Dorling Kindersley, Tie Rack and CityFlyer Express were all born in a recession. Would you be able to spot new opportunities glinting through the gloom? Catherine Monk investigates
From the slump following the 1929 crash, through the three-day week and power cuts of the early '70s to the jolts of the Thatcherite '80s, recessions come and recessions go. Downturn means battening down the hatches and forgetting about any thoughts of expansion. Companies stop spending, slash costs and avoid risky ventures. It's not the time to launch a new business.
Or maybe it is. For the sharp-eyed entrepreneur, recession can provide unexpected opportunities such as cheaper rents, lower supply costs and non-core businesses sold off by larger companies for a song. So, how do you get entrepreneurial when everyone else is hiding in foxholes? Each of the three most recent recessions has spawned companies that survive and thrive today. Entrepreneurs often find that their flexibility and unconventional approach can unearth goldmines in even the bleakest recession.
Sometimes, all that's needed is an original idea. This was the case for Peter Kindersley, who launched publishing company Dorling Kindersley during the 1973-75 recession. He felt there was a market for practical books with pictures and text closely integrated - a concept he believed could not be properly developed in the conventional publishing world. Armed with just pounds 10,000, he and Christopher Dorling started out in 1974 and were in profit by 1975. The company's value on going public in 1992 was pounds 100 million, and in 2000 Kindersley sold the company to Pearson for pounds 311 million. He walked away with pounds 100 million.
Despite the success, it wasn't Kindersley's choice to start in a downturn. 'You don't always launch things when you want to,' he says. 'Sometimes you're forced into them.' At the time, he was driven by personal and market circumstances. He had left his design director's job at Mitchell Beazley and had a family to look after. 'The alternative was to go backwards and work for someone else.'
Kindersley knew that, despite the recession, the publishing industry was still demanding high-quality, and therefore expensive, books. Although the costs per page were high, he knew enough about the business to ensure that other expenses were kept to a minimum. The biggest savings were in the print run. Typically, DK was producing 100,000 copies of books for various markets and getting good print costs, while other publishers were used to a 10,000 run for the UK market.
Another trick was to insist publishers treat DK like an author, and pay in advance. This approach drastically reduced DK's financial risk. 'We effectively became virtual authors. We had the ideas, made the books and employed the authors while publishers around the world gave us advances,' he says.
Kindersley also put an emphasis on sales. He didn't stint on the high-quality design of the books, and he invested heavily in good sales staff with multilingual skills to deal with foreign publishers. 'A recession is a good time to be adventurous because a lot of people will be behaving normally,' he says. 'People spend less on big things like cars and more on smaller items like books.'
This phenomenon helped Tie Rack take off in the recession of the early '80s. Founder Roy Bishko set up Tie Rack in 1981 and sailed through a second recession in the late '80s. In 1999 the company was bought by Italian retailer Frangi for pounds 22.6 million and today it has 400 stores in 28 countries.
As with Dorling Kindersley, an original idea was key to the company's success. Bishko took advantage of low property prices in 1981 and opened three heel bars in London. By testing sales of other merchandise in the shop windows, he found that ties were popular. By the end of the year he had three Tie Rack stores.
Bishko knew he had to entice customers away from the chain stores by doing something different. He slashed the price of silk ties and spurned convention by selling ties with just the VAT added to the wholesaler's price. Once the crowds came, the prices rose.
He brought in Sophie Mirman from Marks & Spencer (who later set up Sock Shop) and, in 1984, Will Hobhouse to take over the franchising side. By 1985, at the height of Tie Rack's expansion, 30 stores were being opened a year. The company has expanded into Europe and has made a troubled foray into the US.
Hobhouse is convinced Tie Rack benefited from launching in a downturn. 'In the retail business, rents come down at the time of a recession, so you can get better rental deals, and better suppliers,' he explains. 'If the content is good, it's a good time to roll out and expand. If you have a great idea, why wait?'
With basic costs reduced, Hobhouse says it's an ideal opportunity to innovate. 'Retailing is a lot about testing and developing winners; you have to constantly develop and evolve.'
It's not just overhead costs that come down in a recession. According to Conor Boden, 3i's management buy-in director, large companies often sell off sideline businesses at hugely reduced rates. 'With the economy slowing down, companies need to get back to the basics and generate more cash,' says Boden. 'One way is to offload some non-core businesses and this tends to raise interesting opportunities for a venture capitalist.'
A company that benefited directly from this was CityFlyer Express, which was bought out of administration in the middle of the 1989-93 recession and then sold to BA for pounds 75 million in 1999. Co-founder Robert Wright never considered waiting for a better economic climate to launch the aircraft service. It was precisely the recession that made CityFlyer Express possible.
The airline was created in 1991 from the ashes of Air Europe Express. Wright and other members of the AEE management team believed they could make the feeder concept work. 'The regional airline had made money, but not enough to cover the main business of Air Europe,' says Wright. 'Air transportation is highly predatory and there were other airline companies after parts of the business. It was now or never.' So, with pounds 250,000 of their own money and pounds 1.5 million from private investment, the management bought the company out of administration.
They started with four aircraft on routes they knew well - Antwerp, Rotterdam, Dusseldorf. But the airline had a bumpy takeoff, making a pounds 500,000 loss in its first year. 'Everything didn't go exactly to plan,' recalls Wright. 'The airline lost a lot more money and the VC wobbled. But once we turned the corner, CityFlyer Express rocketed at a rate much higher than planned.'
The recovery happened because the team worked out where they could cut costs. 'After 12 months we saved operating costs by axing a whole programme of weekend charter flying that didn't make sense, reduced the number of flights and slowed down the recruitment rate,' Wright explains.
By 1993 the company made its first profit and business grew rapidly. But the big break came when CityFlyer Express won the first fully fledged short-haul franchise from British Airways in 1993, flying its own aircraft in BA's colours. Wright believes that eventually selling to BA in 1999 was the right decision. 'There were huge restrictions on the number of slots at Gatwick, which put a cap on our growth, and by 1998-99 it was clear we were at the top of the economic cycle.'
He acknowledges that there were certain benefits to launching a business like CityFlyer Express in a recession. 'Various costs are more realistic, such as leasing rates on aircraft.' He also believes, as do Kindersley and Hobhouse, that staff are more realistic and that their attitude and aspirations are more flexible during recession. At CityFlyer Express, staff did not receive a pay rise until two years after launch.
Recession offers opportunities for smaller players, Wright argues. 'You can make money out of the scraps that fall from other peoples' tables. In cost-cutting, bigger organisations drop things that are wrong for their business but are good for smaller entities.' This concept, he adds, can be applied to most industries.
For entrepreneurs debating whether now is such a good time to launch a business, the outlook is potentially bright. Opportunities arise that otherwise might not have existed, and a poor economic climate favours a dynamic and flexible entrepreneurial culture. There are risks, however. As 3i's Boden points out: 'You can't ignore what goes on in a marketplace.' An entrepreneur considering launching a business in an industry that is suffering badly from the downturn should wait for the market to improve.
Even so, some recession-prone sectors still offer opportunities. The airline industry, for example, is under pressure, but it's largely the national carriers that are feeling it. Budget airlines are doing well as customers search for cheaper options.
None of this is for the faint-hearted. But with the right idea and a robust business plan, the cloud of recession might prove to have a silver lining.
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