Downturn a chance for some to expand

While many companies are firing staff, shelving renovation plans and pinching pennies, the owners of Raj Manufacturing in Tustin, Calif., are expanding.

The swimwear maker is betting that it can boost its market share as its competitors are cutting back – and the hot sales of its daring Animal Instinct bathing suit seem to support the move.

Other businesses are also growing. They’re far from the majority, but these contrarians – including an engineering firm counting on the steady need for seismic safety, a fitness studio selling franchises, retail stores moving in where a bankrupt competitor moved out – are betting that strong demand will carry them through.

By growing now, they say, they will be better positioned for the future.

“It’s a bit counterintuitive doing this in a tough economy,” said Alex Bhathal, who owns Raj Manufacturing with sister Lisa Vogel. “The growth and development takes us out of our comfort zone.”

Animal Instinct, a skimpy one-piece pastiche of sequins, zebra, snake and leopard prints with a revealing cutout along the sides, retails for $124. But it has tripled sales expectations despite the economic slump.

So Bhathal and Vogel, who manufacture swimsuits for Guess, St. John and Athena, have added international accounts, launched an in-house luxury line and built 10,000 additional square feet of warehouse space.

Retailers Forever 21 Inc. and Kohl’s Corp. are also expanding. The two chains recently bid $6.25 million to move into 46 Mervyns stores left vacant by the chain’s recent bankruptcy and liquidation.

The Walt Disney Co. plans to spend $1 billion to make over its disappointing California Adventure park in Anaheim, Calif.

And pizza chain Shakey’s, riding high from a rollout of renovations and an improved menu resulting in a 9 percent jump in revenue in the last four years, has been opening locations for the first time in 15 years.

There is, of course, sizable risk. Even if a company’s owners pay for an expansion themselves, as Raj’s did, companies that incorrectly project sales can quickly spiral into debt with few available sources of loans to help reverse course.

“The challenge is having contingent sources of cash,” said Al Osborne, senior associate dean and management professor at the University of California, Los Angeles, Anderson School of Management.

There is also the problem of over-expansion. Starbucks was applauded for growing aggressively during the 2001 recession. When the economy turned around, the coffee retailer dominated its market.

But in the last year, Starbucks has seen its profit plunge as a result of costlier raw materials, stingier customers and greater competition.

All of a sudden, its earlier expansion became a burden and hundreds of stores had to be shut.

That’s why investing in your company during a downturn requires finesse and prudence, Osborne said.

“It really is a return to basics and the ability to take calculated risks,” Osborne said. “Businesses just need to do things with a clean balance sheet, and they need to be more productive. Only truly valued producers will survive.”