The Winner’s Edge

I come up hard, awful hard
I had to win
Then start all over
And win again
—”Trouble Man,” Marvin Gaye, 1972

Over the past few years, chief executives who run the BE 100s–the nation’s largest black-owned businesses–have faced a series of disruptive forces: a merciless economy, relentless global competition, and technologically altered industries. Their response: transformation or sudden death.

They’ve discovered that aimlessly pursuing random opportunities will cause them to crash and burn. Those companies with the winner’s edge have adjusted their business models through cool, calculated analysis and deliberate execution, discarding unprofitable legacy lines and unproductive resources while focusing on adaptive strategies and sharpening the corporate mission.

Just like Marvin Gaye’s anthem of determination, the BE 100s at 40 share a common trait with their brethren of old: They didn’t make it playing by the rules. Today’s leaders may retain the resilience of legends such as A. G. Gaston and John H. Johnson and apply the deal-making prowess of titans such as Reginald F. Lewis and Bob Johnson but, at the same time, they embrace updated models of innovation, collaboration, and flexibility.

Take Stephen Hightower, CEO of Middletown, Ohio-based Hightowers Petroleum Co. (No. 17 on the BE Industrial/Service companies list with $227.2 million in revenues), who boosted revenues for the petroleum products distributor by 44%. By demonstrating “the capability of competing in a market of giants,” he snared customers such as Chrysler, United Rentals, and Walmart, among others, positioning the company to reach $300 million in revenues by year’s end. “It’s really a phenomenon just being able to manage the growth of new customers coming on board while maintaining the customer base that you already have. That is the challenge of growing at such a rapid rate.”

Industrial/Service Companies: Not Waiting for Opportunity
Despite the recovery, the BE 100s are not letting themselves fall prey to the vagaries of the economy. There’s good reason to be guarded. The past few years have been brutal and it will still be tough sledding for most in a weak recovery. The Commerce Department reported that the economy grew at a 2.2% annual rate in the first quarter and consumer confidence remained largely unchanged, according to economist Richard Curtin, director of the Thomson Reuters/University of Michigan Surveys of Consumers. The overall unemployment rate remains above 8%, and the rate for African Americans decreased slightly to 13%. Business owners continue to be wary of access to capital, rising gas prices, the ongoing European debt crisis, and the recent 4.2% decline in durable goods orders–the steepest drop since the Great Recession and an indicator of the fragility of the manufacturing sector.

(Continued on next page)

Against this backdrop, the BE Industrial/Service companies posted a relatively flat performance with a 0.17% decrease in revenues to $18.7 billion and a 2.26% decrease in payroll to 55,441 workers. To survive and grow, these companies have operated with a sense of urgency, finding fresh sources of capital and new business. After nearly 70 years as an independent family-owned business, Johnson Publishing Co. L.L.C. (No. 30 on the BE Industrial/Service companies list with $105 million in revenues) sold an equity stake to the Special Investments Group of JP Morgan Chase. While it marked the first time it took outside investment, JPC still retains more than the 51% African American controlling interest required to be included on our roster. The capital has been used, among other measures, to reinvigorate branding and fortify the company’s digital presence.

In some cases, such activity has led to greater shareholder value but an end to black-owned status. For example, last year Bob Johnson and RLJ Development President and CEO Thomas J. Baltimore Jr. orchestrated the roll-up and merger of the hospitality development and investment firm with two affiliated private equity funds and the subsequent initial public offering of RLJ Lodging Trust. Trading on the New York Stock Exchange, RLJ is one of the nation’s largest REITs with 141 Marriott and Hilton hotels in 20 states. And in 2010, Bob Johnson sold his controlling interest in Bobcats Sports & Entertainment (No. 34 on the BE Industrial/Service companies list with $100 million in revenues), parent of the NBA franchise Charlotte Bobcats, leading to the addition of a prominent freshman to the BE 100s chief executive bench: former basketball superstar Michael Jordan.

Atlanta-based Jackmont Hospitality Inc. (No. 63 on the BE Industrial/Service companies list with $50 million in revenues), continues to sizzle after a $40 million transaction to add six existing T.G.I. Friday’s restaurants to its 15 existing outlets and holds development rights for at least five more over the next five years. And Detroit-based Bridgewater Interiors L.L.C. (No. 3 on the BE Industrial/Service companies list with $1.7 billion in revenues), which General Motors awarded seat production contracts for its Chevy Malibu and Chevy Impala brands, would not be opposed to becoming more vertically integrated through the acquisition of a seat parts manufacturer.

Competition is fierce though. Silver Spring, Maryland-based TV One L.L.C. (No. 28 on the BE Industrial/Service companies list with $121.3 million in revenues) restructured to expand offerings and grow audience. For one, President and CEO Wonya Lucas joined the network last August from Discovery Communications. To stay competitive on crowded airwaves, Lucas will keep popular programs such as Unsung and Life After and add new, original programming to its lineup: Love Addiction, a relationship intervention show, and My Mama Throws Down, a cooking competition from the producers of Iron Chef America.

Despite figures from Nielsen Media Research that total subscribers grew to 56.3 million in December 2011, Lucas must contend with challengers that threaten market share: media mogul Oprah Winfrey’s network, OWN, a unit of Harpo Inc. (No. 14 on the BE Industrial/Service companies list with $309 million in revenues), has developed a slate of black-oriented fare, while TV One partner Comcast announced backing channels from Sean “Diddy” Combs and Earvin “Magic” Johnson. [Black Enterprise Business Report and Our World with Black Enterprise, both owned by the media company that publishes this magazine, also air on TV One.]

(Continued on next page)

Richard Copeland, CEO of Minneapolis-based Thor Construction Inc. (No. 53 on the BE Industrial/Service companies list with $63 million in revenues) doesn’t wince at such pressures either, seeking strategic alliances with other multicultural outfits. “For America to truly maintain its status as a great financial powerhouse, it needs to embrace the changing demographics,” says Copeland, who projects a whopping $150 million in revenues for 2012 because of new partnerships and existing contracts. “Right now we have great relationships and the strongest backlog we’ve ever had. We are poised in our brand recognition in a lot of major urban cores.”

Auto Dealers: Shifting Gears
Pent-up consumer demand placed U.S. new car sales in overdrive, increasing from 10.4 million units in 2009 to 12.7 million in 2011.  The National Auto Dealers Association forecasts that sales will increase to 13.9 million new cars and light trucks in 2012–though that’s still a long ride from 16 million to 17 million units sold each year from 2000 to 2007.

The new environment has revved up dealerships, however. “Salespersons in the dealerships are being more aggressive in capturing consumers,” says Damon Lester, president of National Association of Minority Automobile Dealers. “Consumer credit has loosened up since 2009 and consumers have an easier time of getting car loans.” Lester also points out that dealers are being creative in assisting consumers with their vehicle purchases, to wrap up and finalize their deals. In fact, the nation’s 60 largest auto dealers realized a 6% lift in revenues, from $5.6 billion in 2010 to almost $6 billion in 2011.

As the domestic auto market expanded 10% in 2011, Chrysler dealers saw models zoom off the lot. Most engaged in austerity measures as restored consumer confidence, consistent advertising messages, an improved economy, and appealing new models helped to dramatically improve year-over-year sales numbers. For instance, new-vehicle sales increased more than 50% for James Davis, CEO of Houston’s Gulfgate Dodge Chrysler Jeep (No. 24 on the BE Auto Dealers list with $62.3 million in revenues). And sales jumped 33% for Damian Mills, CEO of Smithfield, North Carolina-based Mills Automotive Group (No. 6 on the be auto dealers list with $200.6 million in revenues).

Some African American Ford dealers sweated through not having enough products to meet consumer demand. “Inventory was tight. No one anticipated the market being as strong as it was,” says A. V. Fleming, executive director for Ford Motor Minority Dealers Association. In fact, Ford had scaled down manufacturing so as to not oversupply dealers.

Then last year’s earthquake and tsunami in Japan disrupted the competition. “Having those Asian imports not able to produce gave Ford an opportunity to pick up some conquest sales. At times there were fewer cars out there than black dealers wanted, but once they got them, they were able to move them.”

(Continued on next page)

Steven Ewing’s “Weighed Advantage” program separates Smyrna, Georgia-based Wade Ford Inc. (No. 5 on the BE Auto Dealers list with $264.4 million in revenues) from competitors. New auto buyers receive free paintless dent repairs, key replacement, and a Wade Ford personal assistant cell phone app. If a customer finds a better deal for the same car in the same color, Wade Ford’s low-price guarantee pays them the difference plus $500. CEO Ewing says he knows the tactics are working because he monitors everything from showroom traffic to percentage of closed deals. “Since we’ve implemented this process, our closing ratio has increased by about 25%,” he says.

 

The retooled, post-bankruptcy General Motors continues to set a new pace: In March, sales for the manufacturer were up 12% year over year, selling more than 231,000 vehicles in the U.S. that included 100,000 cars and crossovers that achieve an EPA-estimated 30 mpg highway rating or better. The electric hybrid Chevrolet Volt has been the notable standout, posting record domestic and international sales. The model provided a significant sales jolt to GM dealers, like our 2012 Auto Dealer of the Year Bill Perkins Automotive Group (No. 12 on the BE Auto Dealers list with $118.3 million in revenues).

There is a strong case to be made for auto manufacturers to rebuild the number of minority dealers, says Marc Bland, head of diversity and inclusion at Polk, a global automotive market intelligence firm. For one, ethnic markets are outperforming the industry. From 2010 to 2011, new-vehicle registrations by individual customers who bought from dealers grew 14% in the combined African American, Asian, and Hispanic market. The overall market increased 12.6%. “Seven out of every 100 vehicles sold go to African Americans,” Bland says, “and it has been shown that minorities tend to look for and reach out to minority dealers when they are accessible.”

Advertising Agencies: New Strategies in the Digital Age
African American advertising agencies still search for the right formula to snare accounts and grow business. Although the be group realized nearly 18% revenue growth, conditions in the sector remain rough (be did not choose an Agency of the Year this year). As the economy recovers, corporate dollars remain tight and selective. Competition for the multicultural market grows in ferocity as small boutiques battle general-market giants.

And digital technology and social media have forced firms to rethink operations and services. “It’s a big challenge,” asserts Carol H. Williams, CEO of Emeryville, California-based Carol H. Williams Advertising Inc. (No. 6 on the BE Advertising Agencies list with $18 million in revenues). “Clients are really working to evolve both their philosophical understanding  of marketing and their methods to get a handle on the dynamics of content and context in a social media world.”

Williams also says agencies must adopt new approaches to campaign development. “As the advertising industry continues to consolidate accounts and services, it’s imperative that we address the cultural paradox created by always-on, access-on-demand media. Fresh approaches that are inherently cultural are called for to identify key commonalities as well as the nuances that make campaigns really connect,” she asserts. “Right now, we see a lot of mass market agencies struggling to tack on multicultural to their accounts, with very mixed results. It puts more pressure on agencies that specialize in a given culture to develop compelling, nuanced strategy–pressure I welcome.”

(Continued on next page)

Kelli Coleman, executive vice president of GlobalHue (No. 1 on the BE Advertising Agencies list with $83 million in revenues), agrees that the African American segment continues to be challenged but notes “a slight uptick in budgets” for the Latino market. Her firm’s greatest success story, however, has been its multicultural, multiplatform campaign for the Jeep brand in which it serves as global agency of record. The result: Jeep’s year-over-year sales

increase of 44%, the biggest spike in the industry. “Our deep understanding of multiculturalism and how it influences the total market is the reason behind this marketing success,” says Coleman.

Los Angeles-based Walton Isaacson (No. 2 on the BE Advertising Agencies list with $50 million in revenues) realized the most significant revenue growth among be agencies last year, rising to become the nation’s second largest black-owned agency. The firm has been able to capitalize on its status as agency of record for Lexus Multicultural Marketing, which includes African Americans, Hispanics, and LGBT. Successful campaigns include general market creative for Lexus CT200h. “I’m really optimistic about what I see happening. Our budgets have increased. Across the board it seems like clients are feeling more comfortable about the economy and spending,” maintains Co-founder and Partner Aaron Walton. “We’ve seen tremendous growth, not just in the multicultural work that we do, but also across all the business segments that we support.”

Financial Services: Ready for the Rebound
Among BE’s financial services companies–banks, asset managers, investment banks, and private equity firms–uncertainty still reigns. With extreme volatility in the stock, bond, and housing markets, as well as skittishness brought about by the looming European debt meltdown, these firms, collectively and individually, must seek to find new strategies for revenue growth and customer base expansion.

Black banks have been reeling since the Great Recession. Many still need new sources of capital after heavy loan losses, contending with stringent capital requirements and the cost of regulatory compliance. In fact, five black banks have been forced to shutter operations in the past year. And Carver Federal Savings Bank (No. 1 on the BE Banks list with $671 million in assets) had to be rescued from a shutdown or takeover last year when Wall Street powerhouses Goldman Sachs Inc., Morgan Stanley, Citigroup Inc., and others injected $55 million into the institution.

Veteran banker Paul C. Hudson doesn’t see much progress for the black community until next year. The chairman of Los Angeles-based Broadway Federal Bank (No. 5 on the BE Banks list with $417.4 million in assets) described 2011 as “one of the hardest years ever” in its 66-year history, citing several large loan write-offs and the closing of two of its five branches. Though Broadway is meeting capital requirements under a cease-and-desist order by regulators, it is looking to raise $10 million to $20 million.

William Michael Cunningham, social investment adviser at Creative Investment Research Inc., maintains that black institutions need to become more aggressive about making loans in their communities. “There are a lot of opportunities for those banks that recognize that they’re in a unique position to get additional deposits by appealing to customers who are fed up with the large banks,” Cunningham says.

(Continued on next page)

For Newark, New Jersey-based City National Bank (No. 8 on the BE Banks list with $358.4 million in assets), less lending caused assets to fall from $387.3 million in 2010. CEO Preston D. Pinkett III says the new strategy will be to focus less on commercial real estate lending and diversify into small business and consumer areas. The bank also seeks to raise new capital this year to cover additional loan losses as well as expand its business. Says Pinkett: “As the big banks are getting bigger and stronger, minority banks must find ways to serve their customers and stay viable.”

In terms of private equity,  the average deal size for global and U.S. deals–up 18% and 24%, respectively–helped drive 2011 levels higher, says Thomson Reuters. Given this environment, BE firms’ capital under management grew 80.99%. West Hartford, Connecticut-based Fairview Capital Partners (No. 3 on the BE Private Equity Firms list with $3.3 billion in capital under management) saw capital under management increase as well. Co-Managing Partner JoAnn H. Price says growth came mainly from a $250 million investment from three existing pension funds. The firm plans to raise another $750 million over the next two years, in part, through investing in deals in emerging markets such as Africa. Says Price: “You’ve got to be aggressive and pursue a variety of strategies to reach your ambitious targets.”

The performance of Addison, Texas-based UrbanAmerica Principals III L.L.C. (No. 4 on the BE Private

Equity Firms list with $989 million in capital under management) was essentially flat last year. CEO Richmond S. McCoy says it amounts to normal fluctuations in valuations. So now the firm is looking to seed two new $200 million private equity funds–one targeted at the senior assisted living housing sector, and the other for distressed faith-based bank loans.

For asset managers, the equity markets were volatile last year: the Dow Jones industrial average gained 5.53%, the S&P 500 was flat at 0%, and the Nasdaq fell 1.8%, according to SNL Financial in Charlottesville, Virginia. As a result, be money managers’ assets under management dropped 17.5%. Chicago-based Ariel Investments L.L.C. (No. 7 on the BE Asset Managers list with $4.4 billion in assets under management), saw assets under management decline from about $5.5 billion in 2010. In response to market performance in the aftermath of the worst economy since the Great Depression, Ariel Investments CEO John W. Rogers says: “I think it’s important we reinforce our message that slow and steady ultimately wins the race. We have to keep reminding investors to stay the course … that America’s best days are ahead of us and the stock market will recover.” To add future business, Ariel has launched three new funds: Ariel Discovery, a publicly traded mutual fund geared to invest in small-cap U.S. companies; Ariel International Equity Fund, its first international fund aimed at investing in foreign companies in developed markets; and Ariel Global Equity Fund, which will invest in foreign and U.S. firms.

(Continued on next page)

Houston-based Smith Graham & Co. Investment Advisors L.P. (No. 6 on the BE Asset Managers list with $5 billion in assets under management) slightly grew assets under management by roughly $100 million. Noting 2011 as part of a turbulent cycle, CEO and Chairman Gerald B. Smith says three new fixed-income clients contributed to the modest gain. “The uncertainties and issues that were happening in Europe with [its] sovereign debt crisis had an impact on our markets here,” he says. “We’ll see better performance this year just because of the fundamentals in the marketplace.”

 

The U.S. long-term municipal bond market saw its biggest drop in a decade. And issuance of those bonds fell to $287 billion in 2011 from a record $430.5 billion the previous year, according to Thomson Reuters. At New York-based M.R. Beal & Co. (No. 4 in taxable securities with $109.1 million in lead issues and No. 2 in tax-exempt securities with $2.9 billion in lead issues on the BE Investment Banks list), taxable securities lead issues fell 93% and co-lead fell 45%. Vice Chairman and Chief Operating Officer Stanley E. Grayson attributes the slide to an overall drop in the muni-bond market and some local governments not trading at the same volume as previous years. He noted that the volume is expected to rise after the 2012 presidential election. Grayson maintains the firm’s laser focus will position McBeal & Co. to expand its execution services and look at financial advisory services, particularly in the area of public—private partnerships.

For New York-based CastleOak Securities L.P. (No. 3 in taxable securities with $6.8 billion in lead issues on the BE Investment Banks list), business activity was strong. The firm underwrote 19 lead management investment-grade transactions totaling nearly $7 billion in 2011, up from 11 transactions worth $3.6 billion the prior year. It co-managed 106 equity transactions totaling about $125.7 billion last year, versus 87 transactions totaling $130 billion in 2010. The company successfully completed a $350 million transaction for San Diego Gas & Electric, $150 million for Southern California Edison, and two Toyota trades totaling $92 million. CastleOak also increased its staff from nearly 40 in 2010 to 50 in 2011, and it expects significant new hires this year. It also opened new offices in Indianapolis; Columbus, Ohio; and Cleveland.

CastleOak’s chief, David R. Jones, is representative of BE CEOs that will continue to find opportunities in any environment, especially the most tumultuous. True to the spirit of the old Motown tune: When you see these entrepreneurs coming, don’t get in their way.

–Additional reporting by Marcia Wade Talbert, Aisha Jefferson, Cliff Hocker, Bridget McCrea, and Jeffrey McKinney