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Some businesses think big during the downturn

The recession offers bold firms an opportunity to increase market share. But the risk can be huge.

January 13, 2009|David Pierson

While many companies are firing staff, shelving renovation plans and pinching pennies, the owners of Raj Manufacturing in Tustin are expanding.

The swimwear maker is betting that it can boost its market share while its competitors are cutting back -- and the hot sales of its daring Animal Instinct swimsuits seem to support the move.

Other businesses are also growing. They're far from the majority, but these contrarians -- including an engineering firm counting on the steady need for seismic safety, a fitness studio selling franchises and a store moving in where a bankrupt competitor moved out -- are betting that demand will carry them through.

By growing now, they say, they will be better positioned for the future.

"It's a bit counterintuitive doing this in a tough economy," said Alex Bhathal, who owns Raj Manufacturing with sister Lisa Vogel. "The growth and development takes us out of our comfort zone."

Animal Instinct's popular one-piece suit, a skimpy pastiche of sequins, zebra, snake and leopard prints with a revealing cutout along the sides, retails for $124 -- not a cheap item. But it has tripled sales expectations despite the economic slump.

So Raj, which manufactures swimsuits for Guess, St. John and Athena, has added international accounts, launched an in-house luxury line and built 10,000 additional square feet of warehouse space.

Retailers Forever 21 Inc. and Kohl's Corp. are also expanding. The two chains recently bid $6.25 million to move into 46 Mervyns stores left vacant by the chain's recent Chapter 11 bankruptcy and liquidation.

Walt Disney Co. isn't standing pat, announcing in October that it would spend $1 billion to make over its disappointing California Adventure park.

And pizza chain Shakey's, riding high from a rollout of renovations and an improved menu that resulted in a 9% jump in revenue in the last four years, is opening new locations for the first time in 15 years.

There is, of course, sizable risk. Even if a company's owners pay for an expansion themselves, as Raj's did, those whose sales miss projections can quickly spiral into debt with few available sources of loans to help reverse course.

"The challenge is having contingent sources of cash," said Al Osborne, senior associate dean and management professor at the UCLA Anderson School of Management.

There is also the problem of overexpansion. Starbucks was applauded for growing aggressively during the 2001 recession. When the economy turned around, the coffee retailer dominated its market.

But in the last year, Starbucks Corp. has seen its profit plunge. Its earlier expansion became a burden, and hundreds of stores had to be shut.

That's why investing in your company during a downturn requires finesse and prudence, Osborne said.

"It really is a return to basics and the ability to take calculated risks," Osborne said. " Businesses just need to do things with a clean balance sheet, and they need to be more productive. Only truly valued producers will survive."

Degenkolb Engineers of San Francisco is planning to increase its employee base of 140 by 10% this year to keep up with its work bringing buildings into compliance with earthquake safety standards.

More than half its projects are hospitals, most of which are under state mandate to improve seismic safety.

"What drives the hiring is our revenue and strong backlog of work," said company President Stacy Bartoletti.

Richard Giorla is betting that people will still want to be healthy and active during a deepening recession. His Cardio Barre studios offer a workout that combines a ballet warmup with aerobic exercise, focusing on routines that minimize injury risk.

Participants work out at a ballet barre, performing moves like those used by dancers to build strength and flexibility, but at a fast pace that keeps the heart pumping.

The former professional dancer -- he trained in ballet and worked for Michael Jackson and at Chippendales -- said he had sold five franchises at $30,000 apiece and agreed to collect a weekly 8% royalty fee. He said he had 30 prospective franchisees but wanted to limit growth for fear of overextending the brand.

Giorla selected the five applicants who appeared the most financially sound and supportive of his workout program. One received a loan of up to $250,000 through the federal Small Business Administration to get started.

"I have buddies who are dying in this economy," Giorla said from his original Studio City branch. "One is selling watches. The last thing people need now is a luxury item. But my class is $16 for one hour. It's not a lot of money. It's a great stress relief during this time."

Some companies say they must invest because they've reached a crucial point that requires growth.

In a former furniture factory in Sun Valley, employees at LA Propoint Inc. were putting the finishing touches on their new, 27,000-square-foot headquarters. Racks were being bolted to the wall in preparation for computer drafting equipment in a room heavy with the smell of fresh paint.

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