Big Job FOR Small Business : Don’t Rely on ‘Mom and Pop’ to Ignite Growth, Analysts Say

In California, as in the rest of the country, small business is being asked to do an enormous job: spur economic growth.

Small companies are indeed vital to job creation and economic expansion. And California--reeling from massive restructurings and downsizing in some of its biggest industries and corporations--certainly could use the help.

But don’t expect too much from small business, economists warn. That’s because only certain kinds of small businesses can be expected to produce the job growth needed to ignite a solid recovery in California.

Those are businesses that exploit new technologies or new market niches, or that export their products or services to other markets. Those are success formulas even for small companies in otherwise distressed industries or market segments.

For instance, sales of most golf clubs have been flat since 1989. But Callaway Golf of Carlsbad, Calif., has been burning up the fairways. Largely driven by its popular “Big Bertha” oversized club, Callaway’s sales climbed to $132 million last year from $5 million in 1988.

On the other hand, most small businesses do not have what economists say is necessary for growth. That is particularly true of mom-and-pop businesses, such as restaurants, small retail stores and grocery stores, which operate primarily on the sweat of family members and an occasional part-time employee.

And small businesses face the same forces--such as the credit crunch and low consumer confidence--that have been stalling the growth of large companies, economists say.

Bill Pechstedt, president of Sanford-Lussier, a Huntington Park manufacturer of hardwood moldings, said his company has seen no growth in recent years because homeowners have been keeping a tight grip on their pocketbooks and are putting off buying all nonessential products--including his.

Sanford-Lussier has not increased the size of its 25-member staff since the mid-1980s, and it has lost only two employees, through attrition, Pechstedt said.

“We’re thinking about keeping the ones we’ve got working,” Pechstedt said. “We’re the only people in town, as far as we know, to not have layoffs and not miss a day of work. . . . We’re real tickled we’re able to do that.”

Small businesses can also be overwhelmed by regulation. The “major risk at the present time to growth of small business in California (is) government and governmental regulation,” said Lynn Reaser, chief economist at First Interstate Bancorp.

“Small-business hiring is being curtailed by the concern about increased non-wage costs, such as health care and worker training, and that is likely to hold down the growth of small-business employment in the next five years,” especially where companies also face increasing federal regulations, Reaser said.

No one “silver bullet” will fix the state economy, Reaser said. Instead, “most of the job growth in California will come a few at a time in small companies scattered throughout a wide array of industries.”

Unless they have the ingredients of success--exports, new technology or product niche--small businesses won’t help create a job boom in California, said Jon P. Goodman, director of the Entrepreneur Program at the USC School of Business Administration.

California, often seen as a mecca for small businesses, is no less hostile to these non-growth businesses than elsewhere, as evidenced by the dismal fate of strip malls, the havens-gone-bust for mom-and-pop stores.

“A biotechnology company with 12 employees is fundamentally different from a dry cleaners with 12 employees,” Goodman said.

California has always been hospitable to creative, entrepreneurial companies.

In the past, such companies brought jobs and prestige to the state and in the process became legends. The state’s enormous, and now declining, aerospace industry grew from a base of a few small, adventuresome engineers. So did its high-technology sector.

Intel, Hewlett-Packard and Apple Computer, three of the state’s most admired high-tech companies, grew from a handful of ideas and entrepreneurs and have in turn spawned uncountable other companies. And the now bulging biotechnology industry owes its beginnings to a few California companies such as Genentech and Amgen.

“People sometimes forget, because they are laying off now, that (companies like) Apple once were small businesses and created thousands of jobs. . . . And entrepreneurial firms in turn create more entrepreneurial firms,” Goodman said.

California seems to have more of these high-potential companies than other states. Some of them have been thriving and growing even during the recession.

Among them are Callaway Golf, Audre Recognition Systems and Threads for Life.

Nearly one-quarter of Callaway’s sales last year were outside the United States, and half of those were in Japan. Callaway is no longer a small business. When former winemaker Ely Callaway founded the company in 1982, there were four paid employees. It now has more than 1,000.

“The basis of our success is we have a product different from anything else . . . a product that people want to buy,” said the 74-year-old Callaway, who serves as chairman.

Audre is a San Diego-based high-tech company, formed in 1983, that is still considered small: fewer than 40 employees and less than $1 million in annual sales. But it has a technology for converting complicated technical data into computer programs that could transform the way engineers use computers.

Investors think this unique technology has enormous growth potential, at least judging by the phenomenal rise in the company’s stock price.

Threads for Life is a fast-growing Los Angeles company that makes “street” fashion under the Cross Colours and Karl Kani labels. It started out less than three years ago with a handful of employees. By targeting a market that few other clothing companies were--urban youth--Threads settled into its own niche. Its work force has grown to about 100 employees.

“We were very, very small, but we’ve grown to a sizable business. . . . We’re doing OK considering there’s a recession,” said Threads Chief Executive and President Carl Jones.

Still, such growth is the exception, particularly in California’s sluggish economy.

Chris Cochran, an economist in the office of economic research in the California Trade and Commerce Agency, said that for the near term, growth in the small-business sector isn’t expected to rebound to the levels of 1988-90, before the recession set in. “It will be very anemic growth--worse than in the same time period in the last recovery,” he said.

In the state, new businesses are being formed at a slow pace. Even so, more new businesses are being formed than are failing.

According to Dun & Bradstreet, business incorporations (sometimes used as an indicator of business starts) in California rose only 1.1% in 1992 to nearly 37,000. That followed two years of declines.

Meanwhile, failures--an indicator that often lags the economic trends--increased 34% in California in 1992 to nearly 20,000. Some economists and small-business groups cite these figures to show a net increase of about 17,000 new firms, and say they are primarily small businesses.

Among the ones that survive, a common thread will be exporting, either overseas or just out of their immediate area.

More than half the state’s new jobs are being created in export-related areas, said Gladys Moreau, director of the Export Managers Assn. of California, which aids developing small businesses.

Such jobs, she said, are high-wage, averaging 17% above the median. Last year, California businesses exported nearly $69 billion worth of goods and services, Moreau said, adding that every $1 billion in exports creates 25 jobs.

“Judging from our own growth, small business exporting has been exploding,” she said. “We started less than two years ago from absolutely zero--no phones, desks or computers. . . . Now we are getting close to 100 calls a day from people needing help or asking questions, and we have 1,200 to 1,400 clients that we (advise) on a regular basis.”