Why Are These CEOs Smiling?

With all the bad economic news these days, it's hard to believe every company isn't struggling just to survive. But for all the damage they do, recessions often help the best businesses widen their lead over the competition. "The true sign of greatness is a company's ability to emerge from difficult times stronger than it was going in," says Jim Collins, author of the just-published Good to Great: Why Some Companies Make the Leap...And Others Don't.

Some market leaders, like Wal-Mart and Dell, have such enormous scale and low cost structures that they can use aggressive pricing to bleed their rivals. Other relatively smaller players, like Toyota, Steel Dynamics and Southwest Airlines, are so efficient and innovative that they can steal customers away from lumbering giants. Certain companies, like online-auction dynamo eBay, offer a service that lots of struggling firms and consumers are eager to use in hard times.

Recession winners do, however, share some common traits, from good labor relations to contingency plans. Smart CEOs avoid across-the-board layoffs, instead making careful cuts that don't deplete their talent pool. And the savviest bosses stay aggressive, often using downturns to "become savvy acquirers," says Orit Gadiesh, chairman of Bain & Co., a Boston-based consulting firm. GE Capital, for instance, went on a buying binge during the Asian financial crisis a few years ago. Above all, while mediocre firms often flail around for a new strategy to deal with a downturn, the best companies just keep on doing well what they've done well before. Here's how six of them are doing just that.

--WAL-MART Some people always pinch pennies, but when the economy turns down, it swells the ranks of bargain hunters. That helps explain why Wal-Mart enjoys a bust almost as much as a boom. Last month, when most retailers saw shoppers browse or simply disappear from the aisles, Wal-Mart's same-store sales (for locations open at least a year) grew a healthy 6.3%, beating Wall Street's-and the company's--expectations. Even some discounting rivals, like K Mart, are flagging, though Dollar General and Kohl's, as well as wholesale clubs like Costco, have held up well.

If shoppers are going to keep coming, Wal-Mart CEO H. Lee Scott figures he had better keep building. So in early October, Wal-Mart announced an expansion plan of unprecedented size: 50 new flagship stores, as many as 185 new Supercenters (selling groceries and other household goods), as many as 55 new Sam's Club wholesale warehouses and 15 to 20 new Neighborhood Markets, which are smaller, drug-and-food stores. This new construction will add 46 million sq. ft. of retail space, Wal-Mart's biggest addition ever and 9% more than the company added last year.

Thanks to its enormous scale (some 4,500 locations around the world, bringing in $191 billion a year) and unrivaled just-in-time inventory and sales-tracking technology, Wal-Mart can offer bargain prices and still make a profit like, well, nobody's business. Bearing the brunt of Wal-Mart's success is pretty much everyone--from such department stores as Saks and Federated and clothing stores like the Gap to drugstores like Rite Aid. By 2005 Wal-Mart's share of the grocery business should leap to 20% from 11% last year, according to investment bank Bear Stearns; its pharmacy division should double from 6% of the market; and its apparel business should grow to 14% from 8%. When it comes to buying the essentials, more and more Americans think of Wal-Mart as one-stop shopping.

--EBAY Even though it's the middle of fall, spring cleaning is in full bloom these days, as cash-strapped consumers and businesses alike are busy scavenging for any old junk they can sell. And as the most popular, albeit virtual, flea market in the world, online-auction-site eBay is more than ready to make that business happen--and make a mint in the process.

Unlike its once mighty rival, e-tailer Amazon.com, eBay doesn't need a growing economy to keep itself growing. Now that visionary CEO Meg Whitman has built up a community of 37.6 million users in 200 countries, there is simply no better place for buyers and sellers to meet. eBay profits by taking a cut of every transaction. "It's a very clean model. There are not many risks," says Rajiv Dutta, eBay's chief financial officer.

More than half the company's users were referred by other users--which means eBay has to spend relatively little on marketing. And unlike Amazon or any other bricks-or-clicks retailer, eBay doesn't have to concern itself with the messy, costly business of supply-chain management--there's no inventory, no network of warehouses, no sales force and no fulfillment responsibilities.

It isn't just a trading post for Beanie Babies and stamps, either. eBay brokers everything from used cars to office furniture. Companies from Sun Microsystems to Bloomingdale's and Ritz Camera have set up customized shops to sell servers, clothing and lenses. Small and large businesses looking to liquidate are rushing to eBay. It has also started building a fixed-pricing business, which gives the auction-shy a chance to buy.