A family-owned business on Catalina finds out that. . . : No Store Is an Island
When small-business consultant Nitin Bhatt began working on a make-over of Avalon Liquor & Gifts on Catalina Island, he asked owner Patrick Johnson to fax him a list of documents.
There was only one problem: Johnson did not have a fax machine.
“Here’s my first recommendation,” Bhatt said. “Since the store was founded by his parents 45 years ago and Pat’s worked there since he was 13, they have not changed the way they do things. He needs to bring operations into the ‘90s and start interacting more with the financial and business world here in Los Angeles.”
Although it’s only 26 miles off the coast, Catalina Island is in many respects a different world. “On a laid-back island, I guess it’s been easier for us to keep doing things the way we’ve always done them,” Johnson said. “But there comes a time when you’re hit with a problem and you have to wake up. That happened to us with the recession.”
Johnson’s business, founded in 1953, has struggled in recent years, in particular presenting cash flow problems related to the seasonal nature of island tourism. Avalon Liquor’s sales during the winter season--when it caters to the island’s year-round population of 3,000--are only about one-third of its sales during the summer months.
“Over the past few years, we have had to pay off our debt each summer when cash flow was good and then go back into debt during the slower winter months. It’s gotten to be a vicious cycle,” Johnson said.
Bhatt began by looking at the cash flow issue and quickly turned up several other problems. “I feel that this business has tremendous potential, but it needs a spark to get it out of a rut,” he said.
The most obvious problem Bhatt spotted was a decrease in Avalon Liquor’s profitability over the last three years--despite a steady increase in sales and an almost 5% reduction in expenses. “In 1994, this business had a profit margin of 27%--above the industry average of 24%. But by 1996, the margin had fallen to 12%,” Bhatt said.
The key factor behind the drop was an increase in cost of goods sold. Over the last three years, Johnson’s supplier has increased overall prices almost 15%--a big jump that ate into Johnson’s profit margins. Because the price increases were not passed on to his customers, his business was shouldering the burden.
Johnson has had a long-term relationship with a supplier on Catalina Island who delivers his inventory to his back door. But over the last few years, that relationship has deteriorated, Johnson said, with mistakes cropping up on his invoices, customer service declining and individual item price increases of 2% to 5% being implemented without notice. Because Johnson’s financial data is not computerized, he had not realized how much his supplier’s prices had risen. “I’ve begged them to highlight the increases for me on their invoices, but they aren’t willing to do that,” Johnson said.
Bhatt found that Johnson could begin buying from Orange County suppliers and save up to 9%--even with increased shipping charges.
The profitability decline led Bhatt to question why Johnson would let such a problem go unchecked. The answer he found was not atypical for many small businesses: Johnson had mingled his personal and commercial accounts to such an extent that he did not have a clear picture of how his business was doing.
“His finances are all in the same pot,” Bhatt said. “He needs to be very clear about separating his business and personal accounting. Better internal accounting controls are crucial, so a business person can spot problems like this before they actually threaten his livelihood.”
Computerizing, with a link to his home computer and a part-time bookkeeper to set up his systems, is a must, Bhatt said. Currently, Johnson’s wife, Victoria, keeps the store’s books by hand, using the system that Johnson’s mother taught her when she and Johnson took over the business a decade ago.
“A computerized system could keep daily logs of sales, expenses and income so you could track unfavorable trends, like rising costs, every six weeks instead of noticing them only at year-end,” Bhatt said.
He recommended that Johnson select a computer provider who will include a value-added service such as the loan of a technician who can install the system, customize it for Avalon Liquor and provide training. It should include an inventory control system, Bhatt said. That will go a long way toward helping the store overcome another problem: shortages of merchandise during both high and low seasons.
“It is key for Pat to be able to track his product mixes and volumes and know what is selling well and what isn’t,” Bhatt said. “When I crunched some of the numbers, I found that his inventory turnover ratio is 11 during the high season, which is excellent. I also found that beer turns over faster than liquor, which turns over faster than wine. But if Pat doesn’t know that, he has to guess when he buys his inventory and that leads to shortages.”
Another area Bhatt addressed was the cash flow crunch. Because sales have increased but profit has not, the business has been unable to finance increased business activity. “One of the things that became obvious to me is that you need a relationship with a business bank with a line of credit so that you can stock up on inventory in the slow season and at the beginning of the busy season,” Bhatt said.
The one local bank that Johnson has dealt with did not offer him favorable conditions for a line of credit, so he has turned to friends and family in cash flow crises in the past or obtained merchandise at interest rates of up to 24%.
Again, Bhatt said, Johnson needs to look toward the mainland to establish a relationship with a bank that will help him meet his short-term cash flow needs and keep his shelves stocked.
“He has a strong business with a long history and it has been profitable until very recently. I think any banker would be willing to look at giving him a line of credit, providing he is willing to put up a personal guarantee,” Bhatt said.
In addition to a line of credit, Johnson might also consider obtaining loans to help him purchase his computer equipment and redesign his store, Bhatt said.
A redesign is crucial to establishing a long-term strategy for Avalon Liquor’s future growth. Bhatt recommended that Johnson enhance the store’s image by installing more prominent signage, emphasizing the store’s line of gifts as well as liquor. He should makeuse of the glass windows along the front of the store to advertise weekly specials and pull in tourists, who make up 60% of sales.
Although space is at a premium, Bhatt also recommended that an area in the store be used as a gift display shelf, with prominent signage advertising the sweatshirts, T-shirts and caps that tourists buy on impulse. Because these are high-markup items, they can add to Johnson’s bottom line significantly.
“They carry some sweatshirts that say ‘Catalina Island’ on them now, but if I were just coming in for a six-pack, I would probably not notice them,” he said.
He also recommended that Avalon Liquor expand the line of gift baskets that Victoria Johnson customizes for picnics or special occasions and delivers to local hotels. The baskets, which start at $17.95, include fruit, cheese, crackers and other snack items and a bottle of champagne and generate a good profit margin. They have brought in positive comments from customers, who sometimes call from the mainland to order baskets delivered to their rooms when they arrive on the island. Bhatt recommended offering different kinds of baskets--he suggested a margarita basket that might include tequila, limes, salt, margarita mix and glasses along with chips and salsa--and told Johnson to seek partnerships with some of the local hotels to promote the baskets.
Moving into new areas, like tourist items and gift baskets, is important because liquor consumption in California has decreased steadily over the last decade, Bhatt said.
“Pat should keep that trend in mind--not that he should become alarmed, but so he knows he has to concentrate on bringing up other areas of his business,” he said.
In order to attract more locals during the off-season, Bhatt said Avalon Liquor might think about introducing wine and cheese tastings at the store, using his long-term friendships with many people on the island to get started.
On Bhatt’s recommendation, Johnson has enrolled in a weekly course called Fast-Track Entrepreneurial Training through USC’s Business Expansion Network, where Bhatt is associate director.
“It was tough for me to go over to town once a week, because I don’t like leaving Catalina,” Johnson said. “But I knew I needed to get the cobwebs cleared out of my head and put a business plan in place.”
Along with attending the class, Johnson has gotten several bids for computerizing his business and is already implementing some of Bhatt’s other recommendations.
“Pat is committed to the business and likes working there. Long hours are not a problem for him,” Bhatt said. “Overall, I feel very positive about his business’ potential.”
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This Week’s Company Make-Over
* Name: Avalon Liquor & Gifts
* Type of business: Liquor and gift store catering to tourists
* Owners: Patrick and Victoria Johnson
* Annual sales: $670,000
* Where company is based: 112 Catalina St., Avalon
* Founded: 1953
* Employees: Two full-time, three part-time
* Financing: Family funds
* Status: Private
Main Business Problem
Dealing with seasonal business fluctuations, modernizing.
Goals
Increase sales, provide better customer service and pricing, improve product availability.
Recommendations
* Update business systems and technology by purchasing fax machine and computer system that will generate periodic financial reports and include inventory control system.
* Address loss in profitability by negotiating more favorable terms with new suppliers and decrease cost of goods sold.
* Separate business and personal finances and analyze business fluctuations regularly.
* Establish a business banking relationship and line of credit to finance seasonal business needs and obtain loans to help purchase computer equipment and redesign store.
* Change image of store by improving lighting and signage, keeping shelves stocked, making line of gift items more prominent and expanding gift-basket business in line with trends that show alcohol consumption falling across the state.
Meet the Consultant
Nitin Bhatt is associate director of the Business Expansion Network, a community economic-development project of USC. BEN has provided management and technical assistance to more than 5,000 businesses. In addition to advising entrepreneurs, Bhatt conducts training seminars on feasibility analysis and business planning and serves on the leadership council of the Los Angeles Regional Business Assistance Network. The 12-week training course for entrepreneurs he oversees begins a new semester on Jan. 14.
