High-Growth ‘Gazelle’ Firms Undermine Myth of Hot Sectors

Attend any small-business conference, class or even cocktail hour and the question arises: What are the hottest growth industries?

Eager would-be entrepreneurs continually ask about business trends, hoping to jump on board and boost the odds of a payoff for their beginners’ bucks.

But a new study by a Massachusetts economics research firm shows that this approach may be wrongheaded most of the time.

High-growth industries don’t necessarily provide the greatest opportunity for new companies, according to the study, titled “Hot Industries 1997.”

Surprisingly, older, slower-growing industrial sectors often contain larger percentages of high-growth companies, or “gazelles,” than do the booming industries.

“The study brings some reality in dealing with the myth that hot sectors produce hot companies,” said David Birch, founder of Cognetics Inc. and co-author of the survey.

According to Birch’s work, wholesale trade and manufacturing had higher percentages of gazelles (companies that grew at least 20% over four years) than did any of the nine other sectors tracked by the federal government. From 1992 to 1996, gazelles accounted for 7.1% of companies in wholesale trade and 7.0% of manufacturing firms, even though overall employment growth in those two industries was low, at 8.1% and 1.9%.

By comparison, construction employment increased 20.2% but only 4.6% of the companies were gazelles. Employment boomed in the service industry at 18.3%, but only 2.2% of those companies were gazelles, the study shows.

When the data were broken down into more detailed categories, high tech failed to emerge as the leader in growth companies as expected. Of the top 20 categories for gazelles, only two areas--electronics and instrument manufacturing--fell into the technology sector.

Most of the rest of the gazelles were found in non-glamorous rubber and plastics manufacturing and in the production of metal, paper and chemical goods, as well as in transportation equipment and machinery.

“Small manufacturers are the hottest sector in the United States, even though the sector as a whole is suffering,” Birch said. “There’s a lot of running room in textiles, furniture, paper, oil and chemicals because big companies are pulling back.”

Many larger firms in those industries have retrenched to their “core competencies,” according to the study, leaving room for small companies to gross $10 million to $30 million yearly.

Meanwhile, growth industries are really growth industries mainly for giant companies, Birch’s report argues. Small companies shouldn’t try to go mano a mano with American Express or Visa, because they’ll be squashed, he said.

Start-ups that want to grow can apply new technology or methods to dull, lackluster industries and find success there more easily than in high-growth sectors, Birch said.

He cited a shrimp merchant and wholesaler in New England. Rather than using wholesale distribution channels already in place that involved a chain of handlers from the docks to purchasers, the entrepreneur created his own distribution system with special speed-dialing telecommunications directly to hotel food buyers.

“He became very successful in the fish business, a mundane industry, because he went about it differently from everyone else,” Birch said.

Venture capitalists who heretofore focused on high-tech companies for rapid growth and high investment return are beginning to look at these other fast-growing companies, he said.

What does the study mean for Southern California?

Jack Kyser, chief economist at the Los Angeles Economic Development Corp., says businesses here are adept at adopting new methods to spur growth. Smart & Final, which sells bulk foodstuffs and other restaurant supplies, long ago straddled a position between a wholesaler and retailer to capture both consumer and small-restaurant sales. More recently it began using a satellite link to keep corporate headquarters apprised of sales in neighborhood stores.

Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, suggests that in addition to innovation, the size of the industry sectors in Los Angeles enables small businesses here to prosper, even when total growth in specific industries may be sluggish.

For example, production of apparel, textiles and toys overall is falling, but Southern California companies are doing well in these sectors, Levy said, because these are cyclical industries that need new products each year. The need for new products has also spurred growth in ethnic food companies, a thriving sector in Los Angeles.

This regeneration of food, clothing and toys provides numerous opportunities for small firms here, Levy said, but only because of the large size of the manufacturing sector.

“You want a big pool because with a huge size, there’s always opportunity there,” he said.

But both Levy and Birch say the status of an industry is irrelevant to small-business success. Whether an industry is hot (and thus providing small firms with opportunities to work for corporations) or is down (and thus providing small firms with opportunities to grow large in the sector), the fate of a small business ultimately depends on the talent and hard work of the owner.

In fact, asking which industry is hot and founding a business for that reason “verges on being preposterous,” Birch said. Individuals propel growth in a sector, he said. Sectors don’t have lives and don’t do things, he added--individuals do.

“Don’t focus on an industry as a way to think about what you should be doing,” Birch said. “The strategy should be, ‘What is something I can pour my life into,’ and then figure out a better way to do that.”

To view a list of the industries generating the greatest numbers of gazelles, go to https://www.latimes.com/smallbiz

Times staff writer Vicki Torres can be reached at (213) 237-6553 or at vicki.torres@latimes.com

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Where the Gazelles Are

Based on Dun & Bradstreet data on 9 million U.S. companies, Cognetics Inc. determined that these industries are generating the most small, fast-growing “gazelle” companies:

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Rank Sector % Gazelles Growth of sector 1 Electronic equipment 10.7% Low 2 Rubber/plastics manufacturing 10.1 High 3 Primary metal products 9.4 Low 4 Paper products manufacturing 9.3 Low 5 Instruments manufacturing 9.1 Low 6 Chemical manufacturing 9.1 Low 7 Machinery manufacturing 8.7 Low 8 Transportation equipment 8.4 Low 9 Fabricated metal products 8.3 Low 10 Heavy construction 7.8 Low

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Source: Cognetics Inc.