For Businesses, Small Is the New Big
In April 17, 2000, Gary Erickson was about to fulfill the wildest hopes of any business entrepreneur. That morning he drove to the Berkeley office of Clif Bar, a company he'd founded eight years earlier, and got ready to sign papers selling it to food giant Quaker Oats for $120 million. Erickson would take home half that: a cool $60 million.
It was a remarkable rags-to-riches story for a guy who at age 33 was living in his parents' garage and making less than $10,000 a year when he envisioned a more wholesome energy snack. An avid outdoors enthusiast, he hit upon the idea on the last stretch of a one-day, 175-mile bike ride as he realized he couldn't stomach another bite of energy bars that tasted like cardboard. His initial investment was $1,000, and R&D was done in his mom's kitchen. He named the product for his dad. But rather than feeling on top of the world about this dream deal, Erickson was uneasy. "I stood in the office waiting to go out and sign the contract," he recounts in his book Raising the Bar. "Out of nowhere, I started to shake and couldn't breathe." He told his business partner that he needed to get some air. Outside in the parking lot, he broke down in tears. And then it hit him as he began to walk around the block: "I don't have to do this.
"I began to laugh, feeling free," he writes. "I turned around, went back to the office and told my partner, 'Send them home. I can't sell the company.'"
What possessed Gary Erickson to turn his back on millions of dollars and throw away a golden opportunity for his company to get big? He was bucking all the business trends. Many of the outspoken champions of socially responsible business, such as Ben & Jerry's, The Body Shop, Stonyfield Farms, Green and Black's chocolate, Tom's of Maine and Aveda eventually sold to corporate conglomerates. And even the brash young Internet companies, which trumpet their independence as a badge of hipness, are conceived with the intention of being gobbled up soon by Google or another huge firm.
Erickson stubbornly clung to the idea of guiding Clif Bar according to his own vision, not the business-as-usual paradigm of rapid expansion fueled by massive outside investment.
"If we had sold to Quaker Oats, we would just be another bar on the shelf," Erickson explains, sitting at a small desk in his surprisingly modest office that looks out on the sidewalk where he made the fateful decision. "We would not have an environmental program; we would not have given $1.2 million last year to charity in money and products. We would not have gone organic. No one working here would even be here now."
Saying no to conventional-style growth has made Clif Bar a stronger brand, showing that small is not only beautiful but successful. The company now features numerous new energy snacks and has grown 20 percent in each of the last two years. But that is not what Erickson likes to brag about. He shows more excitement talking about Clif Bar's shift to mostly organic ingredients; the Lunafest women's film festival they sponsor in 120 U.S. cities; company vehicles that run on biofuels; the cutting-edge sustainable architecture at the headquarters they are set to build; public-education efforts to address global warming; ample opportunities for staff to volunteer at favourite charities on company time and a work environment that includes a lavish on-site gym, personal trainers, massages and-since the Clif Bar wrapper features a mountaineer-a climbing wall. Mo Siegel, founder of Celestial Seasonings, who sold his tea company to Kraft at a huge profit, once heard Erickson telling the story of Clif Bar's aborted sale and asked, "Can we switch places?"
Clif Bar is not the only thriving company choosing to grow its own way rather than follow the "get big or get out" ideology of global business that has led to Wal-Mart accounting for almost 10 percent of U.S. retail sales and some corporations accumulating economic output higher than that of some nations. Even if you don't read about them in the business press, most companies today measure success in some way other than ever-increasing sales and profits. They don't reject growth per se, but simply decide that the usual tools to achieve it-bringing in big-time investors, selling publicly traded shares or franchising the business-don't fit with their missions and values.
Even in the booming, turbo-charged Internet sector, there are companies that refuse to play by the usual rules. Facebook, a hot social-networking site launched in 2004 by a Harvard sophomore and now based in Silicon Valley, has reputedly turned down a $750 million offer from Viacom and a billion from Yahoo. "I am here to build something for the long term," founder Mark Zuckerberg has declared. "Anything else is a distraction."
Some companies have been doing business this way for centuries. Bob de Kuyper, chairman of the internationally known distillery that bears his name, meets regularly with private equity firms that are interested in buying him out. "Such discussions are always useful in terms of contacts," De Kuyper says. But he knows the outcome in advance. The gin distiller and liqueur producer located in the Dutch city of Schiedam has been in the same family since 1695. "And our strategy aims to keep it that way," he adds. His family business produces some 80 different alcoholic beverages that are exported all over the world. With around 100 employees, the company reports annual turnover of 60 million euros ($80 million ) "and a substantial return we're proud of." De Kuyper questions the alleged advantages of getting big through acquisitions or capital injections from outside investors. "Growth is nice and important, but constant fast growth is nonsense," he says, pointing out that benefits of scale can also be achieved without mergers and acquisitions-such as the joint venture De Kuyper entered into with other drink producers to invest jointly in a bottling plant.
So many businesses are now adopting this idea of growing on their own terms that it amounts to an emerging economic movement, according to Don Shaffer, executive director of the Business Alliance of Local Living Economies (BALLE, www.livingeconomies.org), which coordinates 52 networks of local businesses in North America, encompassing 15,000 entrepreneurs. "We believe that a strong base of locally owned businesses in a place is good for democracy, for the community and for the economy," he says. "Staying small is no longer just a romantic ideal, or a niche market. It's a viable way of doing business."
Shaffer points to New Seasons Market, which operates eight natural-food stores in Portland, Oregon. "They have been encouraged many times to expand to other cities and become the next Whole Foods. But they're not interested; they want to invest their energies at home. Many businesses are now defining success differently."
As co-owner of San Francisco-based Comet Skateboards, Shaffer walks his talk as a businessman. "We have ambitions to be the best company in the business, not the biggest," he says, noting how Comet's skateboards are carefully designed for top performance and made from Forest Stewardship Council-certified wood, ensuring it was ecologically harvested. "We consciously decided we were looking for just a segment of the skateboard audience-the enthusiasts that know quality in skateboards and care about sustainability. We're still small but we're excited by the loyalty we're getting from our audience."
While companies like these seem to defy the fundamental economic realities of our age, Shaffer responds that BALLE's membership has tripled in the last 18 months due to mounting interest in finding a different way to do business. The group is now making connections to similar networks that have popped up recently in other countries, such as Sur Norte in Argentina. "This is a new approach to entrepreneurship for the 21st century," he predicts.
If there truly is a "small is beautiful" revolution underway in business today, it first erupted in San Francisco around the same time hippies were emerging as a cultural force in the soon-to-be-famous Haight-Ashbury district. But while hippies saw LSD as the substance that would change the world, this revolution began with beer.
Fritz Maytag, owner of Anchor Brewery, remembers, "It was 1965 and the brewery was bankrupt. It was going to close on Friday and I bought it on that Wednesday." At the time, small breweries were dying out all across America, with no one giving it much thought. Their beer was considered inferior to huge brands like Budweiser and Miller, which had shiny new industrial facilities and millions to spend on advertising. But Anchor was, as Maytag saw it, "a beloved San Francisco institution," noted for its Steam brand beer which had a taste distinct from the lackluster lager beers flooding the American market.
Maytag, who had recently graduated with a degree in Japanese from Stanford University, and was heir to a washing-machine company, set about studying European brewing traditions and gradually improved his beer to the point that that drinkers would pay the same price for Anchor Steam as for Guinness, Heineken and other fancy imports. This made Anchor America's first microbrew-which helped touch off an explosion of high-quality artisan breads, cheese, wine and other goods from small producers dedicated to the principle that bigger is not necessarily better. The tables have turned since 1965, and today the burden of proof in some industries is on large companies to prove their products are as good as those coming from small ones.
"I like things small," Maytag explains. "I didn't want to sell my company to outsiders in order to finance a bigger brewery. In a small company, everyone knows each other. That has its advantages."
Then, almost on cue, Maytag stops and points through his office window, which looks out on the copper brewing kettles imported from Germany. "Look over there; it's overflowing. They don't notice it yet." He waits a moment, ready to rush out and draw attention to the problem, but then seeing a worker bring the situation under control, he returns to our conversation. In how many big companies can the president spot a problem on the production line? "But how do you stay small?" Maytag continues. "No one asks that question."
Bo Burlingham, longtime editor at Inc. magazine, addresses that issue in his book Small Giants, which studies 13 companies that have decided "to be great instead of big." They range from countercultural outposts like Zingerman's food companies in Ann Arbor, Michigan, and singer Ani DiFranco's Righteous Babe records in Buffalo, New York, to very straight enterprises like ECCO in Boise, Idaho, which manufactures warning lights for commercial vehicles.
What makes these companies special in Burlingham's eyes, beyond a record of clear financial success and a conscious decision not to pursue growth for growth's sake, is a quality of infectious enthusiasm he calls "mojo." They aren't just pumping out product in the name of ever-rising quarterly profit goals, he writes, "they had a buzz. There was excitement, anticipation, a feeling of movement, a sense of purpose. That happens, I think, when people find themselves totally in synch with their market, with the world and with each other." He questions whether "mojo" is possible in a big operation.
Burlingham also detects something else in these organizations that accounts for their unlikely success-a "feeling of intimacy" that fosters strong connections with their customers, with their suppliers, with the communities where they are based and, most important, within the workplaces themselves. All of this would be difficult to replicate in larger companies.
Small, however, remains a controversial idea in the business world, even among those who advocate that companies must have a sense of social responsibility:
Gary Hirshberg, president of sustainable business leader Stonyfield Farm, has absolutely no regrets about selling his yogurt company to the French multinational Groupe Danone in 2001 (see sidebar). "Being larger made our dreams come true," he says. "We are giving millions more to our Profits for the Planet charitable programs. And we are supporting tens of thousands of acres of organic production around the world."
Peter Barnes, co-founder of the socially responsible pioneer Working Assets and author of Capitalism 3.0, doesn't see that reducing the scale of businesses solves the core problems with our economy today. "There are always a few people who will buck the tide, but that shouldn't be confused that with systemic change. The tide is still there. Something in the operating system of capitalism today requires companies, especially publicly traded companies, to maximize profits. So we have to look at changing that operating system so we can save the commons, save the planet."
Marjorie Kelly, founder of Business Ethics magazine and author of The Divine Right of Capital, is not ready to give up on larger businesses, feeling that they can drive positive changes in the economy. But she admits that the push to get bigger constantly instills a dangerous short-term economic mentality: "Studies show four out of five business executives will ignore business fundamentals to meet some short-term goals. The situation has been set up so that now seems normal."
Even Fritz Maytag himself, despite his stature as father of the microbrew revolution, refuses to speak as a prophet of smallness. He's full of praise for big companies, noting the great innovations that they've made in management practises and overall production quality. "There's no doubt that big is the modern way," he notes. "If you make something well, and you sell more and more of it, the price goes down and the profits go up."
Surprised at this, I ask if he regrets staying small at Anchor. "Not at all," he answers. Maytag certainly had the chance to expand the business dramatically in the 1980s when it couldn't produce enough beer to meet the demand. "I often say we were saved by the bell," he says with a grin. "We welcomed all the new microbreweries that came in and took the pressure off of us to grow." Today Anchor brews eight top-quality beers amounting to 85,000 barrels a year with about 50 full-time employees, up from 600 barrels in 1965 but considerably less than some other microbreweries.
Maytag's smile widens as he tells me about his more recent business forays. In a corner of the brewery's basement is a tiny distillery making whiskey (Old Portrero), gin (Junipero) and a recent experiment with the Italian liqueur grappa. Maytag and his staff's effort to revive traditional rye whiskey-America's leading drink throughout the 19th century-has sparked a small rye renaissance in barrooms across the country, much as they did with richer-tasting beer 30 years ago. Maytag also runs a winery across the street in an old soy sauce factory. He seems irrevocably drawn to starting modestly scaled operations.
Although Maytag firmly resists making broad pronouncements about the virtues of small business, his own personal observations are nonetheless persuasive. "I think its more fun this way. I have found being small a joy," he says, with a note of reverie in his voice. "It's like having a good team. You get to know your teammates and how everyone can help each other do their best. That wouldn't feel the same with 1,000 players on the field."