CBJ: How Crutchfield Corp. survived the recession

Crutchfield Corp. found its way through another recession, deeply cutting costs and trimming employee pay but avoiding layoffs.

The Albemarle County company, now in its 35th year, also squeezed out a profit, and CEO Bill Crutchfield is optimistic, as sales have begun to grow again.

A new three-tier online business model to be rolled out in coming weeks and months has him eager and enthusiastic.

But as he explains how his company survived the recession and why he’s enjoying managing even through the toughest days, it’s clear Crutchfield hasn’t shifted into relaxed mode, if he even has one.

“I feel that CEOs can never let down their guard,” Crutch-field said. “There are always dangers lurking around the corner — even in the best of times.”

An unpleasant blast from the past may be ahead. Stagflation — a period in which the economy stagnates but still suffers from inflation — could keep the economy down.

“My fear is the credit markets won’t be able to support the degree of debt that this country needs to finance its deficits,” he said. “And if that happens interest rates will go up significantly. And if they do, that could put the brakes on an economic recovery.”

Persistent high unemployment could drive down consumer confidence further, which hurts retailers such as Crutchfield and others.

University of Virginia economics professor Ed Burton said Crutchfield is right to be concerned about both inflation and the more threatening stagflation.

The mushrooming federal deficit and the Federal Reserve’s ballooning balance sheet give him pause.

But Burton said he is optimistic.

“The question is how much of a recovery we get,” he said. “The debate is over what are the right policies to get a stronger economy in the future.”

Crutchfield is already working on a plan just in case.

“The best way to prepare for stagflation is to remain free of short-term debt,” Crutchfield said. “Having short-term debt that has to be refinanced could be very precarious in an inflationary world.”

The dark days

In the most threatening days of the recession — starting with Lehman Brothers’ bankruptcy in September through the disastrous holiday shopping season for retailers — much of the scenery appeared precarious.

“My employees were terrified. I had been warning people that these good times couldn’t go on forever,” Crutchfield said.

He began holding regular town hall meetings with employees and set up a blog on the company intranet where workers could ask about the situation and plans to deal with the tumbling economy.

The company’s net sales in November and December declined by almost 14 percent compared with the same months in 2007.

By contrast, Crutchfield’s relatively new operations in Canada continued to grow, helping stem the overall declines.

In a January letter to employees, Crutchfield said falling prices for televisions — the firm’s biggest product category — took a toll on revenue. The worsening squeeze on consumer credit also played a role, but “historically low consumer confidence” was the biggest factor.

The liquidation of Circuit City didn’t help, as the market got flooded with low-cost products that Crutchfield was also selling. And the industry’s biggest player, Best Buy, was slashing prices to get rid of inventory.

“Our management group is responding to this economic crisis,” Crutchfield wrote to colleagues in the January letter. “We are not waiting for the situation to deteriorate further.”

That response included:

Pay cuts: 3 percent for most workers, 5 percent for executives and directors, and 10 percent for Crutchfield himself.

A hiring freeze (recently lifted).

Frozen merit increases, reduction of bonuses and elimination of certain perks.

Positions that opened because employees left through normal attrition or were terminated because of performance were reorganized. Crutchfield’s overall employment has declined from 552 in June 2008 to 493 today.

“It’s the obvious stuff to do,” said Robert Spekman, Tayloe Murphy professor of business administration at UVa’s Darden School.

Spekman said not having debt pressure allows Crutchfield “not to panic.”

“It allows him to think more longer term,” he said. “Cash is king. If you have that, you’re in good shape.”

Savings in the details

Each week, Crutchfield and his executive team meet to review specific costs, a list that surpassed 100 items at one time.

“They represent many millions of dollars in savings without affecting customer service,” he said.

The company also negotiated for lower shipping costs, cut pages from mailed catalogs, trimmed travel expenses and more.

For Crutchfield, the situation presented a dual challenge of staying profitable while hanging onto a hallmark of the company’s operation — avoiding layoffs.

“Had this turned into a depression and not just a deep recession, clearly I would have had to resort to layoffs in order to save the company. But, fortunately, it didn’t get to that.”

Kurt Goodwin, senior director of operations, said the message from the top down was that employees had a great deal of influence on how well the company dealt with the recession.

“We didn’t sugar-coat it, though,” he said. “It was clearly communicated that if our efforts did not produce the cost reductions that we were targeting, that layoffs were a possibility. It was also made clear that if layoffs did occur, the least productive employees would be the first to go, regardless of seniority or tenure. That message alone drove improved productivity at all levels of our company.”

Goodwin said he expects that the lower cost structure Crutchfield developed to deal with the down times will position the company to grow faster as the economy improves.

New projects

Crutchfield said sales have begun to bounce back. June sales are almost equal to those of June 2008. And he also said his company is preparing to roll out a new model online.

Instead of one primary site, the company has developed and will market three sites to different consumer groups.

The company’s traditional Web site and catalogs will mostly stay the same.

A new segment will extend the company’s outlet stores online, featuring lower prices.

“They will be special purchases, discontinued products and refurbished customer returns,” Crutchfield said. “The site will not provide all of the free services available on the other two sites. For example, Outlet Store customers will have to pay for technical support.”

Crutchfield Select will serve those seeking high-end merchandise with expectations of full services via the Internet and the company call center.

“They’re positioned to different types of shoppers,” Crutchfield said.

Spekman praised Crutch-field for developing new strategies, but said the company must work hard to effectively reach three audiences.

“The marketing, targeting and positioning and ability to distinguish among them is going to be a big challenge,” he said.

Maintaining motion

Crutchfield acknowledges that the new strategy might not meet expectations — but it might beat them. Either way, he said, the company will continue to try new things regardless of the economy.

“We have to constantly reinvent the business. That’s true of every business,” he said.

General Motors, Chrysler and the defunct Circuit City each failed to adjust to changing markets, he suggested.

“CEOs have to manage their businesses according to the environment of the times,” he said. “If they understand what’s coming and prepare for all the contingencies of difficult economies, they will be able to get through because so many of their competitors are not. Their competitors are not looking at what might be lurking around the corner.”

Bill Crutchfield on ...

Layoffs: “It might be expedient to make quick layoffs to address an expense right away. But if you take a long view ... business perspective, layoffs are not necessarily smart because it’s so expensive to recruit and train good people.”

Consumers saving more: “If this is a fundamental change in attitude, it’ll be good for the economy in the long run but it will depress retail sales, consumer sales.”

Failed strategies: “It’s much better to have that attitude of change even if it means a few failures along the road. Tolerating failure is healthy in business management.”

Innovation: “I’m coming up with more strategic ideas now than I have in years. I’m having more fun than I have in a long time because this is what entrepreneurs like doing best.

KEYS TO SUCCESS

Crutchfield Corp.’s keys to dealing with the recession:

No bank debt: The company owes no interest-bearing debt, avoiding the kinds of potentially crippling payments that many firms had to face or restructure when revenues were already declining as consumers quit spending.

The long view: Partly because it’s private, Crutchfield Corp. didn’t feel pressured to make decisions to boost short-term results or share prices.

Credit rating: With solid credit built over the years, the firm is confident it could borrow if necessary.