California’s New Sobriety : Austerity Now the Name of State’s Business Game
Faced with a moribund commercial real estate market, cost-conscious customers and potential white-elephant buildings, developer Richard Lundquist opted to divide and conquer.
When his firm, Continental Development Corp., took over a building in El Segundo once occupied by TRW, it decided to take the existing six-office suites and cut them in half, creating mini-suites that could be upgraded easier, leased cheaper and targeted to smaller firms.
“The thinking behind it originally was to be the most cost-effective manner of turning some existing space into new office space,” Lundquist said.
The strategy worked. Within a year, the development company had leased out all 30 so-called mini-suites in the building, mainly to start-up firms or branch offices of large companies.
It’s part of the new way Southern California executives are doing business in the wake of the most punishing recession since the Great Depression.
Call it the New Sobriety. As Southern California enters its second year of recovery, the new mottoes for business are: Do more with less, look for the incremental gain rather than the big score, share risk, cut costs, rent instead of buy.
That attitude, born of four long years of recession-induced belt-tightening and downsizing, is affecting the way business people make decisions about everything from hiring people to negotiating real estate purchases, executives and analysts say.
This attitude prevails, though most economic indicators show things continuing to improve all over Southern California: Job growth is up, even in Los Angeles County; business failures are down, and investment is improving.
The New Sobriety is a particularly distinct contrast to previous economic recoveries, when the pain of the recession was quickly forgotten as the region came roaring back.
This time around, there’s a widespread feeling that the economy won’t return to the halcyon times of the past. The defense industry will forever remain a shadow of its former self, and the red-hot real estate market is only a memory.
The New Sobriety even extends to corporate wardrobes, according to John Martens, vice president and general manager at the Neiman Marcus store in Beverly Hills.
Buying patterns are vastly different from the heyday of retail excess, the ‘80s. “People would come in and just buy whatever,” he said. “I don’t think that’s happening now. They’re buying carefully and buying well.”
And that is evident in the new way Southern Californians do business. Consider:
* Some companies that were forced to lay off people as the region’s aerospace and other industries went into a tailspin are hiring again, but they are doing so a lot more carefully than in the past.
* Others are finding it more prudent to subcontract work than expand their in-house staffs.
* And investors in real estate are clearly driving harder bargains, forcing developers to come up with new ways to market commercial and residential properties.
“If you ask a very general question . . . ‘Is the entertainment business doing well?’ the answer you get is a resounding yes,” said veteran film sound director Alexander Singer. “But if you interviewed 100 people (individually) . . . the answer would be quite different. . . . People feel less stable than they ever have.”
Caroline W. Nahas, managing partner at Korn/Ferry International in Los Angeles, the nation’s largest executive search firm, says her firm spends more time than ever with a company considering bringing on new managers.
“I see people being more cautious, in terms of both deciding whether to . . . fill an opening, and very careful and thoughtful regarding the person they hire,” she said.
That has increased the competition among firms to hire qualified people, she said. But that doesn’t mean an executive can write his own ticket anymore: compensation packages are now tied to performance.
Companies have already had to reduce their staffs, said Karen Stephenson, a professor of human resources at the Anderson Graduate School of Management at UCLA. “Given limited resources, both financial and human, they’re now looking hard at their core competencies,” she said.
At Woodland Hills-based defense contractor Litton Industries Inc., that meant divesting itself of non-core businesses last year, and expanding into related electronics industries through acquisitions of smaller companies.
“It’s always been a very competitive business,” said spokesman Robert Knapp. “Now, it’s more so.”
As U.S. defense budgets continue to shrink, survival now means spreading risk, sharing costs and pursuing non-U.S. military customers.
Bids are now made in conjunction with other firms, a growing trend in the industry as the Pentagon pares its list of contractors.
With Massachusetts-based Raytheon and Texas-based Tracor Inc., Litton won a contract recently to build an integrated electronic warfare system for American-made F-16 aircraft owned by the Greek air force, beating out a European rival.
“About 18% of our revenues are now attributable to the international marketplace, . . . compared with . . . around 15% a decade ago,” Knapp said.
Even in the booming entertainment industry, which is supplanting aerospace as the region’s key employer, caution and cost controls are the watchwords. Producers are increasingly looking at the burgeoning of new technologies as a way to maximize profits.
For example, they are converting movies and television programs to a digital format, giving them more flexibility to adapt to other media, such as CD-ROM. With more markets, they get more bang for their production bucks.
At the same time, they are trying to reduce their outlay for new equipment and staff, in part by subcontracting more post-production work to small, cheap, entrepreneurial firms outside the major studio structure.
“The post-production process, which involves a very high degree of computer technology and digital transformation, is now a serious industry in the Los Angeles area,” said Singer, who has worked on more than 270 television programs and five features since 1960.
Roberta Margolis, owner and president of Runway Editing--so-called because it occupies a hangar at the Santa Monica airport--is an entrepreneur in the New Hollywood. Her two-year-old firm now employs 14 people brokering high-end digital editing equipment for use by television and film producers.
Producers “want to cut their costs up front . . . but they’re also trying to preserve their flexibility and options for the future,” she said.
Subcontracting such services is a way to avoid the problem of investing heavily in new systems, only to see them become obsolete in three or five years, she said.
In the residential real estate market, the New Sobriety means that buyers are driving harder bargains and sellers are trying to get as high a price as they can.
That has made buying and selling a house a difficult proposition, said Jim Emery, president of JTE Real Estate Group, a franchisee of Prudential of California.
“Buyers still believe it’s a buyer’s market, but sellers are now trying to get better prices,” he said. “Buyers are now having trouble getting sellers to meet their price.”
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The Switch to Services
From 1990, when California’s total non-farm employment last peaked, to 1993, when it bottomed out, the nature of the work force has changed, with fewer manufacturing and construction jobs and more service sector jobs in areas such as entertainment and tourism. Through 1997, UCLA forecasts, services will continue to boom, making up an ever increasing share of the workforce, while construction and trade will bounce back. Manufacturing, including aerospace and defense, will account for less and less of the economy. Non-farm employment, in thousands of jobs:
1997
Manufacturing: 1,758
Trade: 3,089
Services: 4,018
Source: UCLA Business Forecasting Project
