Magic Johnson's captivating customer service

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LOS ANGELES (Fortune Small Business) -- As an NBA Hall of Famer, Earvin "Magic" Johnson faced down such giants as Larry Bird and Julius Erving. Diagnosed with HIV in 1991, Johnson has fought off full-blown AIDS for the past 18 years. Now, as a coffee shop proprietor, he's fighting his latest battle against...scones.

"My customers in urban America are so skeptical, we have to win them over," he says -- and the skepticism extends to exotic pastries. "So in my Starbucks, we serve sweet potato pie."

Sixteen years after retiring from pro basketball, Johnson is finding almost as much success as a small business owner as he did on the court. Magic Johnson Enterprises, a private Los Angeles-based company, has 35 employees and assets of more than $700 million. It works with local entrepreneurs to open franchises in inner-city neighborhoods across the U.S., and has signed a unique deal with Starbucks (SBUX, Fortune 500) that allows MJE to open franchises and split the revenue fifty-fifty.

Now Johnson is advising big-box stores such as Best Buy (BBY, Fortune 500) on how to crack urban markets once the economy allows the stores to expand again. The key, he says, is paying attention to customers. When Johnson makes public appearances -- as he does about 100 times a year -- he isn't just signing autographs. He also gives his office phone number to any customer who complains to him personally, even if the problem is a dearth of sugar packets. If the problem persists, he wants to know about it.

"Minorities appreciate that, because we are used to corporations coming in, opening up their building, but then disrespecting us with their service," Johnson says. "If you don't engage us, we're going to cut you off our list."

He found that out the hard way. One of his first franchises was an NBA store that lost $200,000 before it closed. The reason? Johnson picked the inventory based on his own preferences rather than the customers'. Another early venture, a movie theater near L.A.'s gang-ridden Crenshaw district, seemed doomed to failure until Magic sat down with the gang leaders and asked for their respect. It worked. The theater is now one of the highest earners in the AMC chain.

Johnson is on to something, says Dominique Hanssens, chair of the marketing department at UCLA's Anderson School of Management. Selling sweet potato pie instead of scones, he says, "shows customers that you're trying to figure out how to serve them in new ways." By targeting a less affluent market, Johnson benefits from less competition, greater loyalty and, paradoxically, more revenue in the long run.

"The lifetime value of his customers can be quite high, even if they don't bring in as much money in the short term," Hanssens says. "Everybody loses business in a recession. But it's better if your existing customers stay with you and just spend a little less."