Old Dogs, New Tricks
How smart entrepreneurs find innovation and profit in sleepy industries.
(FORTUNE Small Business) -- Warren Buffett famously remarked that when brilliant management tackles an industry with terrible economics, it's usually the reputation of the industry that remains intact. His insight helps explain why hot markets always seem to attract the lion's share of interest from entrepreneurs and investors. Last year U.S. venture capitalists poured more than $25 billion into 3,416 early-stage companies, and most of that dough flowed to biotech, energy, software, and the like. Little or none, we'll wager, was invested in parking, local radio, minor-league sports, or beer. Yet the entrepreneurs we profile in the following pages have reaped outsized gains in precisely the sort of tired old-economy industries that Wall Street investors - and business magazines - tend to ignore.
We're not saying it's easy to thrive in a stagnant industry. It takes vision and guts to build dynamic companies in markets where most can see only hassle and red ink. "It's all about breaking down barriers, seeing discontinuities, and looking beyond industry paradigms," says Erich Joachimsthaler, the founder and CEO of Vivaldi Partners, a global marketing consultancy in New York City. That kind of vision has enabled one Chicago developer to mint money in the boring old parking industry. It has helped eight Anchorage entrepreneurs resurrect a moribund hockey team. It explains how a radio veteran turned struggling rural stations into polished ad-sales machines. And it's crucial to a tiny brewery that married mythology to the Internet in one of the most original - and successful - marketing campaigns of recent years. Search for the spark in any dull industry, and you'll find a bright entrepreneur. - Richard McGill Murphy
BEER AND MYTHOLOGY
Creative marketing attracts new patrons to an age-old brew. By Justin Martin
Produce TV spot pairing beautiful woman with beer-swilling schmo. Have schmo ditch woman for cold beer. Presto! Instant (and yawningly typical) beer marketing campaign. "In general the beer industry doesn't get too clever," says Harry Schuhmacher, publisher of Beer Business Daily (beernet.com), an online trade journal. Indeed, the U.S. beer industry has been flat, shipping 181 million barrels of brew in 2006, virtually the same as a decade ago.
The New England Brewing Co. (newenglandbrewing.com) is that rare exception to the rule. Rob Leonard, 38, bought the firm in 2001, when it was nearly defunct. This year he'll sell $300,000 worth of beer, mostly to bars, restaurants, and retailers in his home state. Leonard has five employees at his brewery in Woodbridge, Conn., including his mother (who does the books for free) and two senior-citizen volunteers he compensates with free lunches and beer.
Leonard's company is tiny - one of 1,337 microbreweries operating in the U.S. as of 2006, up from 1,058 in 1996. But when he launched his new Sea Hag India Pale Ale last summer, he embraced the kinds of guerrilla new-media techniques that tend to be overlooked by his beer industry peers. "I wanted to get noticed," says Leonard, "and I needed to find a way to stand out from all the clutter."
Leonard turned to Heavybag Media (heavybagmedia.com), a ten-employee New Haven shop that specializes in novel web-based marketing campaigns. Heavybag dreamed up a full-fledged mythology featuring a maritime witch called the Sea Hag. The legend is utterly fake but seems old and authentic, thanks to such New England yarn-spinning staples as a lonely sea captain's wife, a nor'easter, and a watery death. (For more on "The Invention of Tradition" check out the excellent 1983 book of that title by Eric Hobsbawm and Terence Ranger.)
The agency created a blog (seahag.wordpress.com) to perpetrate the legend. It's run by a fictional grad student named Susan Anderson, whose Sea Hag obsession has ostensibly led her to collect different versions of the tale. E-mails sent to the blog are received by Heavybag, which answers them in Anderson's voice. Heavybag also crafted a sham Sea Hag entry for Wikipedia. A sample: "Sailing ships coming in and out of New Haven have reported sightings of a young, beautiful woman sitting on rocks." (Other Wiki users have yet to blow the whistle on the posting.)
Heavybag also distributed fliers around New Haven, featuring handwritten messages ("This is creepy!") along with a phone number (203-777-3317). Call the number and you hear a scratchy recording of a distress call from a boat pilot: "This woman is out here in the middle of the ocean, and she's on a rock!"
None of the messages link sea hags explicitly with the brewery's pale ale. That's deliberate. The idea is to create a general sense of both awareness and mystery. Some consumers might try Sea Hag ale and become curious about the legend. Others might first be exposed to the Sea Hag legend and then notice that there's a new beer of that name.
Heavybag ups the intrigue through promotional materials that it places in area bars. For example, the agency has distributed stacks of fill-in-the-blank Sea Hag legends. Beer drinkers can furnish their own nouns and adjectives, kind of like those old Mad Libs. The aim is to offer a party game in a bar setting - and to keep building that Sea Hag mystery. "People expect more from marketing messages nowadays," says Jackie Peters, Heavybag's chief creative officer. "We're trying to get people involved in - and interacting with - the brand."
Sea Hag is a year old, but already accounts for half of the New England Brewing Co.'s total sales. (The rest comes from two other brands, Atlantic Amber and Elm City Lager.) Leonard turned his first profit in 2006. Until then he ran the brewery without a salary, supported in part by his wife, who works as a waitress in an Italian restaurant. Those lean days are gone, Leonard reports happily: "I'm finally collecting my first paycheck!"
SKATING TOWARD SUCCESS
A failing hockey franchise gets a jolt of small-biz know-how. By Brandi Stewart, Anchorage
While minor-league baseball has enjoyed a renaissance of sorts in recent years, farm-club hockey has sunk into the doldrums. The West Coast Hockey League, a group of seven minor-league teams struggling to contain workers' comp costs and put enough teams on ice to maintain a competitive environment, ceased operation in 2002 and was forced to merge into the East Coast Hockey League (ECHL). Today less than half of the 27 teams in the ECHL make a profit. Few team owners break out of the old formula for running a franchise: Rent a rink, reel in some local sponsors, advertise the games in the local paper, and hope for the best.
Eight entrepreneurs from Anchorage had a better idea. They banded together to save the Anchorage Aces, a bankrupt West Coast Hockey League franchise. To breathe life back into the moribund team, the new owners used their other businesses to boost the Aces and vice versa. "As small-business owners, we use it as a marketing tool," says owner Al Haynes, 52, whose Subway franchises gave away free tickets during the 2002 - 03 season to increase game attendance. "We promote the Aces team, which promotes us." Adds fellow owner Terry Parks, 57, an Xpress Lube owner: "We saw it as a way to give back to the community and get a higher profile to help our other businesses."
So far the results have been impressive. After losing a total of $800,000 in its first two years under new ownership, the team became profitable, and by 2006 it earned $400,000 on sales of $4.8 million, with sales up 33% over the previous year. As FSB went to press, the Aces had skated to first place in the ECHL and were selling at least 80% of their seats each game (up from about 29% when the new owners took over).
Rather than try to go it alone, Parks and his initial partners - Steve Adams, 51, a Subway franchisee, and lawyer Dan Coffey, 60 - offered stakes in the Aces to five other Anchorage businessmen. Each new owner brought distinct skills to the table. Coffey guided the buyers through the snares of bankruptcy court. Jeff Van Abel, 59, a lawyer who had helped Parks build his Xpress Lube chain, brought valuable legal and business experience. Steve Agni, 53, generated attendance by tapping into a bevy of young hockey fans from his private skating rinks. As the owner of the Anchorage Chrysler Dodge dealership, Rod Udd, 58, had the ad budget to ensure that the team would have a high-profile corporate sponsor. And former Alaska state senator Jerry Mackie, 45, brought political connections and marketing skills through his involvement in Northwest Strategies, an advertising and public relations firm he owns. Though Parks serves as managing partner, all eight co-owners are actively involved in the business.
The new owners paid $1 million for the team (half of it in cash), as well as money to cover new equipment and the first season's operating costs. Over the next two years they took out a $750,000 bank loan and contributed an additional $750,000 of their cash to keep the franchise steady.
While the partners were experienced businessmen, they knew little about hockey. Only two had played the sport at an amateur level, and Parks could barely skate. But like most successful entrepreneurs, they understood their limitations. Parks hired Davis Payne, 36, a former pro hockey player, who coaches the team and also oversees recruitment, equipment, and physical therapy. That division of labor allowed the owners to concentrate on rebuilding the team's image among sponsors and fans.
Early on, the new owners decided to make the Aces a statewide franchise to boost its appeal to sponsors and fans across Alaska. During Parks' first year as managing partner, the Aces sold only 46% of their advertising spots and filled less than 29% of the seats in Sullivan Arena, the team's home stadium. But in 2003 the owners changed the name of the team from the Anchorage Aces to the Alaska Aces (alaskaaces.com). The new image caught the attention of statewide sponsors such as the First National Bank Alaska, which began buying advertising space in 2003, and cable provider GCI, which increased its advertising by 400% after the team was resurrected. Sponsor revenues reached $1.4 million in 2006, up 100% since the new owners took over the team. With the Aces' on-ice success attracting sold-out crowds, ad banners in Sullivan Arena are now seen by the largest indoor audience in the state.
Few minor-league franchises are willing to make the large investment required to televise their games. But Parks last year spent $130,000 to air the Aces' away playoff games live on the GCI cable network. The owners brought the Aces to fans in living rooms and sports bars throughout the state as the team won the 2006 Kelly Cup in Duluth, Ga. "All the clubs in town were packed [on game nights]," Parks recalled. "Some of our sponsors' offices were even full of people watching the game. It made a big difference to our fans, so that was $130,000 invested wisely." If the Aces make the playoffs this year, Parks plans to televise the games again starting in April.
The team's newfound popularity has helped several of the owners with their businesses. Last year sales of Subway meal deals jumped 50% after Adams and Haynes's 24 stores offered two-for-one Aces home-game ticket coupons with each purchase. (The coupons also helped sell 1,200 Aces tickets.)
When the Aces reached the playoffs in 2005, Parks advertised an Xpress Lube deal that offered one free and one discounted Aces home-game ticket to every customer who came in for an oil change. Parks gave away 450 comp tickets and saw his lube business increase by about eight cars a day during the first round of the playoffs. And some owners have even brought their products directly to the fans. Udd hauled six new Dodge cars and pickups into the arena during the 2006 playoffs, boosting sales of new vehicles that weekend by 38%.
With the first-place Aces skating circles around the competition, 2007 has been a good year so far. Although the franchise has been profitable since 2004, Parks says the eight partners won't see a return on their investment until 2008, when he plans to retire the last of the team's debt. That's okay, though, because in the meantime the Alaska Aces are helping their owners sell sandwiches, lube jobs, and pickup trucks.
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From the May 1, 2007 issue