Street Smarts

by Norm Brodsky

  For Seymour, the shop was a dream come true. A self-taught businessman and dyed-in-the-wool entrepreneur, he’d had several previous ventures that did wel enough, but none of them took off the way Hot Pants did fol owing its launch in 1994. His plan, he said, was to grow the business and sel it in five years or so. Toward that end, he opened a second Hot Pants in another town about sixty miles away from the first store.

  He also had a discount outlet, where he sold his old and discontinued inventory.

  One day, I got a cal from Seymour, who said he had to see me. A big opportunity had come along, and he wanted my advice. It turned out that the space next to the original Hot Pants was becoming vacant. Seymour wanted to lease it, knock down the wal , and double the size of his store.

  He figured he could generate between $1 mil ion and $2 mil ion in additional sales pretty much overnight. What did I think?

  Now, you have to understand that Hot Pants was a very crowded place. On most days there were lines at the cash registers and the dressing rooms. Somehow Seymour had managed to generate tremendous buzz among middle-class girls of a certain age—say, thirteen to eighteen years old—and large numbers of them showed up on a regular basis, not only to shop but to socialize with their friends.

  That was good for the buzz, but Seymour thought he was losing a significant amount of business from customers who didn’t want to wait in line or deal with the crowds. He figured he could solve the problem by expanding. I was skeptical. For one thing, I wasn’t sure he could make enough additional profit to justify the investment. “What does the landlord want?” I asked. Seymour said the landlord wanted him to give up his old lease and sign a new one for the combined space at the current market rate. Because rates had increased since he’d signed his original lease, he would wind up paying about 25 percent more on his old space, in addition to the rent for the new space. He’d also have to put up “key money”—a sort of signing bonus for the landlord. Then there was the cost of fixing up the new space, carrying additional inventory, and hiring more staff.

  “You have to look at the effect on your margins,” I said. Seymour agreed. So we sat down and went through the numbers. It quickly became clear that he’d need more than $1 mil ion in additional sales just to break even on his investment.

  And could he, in fact, count on getting those sales? I had my doubts. A specialty-clothing store is not a restaurant. When a would-be diner walks out of a restaurant because the wait is too long, that sale is probably lost. Why? Because it almost always goes to a competitor. I wasn’t convinced, however, that the same thing happened when Seymour’s customers decided against waiting to pay for—or try on—a pair of jeans. When you have a hot store, people come partly because they want to say they bought from you. They’re looking for prestige as wel as merchandise. My guess was that most Hot Pants customers who left because of the crowds would simply return when the store was less busy.

  In that case, I pointed out, Seymour was losing few, if any, sales because of overcrowding. He’d saturated his marketplace. Everybody who wanted to shop at Hot Pants already did. “Wel , then, maybe I’l bring in new lines,” Seymour said, “like for young guys.”

  That’s what I was afraid of. To justify his investment, Seymour might be tempted to change his concept. “You’re talking about a whole new business,” I said. “You could be jeopardizing what you already have. Maybe the girls want to be there alone.” The truth is, Seymour didn’t know why his business was so successful, and neither did I. It could have been the music he played or the quality of his staff or the store’s name or his own personality. Most likely, it was some combination of those things and a dozen other factors—perhaps even the lack of space. The kids may have liked being jammed together. They may not have minded waiting in line to use a dressing room.

  Al Seymour knew for sure was that he was blowing away al the standard projections for a business of his type, size, and location. His sales were two and half times the amount anyone would have predicted for a jeans store in a strip mal with limited foot traffic. You can’t explain that kind of success. You can only recognize it, respect it, and handle it with care. Seymour’s most valuable asset was the brand he’d created. By doubling the size of his store, he would be taking a chance that he’d inadvertently devalue the brand. It was a risk that, in my view at least, was way out of proportion to the potential reward.

  I wasn’t saying that Seymour shouldn’t grow his business. He already had a second Hot Pants up and running. It hadn’t yet matched the performance of the first store, but then it hadn’t been around very long. I urged Seymour to think about starting a third Hot Pants. I suggested he choose a location near enough to the original store that the local kids would have heard the buzz but far enough away that they wouldn’t already be regular customers. If the new store did wel , Seymour would have a proven concept that he could sel in five years to someone interested in taking it national. If the spin-off failed, wel , at least he wouldn’t have damaged his core business.

  But Seymour wasn’t looking for that type of advice. He mainly wanted to know whether I thought he was crazy to double the size of the original Hot Pants. “Do you think I’l go out of business?” he asked.

  “No,” I said, “but I think you’l hurt yourself.”

  I guess Seymour disagreed, because he went ahead with his expansion plans anyway. That may, in fact, have been the right decision for him personal y, even if it was wrong for the business. It’s much easier to expand an existing store than to start a new one. It’s also less expensive.

  Seymour was already working six or seven days a week, putting in long hours every day, and he was a guy who likes to have direct control of operations. So he may have decided he’d be happier with a larger main store than with a third smal er one. That was a perfectly good reason for him to make the decision he did. (Remember, life plan before business plan.) I was just afraid he would lose some of the value he’d worked so hard to build.

  In the end, I don’t think the expansion did undermine the value of Seymour’s business—but he didn’t get much benefit from it, either. He had to borrow money to do it, and he struggled to pay back the loan. The increase in sales scarcely made up for the time, energy, and aggravation it cost him. That often happens when you grow just for the sake of growing.

  Ask Norm

  Dear Norm:

  My sisters and I started a bath-and-body company on a shoestring three years ago. This year we’re on target to hit $4 million in sales. We have great distribution, sell to every major department store in the country, and have been approached by Disney, Warner Bros., and others to create private-label products. We’ll soon be entering the mass market under a different name. The problem is that our opportunities are outstripping our resources. What do you advise?

  Sara

  Dear Sara:

  I’l give you the advice I wish someone had given me before I took my first company to $ 120 mil ion—and wound up in Chapter 11. Your core business must always come first. No opportunity is worth going after if it jeopardizes your core business even one iota. It’s not just about money. You also have limited time. Ask yourself two questions about each new opportunity: Wil it keep me from putting in the time required to build or maintain my core business? And, if the opportunity turns into a financial disaster, wil my core business be crippled? If the answer to either question is yes, you probably should rethink whether or not this is a good opportunity.

  —Norm

  Size Matters

  My point is that growth is a matter of choice. You don’t have to grow at al if you don’t want to. You certainly don’t have to strive to get as big as possible as fast as possible. If that’s what you want, more power to you, but there’s no rule of business that says you must. I can think of many situations in which smal er companies actual y have a distinct advantage over larger ones. In fact, I’ve often found that it’s easier to compete against a big company than against a wel -run smal company. That’s certainly th
e case in my records storage business. We beat the giants on service. We beat them on flexibility. We beat them on location and price. I can count on the fingers of one hand the number of customers (other than national accounts) that we’ve ever lost to the giants of records storage.

  I don’t mean any disrespect toward our large competitors. I consider Iron Mountain, the giant of our industry, to be a great company with first-class operations and people, but it can’t offer what we have: a highly focused, tightly knit, family-oriented smal business with owners who are on the scene and actively involved. We play that advantage for al it’s worth. Al prospective customers visit our main warehouse and meet with me personal y. I tel them, “Anytime you have a problem, you can just cal me.” Sometimes the prospect wil say that the big companies offer the same thing. I say, “Oh, real y? Why don’t you try cal ing their CEOs? See how long it takes to get them on the line. I wear a digital phone wherever I go. If I’m in the country, you can reach me.”

  The message is one of accessibility and personal service, and we constantly look for ways to reinforce it. Every new customer receives a thank-you note from me and my wife, Elaine, who owns the company with me and plays a key role on our management team. I myself visit as many customers as time wil al ow in the course of a year. We invite al of them to our company parties. We name warehouse aisles after the ones who place a certain number of boxes with us. We do al kinds of little things.

  Beyond the symbolic gestures, we offer customers a degree of flexibility that the big companies simply can’t match. Our salespeople, for example, have much more leeway than theirs do in negotiating prices and add-on services with customers. Suppose a smal customer—one with fewer than 2,000 boxes—wants to use its own forms instead of ours to keep track of what it sends us. We say, “Fine.” A big company can’t afford to accommodate such requests from smal customers. It would have chaos in its operations if it tried. And, besides, why bother? If you have 40 mil ion boxes in your warehouses—as the big companies do—you don’t even notice when you lose a 2,000-box account.

  So our size has been an advantage, especial y in going after the smal to medium accounts, which are the bread and butter of our industry. Our primary competition for them used to come not from the giants but from the other regional specialists, whose owners ran their businesses much as I ran mine. And that entrepreneurial edge is precisely what two of them lost when they were acquired by large companies. I just hope we don’t share their fate as CitiStorage grows from a regional to a national business.

  The Bottom Line

  Point One: Business is a means to an end. Do a life plan before you make your business plans.

  Point Two: When trying to move to the next level of sales, don’t assume you know al the factors that led to your initial success.

  Point Three: Growing a business is a matter of choice. Before deciding to grow, make sure you know why you’re doing it.

  Point Four: Bigger is not always better. Smal companies have some advantages that large companies can’t match.

  CHAPTER TWELVE

  Becoming the Boss

  We al face a major chal enge as our companies grow. It’s a chal enge, moreover, that most of us neither understand nor want. I’m talking about the necessity of becoming the boss. I myself hated the idea of becoming the boss when I started my first company. I didn’t even like to admit that I had employees. I’d talk about them as people who worked with me, rather than for me. It was as though we were al equal in the business—we just had different roles. That wasn’t true, of course. It never is. Someone always has to be the boss, even in a startup. If you don’t accept that reality, you’re headed for trouble.

  There are actual y two types of mistakes that people typical y make when they’re new to the boss’s role. The first involves their relationship with employees. The second has to do with their assumptions about their own job.

  To be a good boss, I’ve learned, you need to maintain a certain distance from your employees. You have different responsibilities from theirs. As the boss, you always have to be thinking about what’s best for the business as a whole, and you can’t let emotional attachments interfere with your decisions. Not that you shouldn’t care deeply about your employees and their families, but I believe it’s a mistake to develop personal relationships with them outside the business. Employees should not be your social friends, and your social friends should not be your employees. Yes, you should treat employees with respect. You can laugh with them, cry with them, be happy and sad with them, but neither you nor they should ever forget that it’s a business relationship. If you do, you’re going to create problems for you, for them, and for the company.

  Now, that’s advice I wish someone had given me before I launched my first company. I’m not sure, however, that I would have listened. The problem is, it runs counter to al our human instincts, and it seems to defy the spirit of the start-up. When you start your first business, you can’t help but get close to your employees. After al , you’re working sixty to seventy hours a week together in an incredibly intense environment, struggling to survive. It’s a thril ing adventure, and you’re depending on one another to succeed. There’s a wonderful feeling of camaraderie, of al -for-one-and-one-for-al . The last thing you want to do is create barriers. Your employees are among the most important people in your life. Why shouldn’t they be your friends outside the business as wel ?

  That’s what I thought when I started my first business. I had seven employees, and al but one became personal friends of mine. They came to my home, and I went to theirs. Our families spent time together. We went on joint vacations. And I learned the hard way that I’d made a big mistake.

  To begin with, I tended to promote people to positions for which they were completely unqualified. We had a driver I liked, and I brought him into the office to answer telephones. Four weeks later, I made him our head of customer service. Why not? We needed someone to do the job, and he was my friend. He just happened to have none of the skil s required to succeed in that position. Later I got angry when I realized how much I was overpaying him, but the fault was mine, not his.

  I was also inclined to hold on to people longer than I should have. When we needed a sales manager, I gave the job to one of our salespeople, another friend. It was a disaster. He was a hotshot. He took over al the best accounts and claimed for himself every sale that closed in the office.

  And yet I kept making excuses for him—until I discovered one day that he’d been lying to me and inflating his commissions on one of our biggest accounts. I fired him.

  But there was one episode in particular that convinced me I’d gone too far. It involved my head dispatcher, who’d been with me from the start and had become a close friend. Our families had gone away together. We’d shared many good times. I considered myself part of his family, and him part of mine. Then I caught him stealing from me. He had access to our petty cash, and it turned out he’d been using it as his own personal piggy bank. He’d gotten away with it because I’d trusted him as a friend, and so I didn’t check on him the way I should have. That hurt. It real y hurt. Not that the amount was enough to jeopardize the company, but the emotions were just too much to deal with—I mean, much too much. Before I even confronted him, I went home and cried.

  Unfortunately, it often takes an experience like that to make you aware of the perils of getting too close to your employees. I’ve watched countless entrepreneurs go through it. Anisa Telwar, whom I wrote about in chapter 5, is a case in point. She came to me one day and said she felt lost.

  She’d been having problems with two longtime employees, both of them salespeople who’d helped her start the business. One of them she’d had to let go, which she said was an agonizing experience because she regarded the person as a friend. I could feel her pain.

  Meanwhile, she was making the second common mistake of first-time entrepreneurs who suddenly find themselves in the boss’s chair. She felt that, to be a good boss, she had to become
a manager. Accordingly, she was spending more and more time in the office, attending to various administrative chores, taking care of a thousand little details that al ow a company to run smoothly. It was the kind of work she hated, but she thought it was her responsibility to do it. I made that mistake, too, and I nearly wrecked my company in the process.

  “What do you like to do?” I asked her.

  “I like the excitement of solving problems and building a business.”

  “Wel , I’m the same way,” I said. “And I’ve learned that not only am I not a good manager but I don’t want to be one. I want to do what I like. So what do I do? I surround myself with anal people.” Anisa laughed. “It’s true,” I said. “They love the detail, love the fol ow-up process, love writing letters and memos, love doing al the things that you and I hate.”

  “You’re right,” she said. “I hate that stuff.”

  “Yes, and there’s no reason you should do it,” I said. “You don’t have to sit in an office to be in charge of a business. Management is just another job. You wouldn’t think twice about hiring an accountant to handle the books. Why should you assume that you have to be the manager? You’re the best salesperson you’ve got. There’s nothing wrong with focusing on sales. You can stil give the company direction. You can stil set the standards.

  But first you need to extricate yourself from management and turn it over to people who are good at it. Then you can go back to doing the work you enjoy.”

  Finding the right person is another matter. I was lucky in that regard. Remember, there was one guy from the start-up whom I didn’t socialize with outside the business. He was thirteen years younger than me, he lived far away, and he had a style that was very different from mine. He was ana

  —, wel , maybe I should say he was detail oriented. In any event, he became the president of my company and my partner in the business. I love him and depend on him. Thank goodness we never became social friends.