same time, US investors were still reeling from their losses from a major stock market crash. Those investors that had followed Merrill Lynch research advice lost just as much money as those who didn’t.
A segment of investors decided that research from the major brokerage firms did not make a big difference in their financial returns. These investors decided to do their own homework on stocks and started to wonder why they were still paying, through higher fees, for research they never used. As the recession continued, the trend of investors feeling alienated by research advice from the major firms grew.
This fast-growing group of investors would make up Charles Schwab’s initial group of customers – and they flocked to Schwab in droves. This trend allowed Schwab to follow Rule #2: Solve a Problem That Gets Worse in a Recession. This fast-growing group of dissatisfied investors had nowhere to turn to – until the Charles Schwab & Co., Inc., discount brokerage appeared.
Despite the recession, Schwab knew he had something unique to offer so he aggressively increased his sales, marketing, and expansion efforts – following Rule #4 of being more aggressive, rather than less, in a recession.
He opened small offices in major cities across the country – usually right next door to his big competitors. He kept promoting the message that Wall Street research didn’t really help clients avoid major losses in the stock market crash. Investors still licking their wounds only had to look at their brokerage statement to see Schwab was right.
One sign that Schwab was on the right track was the fact that the traditional brokerage firms absolutely hated Schwab. They felt threatened by his actions but were simply not equipped to do business in this no frills, discount way.
Instead, the big firms resorted to name calling and intimidation. They ran ads trying to scare investors away from Schwab. He retaliated by putting his name and photo in advertisements, inviting prospective clients to call him personally if they had concerns about the bad publicity.
At a time when all the major brokerage firms were nameless, faceless institutions, Charles Schwab opted to market himself – a real live human being. No other Wall Street firm did that. This was yet another way he tried to be unique and different from his competitors (another instance of Schwab following Rule #3 about using uniqueness to marginalize competitors).
Today, Schwab generates $5 billion a year in revenues and has a stock market value of approximately $18 billion. It’s quite a remarkable journey from Schwab being a very small business in a sea of industry giants. But by following a few simple rules in its formative years, Charles Schwab & Co., Inc., became a recession-proof business.
The Common Thread
In the many examples of companies that truly thrived in a recession, you can see how each followed the recession-proof business formula. Their founders looked for opportunities when others were hunkering down (Rule #1). They focused on solving customer problems that got worse in a recession (Rule #2). Then, they solved these problems in a radically different and unique way, making them resistant to competition (Rule #3). Finally, once they had followed the first three rules, they aggressively marketed what they had to offer (Rule #4).
While each of the success story companies featured in this chapter and in previous ones followed these four rules, you’ll notice how differently they did it. And that’s the big point I want to make. Each of these companies had a unique approach to recession-proofing their business.
Companies like Charles Schwab and Hewlett-Packard developed and introduced innovative ways to solve customer problems that cost much less – and passed the savings along to customers. Disney beat competitors with films that were much richer and engaging than its competition’s – winning because of the breathtaking quality of its films. Domino’s Pizza competed on speed when others were competing on quality of food. Price Club competed on the combination of absurdly low unit prices and forcing customers to buy in quantities far greater than they ever normally would – radically changing the “what you get” and “what you pay” equation for buyers.
UPS competed on reliability in a sea of shady delivery services. Federal Express competed on speed of delivery and cost savings – when compared to clients chartering an entire plane (as opposed to the fact that Federal Express rates were 20 times higher than the US Postal Service). Coors competed through its geographical focus. And Fortune magazine competed by covering the business issues of the day in far greater depth than any other publication – and benefited when most Americans had just lost their life’s savings in the Great Depression and were hungry for information on how to get their fortunes back.
Each company was different. There is no single right answer. You don’t always have to compete on price. It’s not always appropriate to compete on speed. At other times competing on reliability is the right move. But in each of these cases, the entrepreneurs behind these recession success story companies chose to do something radically different than the competition. And they did so in a way to harness the sporadic pockets of growing demand that were often only noticed by those actively looking for them.
Each company’s unique situation required a unique approach to the four rules of recession-proofing your business. It’s an important lesson to keep in mind.
From Concept to Execution
As we wrap up this section of the book, we shift from the big conceptual ideas behind creating a recession-proof business to the nuts and bolts of taking specific actions. Ideas are great, but they aren’t worth much if they aren’t executed in your business.
The next section is devoted to the critical topic of marketing in a recession. Marketing is the “tip of the spear” in your business. Marketing is the part of your business that potential buyers encounter first – before they meet your staff, try your products, or experience your service.
Unless you get your marketing right, nothing else matters. On that note, let’s get started on the topic of specifically how to market your business in a recession.