Supply Chain

Middle-Market Business: The Goldilocks Spot

Not too small (to survive the downturns), nor too big (to be nimble), the advantages of midmarket businesses are significant.
David RosenbaumOctober 24, 2012

“Pizza,” says Steve Larek, CFO of Home Run Inn, a family-owned restaurant-and-frozen-pizza operation born in Chicago in 1923, “is middle-of-the-road, middle market, Middle America, middle class.”

And when the 2007 Great Recession hit, Home Run Inn — like Middle America — was staggered. The number of diners in the company’s nine Chicago-area restaurants declined; the market for its frozen pizzas, sold in 26 states, dwindled. So, says Larek, the 300-person company made some “uncomfortable” changes.

Most significantly, it cut production, which no business ever likes doing. “Like everybody, we prefer to keep the factory humming,” he says. “But in the food business, you can’t stack up inventory for very long. So we sacrificed a little on the top line and preserved profitability. Not everyone is able to do that.”

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

Small businesses, for example, typically run lean, having little excess production capacity. And it’s hard for them to cut back on the top line: they need cash to meet payroll and pay bills. “In a smaller business,” suggests Larek, “there’s an attitude that you can sell through [tough times]. We’ve done it ourselves in the past. But there comes a point when you can’t.”

Larek believes Home Run Inn was able to adapt quickly to the turbulent economic environment due, in part, to its size, which he describes as the lower edge of the midmarket. “We have the ability to respond and react more quickly than larger businesses,” he says. The company has fewer decision-makers than big businesses have, and their personal relationships are closer. At the same time, those relationships are not so close (as they can be in smaller businesses) as to be inhibiting. Decisions at Home Run Inn, says Larek, are based on “our responsibility to the business, not personal relationships. That’s a big plus from having grown and evolved.”

Not too big, not too small. Are there real, tangible economic benefits to be derived from living life in the business middle, the Goldilocks space? A study released today by the National Center for The Middle Market, produced in collaboration with Ohio State University’s Fisher College of Business and GE Capital, suggests that are, even though small business gobbled up the lion’s share of attention in the recent Presidential debates.

According to study author and Fisher College professor of finance Anil Makhija, the middle market, defined as composed of companies with annual revenue of at least $10 million and less than $1 billion, is far more resilient than small business. Between 2007 and 2010, 43% of small businesses failed, while only 18% of midsize businesses met the same fate. (Large firms had a 97% survival rate.)

Over the past 12 months, according to the study (a quarterly survey of 1,000 middle-market executives), midsize companies increased head count by 2.2% (950,000 jobs), outpacing the 1.7% growth of the overall economy. Indeed, between 2007 and 2011, the middle market created 2.2 million jobs even as large companies shed 3.7 million.

Makhija also believes companies in the middle market (where only 14% are publicly traded) can plan and act more strategically than large companies (the great majority of which are public) because they’re “not so much tied to quarterly growth. They can take the longer perspective,” Makhija says, as did Home Run Inn when it dialed down production. Large enterprises, according to Makhija, also are quicker to lay off workers during recessionary times, trying to make the balance sheet look good for “the next quarterly announcement.” Small business are also relatively quicker to make layoffs under the pressure of meeting payroll.

“As a privately-held business,” Larek says, “I don’t have to manage to the next quarter.” A midsize business can have excellent EBITDA (earnings before interest, taxes, depreciation, and amortization), but if it has no cash in the bank, EBITDA doesn’t matter.

Even publicly-traded midmarket companies have advantages that come with the Goldilocks spot.

Chaparral Boats, a wholly owned subsidiary of Marine Products that trades on the New York Stock Exchange and, says CFO Jeff Smith, should be in the $150 million range this year, was an over-$250 million business before the recession hit.

The boat business is about discretionary income. When people don’t have it, business goes south, as it did in 2008. “It was bad,” Smith says. But, he adds, it’s been getting better since Chaparral introduced four new models at an entry-level price point in the summer of 2011. That kept Chaparral’s factory busy and generated additional revenue both for the company and the dealers that sold its boats.

“We were nimble and flexible,” Smith says. “We identified what was selling and we went after it.”

Chaparral also reacted to increased consumer price sensitivity by mandating what the retail price for its boats would be throughout its dealer network — a radical move — and advertising those prices nationally. In the past, says Smith, Chaparral would make a new model and sell it to dealers with a suggested retail price. Consequently, customers would run into different prices at different dealers, or find a range of prices on the Internet. Sometimes they’d end up feeling a dealer was taking advantage of them. By setting a fixed retail price, Smith believes, the price gained “more validity,” thereby increasing consumer confidence and spurring sales. In doing so, the company also was predetermining the dealers’ gross profit — and, Smith admits, Chaparral got pushback from dealers on that — but, he says, “in this environment, we thought we’d get better results with that approach.”

Smith, who has been with Chaparral for 20 years, gives some credit to the company’s size for its ability to make bold moves. “Decisions can be made quickly without having to convince lots of department heads,” he says. “It’s easier for us to develop and implement strategy.”

Of course, it’s not all perfect porridge in Goldilocks-land. Chaparral maintained around $50 million in cash reserves that helped it “weather the storm,” says Smith, and now it has more than $62 million on its balance sheet. But today it has 576 full-time employees; in 2005 it had 1,253, and the number dropped as low as 272 in 2009. “That’s very difficult,” Smith says. Unlike a large business, those laid off were people “you saw and knew in the community.”

Both Smith and Larek agree that along with middle-market advantages come some classic middle-child problems and resentments. (Smith says big business, like an eldest child, “gets what it wants.”) Government regulates middle-market companies more like large companies. Obamacare (“which involves a lot of work, time, and money,” says Larek, and is “adding cost to our benefit package,” says Smith), and new 401(k) disclosure requirements will affect midsize companies more than they will small businesses. And both believe the midmarket has gotten lost in the current political debate. No one, they say, speaks for midsize business as public and private agencies and groups do for small business.

“Most of the [political] debate,” says Smith, “seemed to be about S corporations — flow-through companies — with less than 10, 20 employees. I think the candidates are missing a great opportunity to discuss the needs of midcap businesses. They need to understand that if I hire 100 people, that’s like 10 small businesses. If I have to cut 100 people, I don’t think small business can create those jobs as fast as we could.”

It’s not that Chaparral Boats or Home Run Inn don’t aspire to grow, don’t want to be billion-dollar businesses. Of course they do. But right now, in this economic time and place, they may be in the Goldilocks space: just the right size.