Harsh economic times favour people who do their research, especially those opening restaurants, as most start-ups fail. Meanwhile, a tenacious former software salesman makes a killing in the Bronx.
Many wannabe entrepreneurs like food, enjoy playing host, and have long nurtured a dream to open a restaurant or bar. When they suddenly lose their job security, why not give it a shot? There are plenty of reasons not to. Failure looms large. Of the 600,000 ventures started in America every year, 500,000 close up shop within 12 months. Restaurants are notoriously iffy.
There are advantages though, to starting out in lean times. New owners can obtain cheaper equipment and less expensive leases, with landlords more inclined to make deals for tenant improvements. The workforce pool is larger to choose from, while managers and chefs (minimum wages for other kitchen and table staff may have less impact) expect less money, according to James Sinclair, the principal of OnSite Consulting, a nationwide firm focused on repositioning in hospitality assets.
One of Sinclair’s clients has forsaken a senior executive job at Disney, to start a mid-level casual dining establishment in Los Angeles. The place is scheduled to open within days. The former executive found friends to back the venture, and was able to hire an architect at half price. His initial model, however, was flawed.
He did not realise he needed to build profitability from the start, rather than sacrificing revenues to lure people in. He has redefined his plan, accepting that his early customers would lose loyalty if he changed his concept midstream. “He will succeed, because he’s done the research,” Sinclair confidently predicts.
Slower times provide a laboratory for designing a business that is streamlined and perfectly efficient, so when the economy picks up again, it will be poised for growth. If you can hunker down and weather a difficult period, it can be the ideal time to give customers perceivable value, which encourages them to keep returning later. Sinclair would rather make adjustments in an economy mired at the bottom. “In boom times, volume hides sins.” (article continues below)
Tighter purse strings
It is not a straightforward exercise to measure the success and failure of small business start-ups. It is hard to locate a random sample, since no directory exists, where people sign up when they start and sign off when they stop. William Dunkelberg, the chief economist of the National Federation of Independent Business, tracks sentiment among the organisation’s 400,000 members across the country. For 35 years, he has taken a random sample from them and mailed a questionnaire.
Most recently, in October, optimism rose by a 2.7 point improvement over September, but remains stuck in a recession zone at 91.7 (1986=100), based on index values Dunkelberg established in 1973. An improvement in sales produced a marked improvement in profit trends, but remains “ugly”.
American consumers are loath to spend, having boosted their savings rate from only 1% in 2008 to 6%. In a stark illustration of the paradox of thrift, every percentage represents a loss of $100 billion (£63 billion) in retail revenues. These days, customers are less eager to reach in their pockets to provide the revenues every small business needs to survive. New enterprises, in particular, are committed to fixed costs, but need cash flow to foot their bills.
Normally, Dunkelberg would argue that the best time to start a business is the day before a recession ends. Although the present downdraft officially ended in June 2009, it may still be premature to follow that prescription. As Americans were financing the boom of 2003 to 2007 by depleting their savings, they were frantically overbuilding commercial space and overloading on inventory. Now the country is painfully readjusting. “It’s unlike 2003, when people were making fortunes building houses, based on consumer demand,” Dunkelberg explains. He sees no such source of demand today.
A blessing in disguise
Jeffrey Scheck will do whatever it takes not to have to wear a suit again. He was laid off from Oracle in 2008, after eight years of selling software, when his financial clients like Lehman Brothers and Bear Stearns collapsed. After further stints with SAP and Computer Associates, Scheck took an entrepreneurial plunge, investing in an advertising truck, wired for sound. It looks like a big aquarium, rumbling the New York streets; only instead of fish, it can be fitted with various wares – such as furniture in a living room setting, or the live models he used to promote a new Kenneth Cole shoe line.
“In an economic downturn, many are laid off who might otherwise never get on the entrepreneurial track,” says Eric Chen, a professor of business administration at Saint Joseph College in Connecticut. Starting up a business calls for talents like decisiveness, and high-risk tolerance. Those traits may differ from the skills required to run an ongoing enterprise. Scheck admits, “I always believed I was a good sales rep, but had no chance before to show it.”
It takes grit to launch in the middle of a deep recession. Despite his perfect credit record, Scheck’s longstanding bank, Chase, denied him a loan. He should have come three years sooner, the bankers apologised, before the economy forced them to close credit lines. The undaunted entrepreneur eventually obtained financing from Valley National Bank, guaranteed by a relative. Fortunately his overhead is modest, comprising insurance, gasoline, advertising and the $800 a month he pays on his truck loan.
His concept caught on, as customers have included local politicians, Skibbos Beer, a small Laundromat, Capital One bank, McDonald’s and various restaurants. He has made the Bronx his beat, because competition is less intense than in Manhattan, and he finds the business community there to be friendlier. Soon he is planning to buy his second truck, to expand toward a fleet.
“Many high levels managers at established companies can’t break out of the corporate rat race because of financial obligations,” Chen notes. Scheck, who drives eight to 10 hours a day, thoroughly enjoys his work: “I’m getting an education in becoming street smart. And if I ever do go back to wearing a suit, at least I’ll be 20 times smarter than before.”