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Focusing Only on Growth Can Be a Perilous Strategy

By Barnett Helzberg, Jr.

Dreaming big is characteristic of entrepreneurs, who possess an almost naïve belief that nothing can stand in their way. But making growth the sole measure of success is a perilous strategy. Growth can be an opiate, and the price can be dear. Excitement and ego satisfaction can blind a person to the potential weakening effects of unsustainable growth.

We built Helzberg Diamonds into a profitable national company by becoming adept at assessing how much risk we could assume without betting the farm. By 1995, when we sold the 143-store business to Warren Buffett, we had average per-store sales of more than $2 million, about double the industry average.

But our learning curve wasn't without some costly blips along the way. In one of my own disastrous forays, I got our company into the mail-order hearing-aid business. This related, or so I thought, to a successful mail-order division we had.

My bright idea was to use mailing lists of older people and offer them a hearing aid for $29.95. The venture seemed a sheer winner, a numbers game of simply predicting the percentage of orders we'd get from the solicitations we sent out. For that time, this would have been valid and useful criteria, though prehistoric by today's standards. I immaturely fantasized that it would take about three weeks to grow from $2 million to $100 million in annual volume. I ignored my father's maxim, "Make haste slowly", based on the sound principle that you don't grow a business faster than you can handle the growth. I just imagined mammoth sales increases.

What we didn't anticipate was that hearing aids are a very individual item. We sold 40,000 hearing aids right off the bat. Our mailing was very successful by that measure. But over two-thirds came back. Our product didn't work for everyone. Had I proceeded more calmly we could have sold a few hundred and then waited to see the whole story. You might say my failed venture previewed the "dot.com" phenomenon, in which exuberance and youthful optimism outran many companies' needs for strong business controls.

Fortunately, we were able to return unsold hearing aids to the manufacturer, due to an option we had the foresight to negotiate up front as a way to reduce our risk of expanding the business into an area we clearly didn't understand.

In retail, like many other businesses, growth involves risks, whether you are seeking to increase sales or add stores. You can assume, and become overwhelmed by:

• The risk of taking on more than comfortable amounts of debt (we had little, if any.)
• The risk of not having enough experienced associates to handle increased orders.
• The risk of being unable to deliver quantities of product on time.
• The risk of placing people in key positions before they develop adequate experience.
• The risk of old hands feeling shunted aside as new areas of growth become viewed as the "favored children."
• The risk of placing an inordinate focus on new but unproved ventures to the detriment of old but proven ones.
• The risk of hiring the wrong people out of desperation to meet pressing deadlines.
• The risk of failing to consider worst-case scenarios that can carry unaffordable emotional and financial costs.
• The risk of growing distant in your relationships with present customers and losing their loyalty.
• The risk of forgetting that a good business is built "brick by brick."

You can't avoid risks if you are going to grow. But you can minimize or manage risks to be better able to permanently sustain growth.

We believed our managers and sales associates knew how to operate stores better than anyone in the business. We reduced risks inherent in entering new markets by transferring in proven managers and successful associates from other stores.

To reduce the risks of making mistakes in pricing, advertising or merchandising, we studied our competition in new markets extensively. If an existing jeweler was doing $2 million per year in a mall, we knew we could make money if we opened in that mall.

Jumping into a market just because it appears to be growing rapidly, without taking time to study what's really going on, can be costly. When the oil business was hot in Houston, developers were seemingly building shopping centers every few blocks. The town became overbuilt with retail. When the oil boom crashed, everyone paid. While we wanted to avoid the trap of "paralysis by analysis," our experience taught us that it's far better to pass up a good deal than to act rashly and get stuck with a bad one.

Management's style is also a big factor in considering growth. Personally, I felt uncomfortable expanding our company beyond my ability to know every store manager on a first-name basis. In addition, growth that comes primarily from adding more stores is far less economical than growth that comes from increasing comparable store sales. In retail businesses, this is a challenging balancing act.

Consider, that with 143 jewelry stores, simply increasing sales at each of our stores by $100,000 per year would result in $14.3 million in additional sales – without the cost of adding any new operations.

Extensively studying your market not only minimizes risk, but also can assist you in focusing, and often refocusing, the direction of your growth to adapt to changing markets.

Helzberg Diamonds in the 1950s was heavily invested in fading downtowns and discount stores. For instance, until 1965, we ran the jewelry departments in Kmart stores. Operating in discount chains allowed us to spread across the country. But by the 1960s, shopping malls were drawing people away from downtowns and traditional discount stores.

In 1965, Kmart stores was taking over all jewelry operations and cancelled our leases. But what first appeared as a setback became an opportunity to rethink and refocus our business. Sales at our downtown and discount stores were stagnant. But we saw that at our two stores that happened to be in new shopping malls in Kansas City and Denver were doing dynamite business.

When we studied the mall stores, we saw happily that we could replicate their success in other cities. The mall stores were convenient to value-conscious shoppers, attracted topnotch managers and were located alongside other popular shops. We proceeded to close all 24 discount-store operations and 14 of 15 existing stores.

We asked developers what makes a great tenant and were told simply that if you made money for the mall you were a great tenant. Because mall lease rates are determined by a percentage of store sales, our goal became to pull in the highest number of dollars per square foot in every mall in which we were located. Our landlords were pleased.

We negotiated favorable, long-term leases for large corner spaces and enveloped our customers in an atmosphere of elegance. From a company exclusively engaged in downtown and discount store locations, Helzberg Diamonds evolved into a mall-based jewelry company with stores fanning out across the country.

Finally, in any discussion of growth strategies, some words must be addressed to the importance of sticking to your core business. At one time Helzberg stores sold everything from radios to electric razors. As we began to grow, it became important to distinguish ourselves from our competitors.

Were we a dime store or a jewelry store? Selling luggage sets added little to our reputation as a seller of fine diamonds. Our business definition was simple – "We sell diamonds, and we're the best purveyor of mid-priced fine jewelry in the country."

This focus on selling diamonds only sharpened as we moved into malls, where space was at a premium. Eventually, eliminating products unrelated to diamonds made it possible for us to reduce our overhead as well. As our diamond focus increased, so did our profits. The more we focused on selling diamonds, the better we got at it, until many considered us the best in the country in our niche.

Now, I tell my business students and would-be entrepreneurs not to just focus on theoretically projected profit and growth figures. Tell me how you are going to distinguish yourself from the guy down the street. Tell me how you're going to serve your public better than anyone else. Profits and growth will follow.

Barnett Helzberg, Jr. is former chairman of the third-largest diamond retailer in the United States and author of "What I Learned Before I Sold to Warren Buffett" (John Wiley, April 2003). Helzberg built his small, family-owned business, Helzberg Diamonds, into a very successful national retail operation that caught the attention of billionaire investor, Warren Buffett. Mr. Buffett was so impressed that he bought the company in 1995 through his holding company Berkshire Hathaway. Barnett can be reached at 816-753-7776. Visit his website at www.helzbergmentoring.org.