Region’s Small Firms Say Sales Lagging
Despite the state’s strong economic recovery, a majority of small businesses in Southern California are struggling with flat or declining sales, with a striking one-sixth of such firms saying their revenues have fallen 10% or more in the last year, according to a survey by the Los Angeles Times and the USC Marshall School of Business.
Retailers reported the most difficulty, citing competitive pressures from major chain stores, among other factors. But small manufacturers and service firms also have taken a hit, suggesting that California’s economic growth is slowing.
More sobering are findings that nearly one out of six small businesses surveyed are considering leaving the state and that a majority of the owners do not think the region has addressed critical problems that were glaring during the recession: government regulation, worker training and access to capital.
Nowhere is this frustration level as high as in the city of Los Angeles. The Southern California Business Climate Survey--written by The Times and conducted by USC--shows that filthy streets, crumbling infrastructure, stratospheric business taxes and crime are sapping L.A. businesses to an extent unrivaled in the region. Such competitive disadvantages will be magnified in the event the economy stumbles.
On a positive note, the survey, the first of its kind undertaken in Southern California, found that a sizable group of businesses have burst from the recession with exceptional growth. On the whole, the poll results paint a portrait of a richly diverse and dynamic small-business center that is technologically savvy, productive, export-oriented and seemingly primed to compete in the global economy.
In fact, most of the 1,670 small businesses surveyed earlier this summer said they are expecting sales to improve in the next 12 months. But that optimism is tempered by concerns not directly related to the Wall Street woes and jittery overseas markets now dominating headlines.
Home-Grown Woes Blamed
Although troubled by the widening Asian crisis that has already dented California’s export and tourism sectors, small-business owners surveyed said they view home-grown problems, such as a lack of skilled labor, and big government as the biggest threats to their businesses.
The survey reflects the views of a fairly representative sample of manufacturing, retail and service businesses from San Diego to Ventura, according to William Gartner, professor of entrepreneurship at USC’s Lloyd Greif Center for Entrepreneurial Studies, who assisted The Times in analyzing the survey results. Companies with fewer than 500 employees were sampled. Such businesses make up 99.8% of all firms in Southern California and employ 80% of the region’s private-sector work force.
It remains to be seen whether these problems are mere speed bumps or major roadblocks for small business, the engine powering the region’s job growth. The outlook is guarded, especially when compared with a variety of national surveys conducted in the last couple of years that showed a strong majority of small businesses experiencing growth.
Many firms say the obstacles facing them are becoming insurmountable, eroding profits and limiting their ability to expand. While more than half those surveyed said a lack of skilled help is troublesome for their business, many also appear unwilling or unable to take on new employees.
Two-thirds of the respondents said they will not hire more workers in the next 12 months, a figure that disappointed many economists. Some Southern California business owners say they have given up searching for workers with hard-to-find skills, while others have decided they can’t afford the increased wages, taxes and regulation that come with hiring additional personnel.
“It strikes me as a cautionary signal,” said UCLA economist Tom Lieser, noting that he had expected more aggressive hiring plans given the region’s strong showing in 1997 and early 1998.
That a majority of small businesses in the region are struggling may reflect in part the survey’s heavy representation of businesses from Los Angeles County, whose economy has lagged those of its neighbors. But further analysis of the data suggests other forces are hammering small firms, including competition from large rivals and emerging symptoms of Asia’s financial woes.
Small retailers had the most trouble boosting their sales. While state figures show that areas such as Orange County experienced a retail sales boom in the second half of last year, analysts say the lion’s share went to big chains such as Home Depot, Wal-Mart, Barnes & Noble and other so-called category killers that have expanded aggressively here on the heels of recovery.
Their Biggest Competitors
Cities have avidly courted such development, recognizing that sales taxes are their only reliable source of new revenue in the wake of Proposition 13 and other anti-tax measures.
“It is a big problem for the smaller retailers,” said Tony Cherbak, a retail analyst at Deloitte & Touche in Costa Mesa. “The mom-and-pop retailers just don’t have the financial wherewithal to match the buying power of the big chains.”
Just ask Bruce Gershenoff. The owner of Win, Lose or Draw Sportswear Inc. in Anaheim says his sales have yet to rebound to their 1996 level, in part because big-name manufacturers such as Nike set minimum purchase orders well beyond the reach of many small shops, while reserving the hottest merchandise for giant department stores and sporting goods chains.
“If somebody wants a Dallas Cowboys jersey, I can’t get it. Same with the Lakers and the Bulls,” he lamented. “It really makes it tough on the little guy.”
For all the troubling signs, there were encouraging findings as well. Nearly one-quarter of those surveyed posted sales gains of at least 10% in the last year. Economists were heartened by this fast-growing contingent, suggesting their performances may have more than offset the struggles of the laggards.
Compared with the nation, Southern California also has competitive advantages:
* Slightly more than 15% of Southern California’s small businesses said they export products and services to other countries, principally to Asia, Western Europe, Latin America and Canada. While that may be expected given the region’s polyglot roots, nationwide only 2% to 3% of small businesses are exporting, according to government and private studies.
* More than 45% of Southland small businesses said they use the Internet to do business. That’s double the nationwide percentage found by Dun & Bradstreet in a survey late last year--and a testament to Southern California’s tech-savvy business culture.
* The Southland’s small-business community certainly is more diverse. While the survey didn’t capture the percentages of Latino and African American businesses that would be suggested by Census Bureau figures, it still reflects the influential role minorities play in the region.
* Although Asian business owners were less optimistic about their short-term prospects, reflecting some of the fallout from Asia’s financial crisis, Latinos generally were quite sanguine about the future.
“The last three or four years have been the best for us,” said Cuba-born Raul Lopez, who launched his Downey insurance agency in 1982. “I am very optimistic. Despite the problem we have with the stock market right now . . . most of my clients are doing well in business.”
Even with their optimism, small-business owners who responded to the survey and were later interviewed by The Times repeatedly cited the “Big Three” problems of labor, capital and government.
More than 17% of all firms surveyed said a shortage of skilled workers was the most critical issue facing their businesses. Labor is tight nationwide given a 4.5% national unemployment rate. But Southern California’s high-tech industries are particularly feeling the pinch.
Carson Tang, president of American ProImage in Cerritos, says revenue at his computer peripherals business fell 15% in the last year. It’s partly due to slowing demand, Tang says, but labor is a chief culprit.
“If we could have hired skilled people right away, it would have significantly added to our sales and bottom line,” he said.
Small businesses likewise need a steady flow of capital investment or credit to flourish. By that standard, a good portion of Southland firms say they’re feeling parched.
More than half of all business owners surveyed said access to loans, equity infusions and other funding presented some type of hurdle, with one-sixth rating it a critical concern.
The survey also showed that women were less likely to have a bank loan than men, while minorities had more trouble accessing capital than whites. In fact, African American and Latino entrepreneurs rated financing as the No. 1 challenge facing their businesses.
Regardless of gender, race or ethnicity, Southern California business owners are particularly rankled by taxes and government regulations, a continuation of long-standing criticisms of the state’s business climate.
To be sure, the state has tried to lift some of the burden on business owners in recent years--for example, reducing workers’ compensation costs. Moreover, Los Angeles has helped certain industries, notably entertainment and new media, by lowering taxes and easing the permit process.
But on the whole, small businesses throughout the region, across all industries and revenue groups, exhibited strong negative sentiments about government--that catch-all quagmire of taxes, fees, permits, licenses and environmental regulations.
In fact, healthy and growing enterprises held some of the sourest views. That’s not as surprising as it might seem at first blush, according to USC’s Gartner.
“Those are the companies that are dealing with paperwork for new hires, or maybe they’ve recently tried to obtain building permits and licenses to expand,” Gartner said. “It’s a nightmare.”
Government Getting in Way
Southland business owners uniformly complained about federal taxes and anti-business policies coming out of Sacramento. But when it comes to county--and particularly city--government, Los Angeles stands out as a target of ire. In fact, business owners in Los Angeles were more critical of local government and surroundings than were entrepreneurs anywhere else in the Southland.
Quality-of-life issues were much more of a concern, as city business owners vented about everything from tight parking and garbage-strewn alleys to the panhandlers and drug dealers who frighten their customers. In fact, violent crime took a back seat to their frustrations with petty crimes such as graffiti and vandalism.
The city’s seemingly endless fees, cumbersome permit process and astronomical business tax also riled survey respondents.
Granada Hills accountant Gail Hargrove says an entrepreneur client of hers worked in Los Angeles for 11 months and got socked for $11,000 in city business taxes, compared with the $124 a year she’s paying now in Glendale. Hargrove says her first piece of professional advice in such cases is also her simplest: Move.
“I’m not one of those tax protesters headed for the mountains with an Uzi,” Hargrove said. “[Los Angeles] is driving people away.”
City officials have heard the complaints and say relief may be on the way. The Riordan administration plans to unveil a proposed new business tax code in early October that is simpler and reduces rates for many businesses.
Southern California’s tough tax and regulatory environment has some business owners looking to move elsewhere, even in these relatively flush times. Others such as Robert Evans are calling it quits.
The owner of Evans Exterminating in Burbank is expecting his highest sales year ever in 1998 and solid profitability after several years of losses.
The business is all he’s ever known, having taken over the company his father started in 1952. But at 51, Evans says he’s “completely drained” from hitting one bureaucratic snare after another. He’s retiring to his farm in Ventura County at the end of the year.
“The difficult part is that when you put [in] that much effort, it’s difficult to let go,” Evans said. “But I had to take that course. To be a small-business owner, you have to be a masochist.”
More information on the survey is available online at https://www.latimes.com. The poll results will be discussed at The Times’ Small Business Strategies Conference Oct. 17-18 at the Los Angeles Convention Center. For more information, call (800) 350-3211 or visit https://www.latimes.com/sbsc.
* LACK OF LABOR: A shortage of skilled workers has become critical. D1
* READY TO GO: One in six small firms is considering leaving the state. D1
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Revenue Report
More than half of Southern California’s small businesses say their sales have declined or stayed flat in the last year.
Sales in the last 12 months
Increased: 48%
Decreased: 26%
Flat: 26%
Source: Los Angeles Times-USC Marshall School 1998 Business Climate Survey
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How the Poll Was Conducted
The Times and USC’s Marshall School of Business mailed out a seven-page questionnaire on June 19 to a random sample of 30,000 businesses in Los Angeles, Orange, San Diego, San Bernardino, Riverside and Ventura counties. The firms were drawn from Dun & Bradstreet’s database of all businesses in the six-county region, from which companies with fewer than 500 employees were selected, in accordance with the Small Business Administration’s definition of small businesses. About 3,000 questionnaires were returned undeliverable. From the remaining 27,000, 1,670 valid responses were received by the cutoff date of Aug. 8, representing a return rate of 6%, considered good for an unsolicited direct-mail survey. The responses were tabulated under the direction of William Gartner, professor of entrepreneurship at USC’s Lloyd Greif Center for Entrepreneurial Studies. The results were benchmarked against national figures and regional industry data kept by the Los Angeles Economic Development Corp. The survey results show that 55% of the responses came from Los Angeles County, 16% each from Orange and San Diego counties, 6% each from Riverside and San Bernardino counties and 1% from Ventura County. The sample also is fairly representative of the industry mix in the region, although there are significantly more manufacturers and somewhat fewer construction firms and food retailers than their actual numbers in the six-county area. The sample tends to favor older, mature firms, reflecting D&B;’s database, which generally is made up of more-established businesses with a credit report. Based on the sample and the results, however, Gartner determined that the survey is representative of the small-business population in Southern California.
