Saturday, July 19, 2008

Picking the right from the wrong.

The Oregonian article below about struggling small business is interesting.

I should say upfront that I think the biggest 2 reasons that small businesses fail are

1.) They are mis-calibrations in the first place. Whenever I express doubt about the viability of a business, someone will always point out how great that other store is, how nice the owners are, how great the service and selection.

But do they have a market? Is their store calibrated to serve that market?

That's the biggest reason in my opinion that a business doesn't continue. Just not judging how many people are likely to walk in the door and spend money over the long run.

2.) Owners mistakes and or failings. Being under-capitalized, spending too much on infrastructure and inventory, (or too little), being unhelpful or unfriendly....generally just doing dumbass things.

The reasons mentioned in the article, high gas prices and or the poor economy, aren't enough to doom a business that is otherwise solid, in my opinion.

I was talking to a customer about my perception that every used bookstore within a hundred miles of Powell's City of Books seems to want to copy his formula. For instance, filing new and old books together.

In my opinion, Powell's succeeded despite this practice, not because of it.

The same is true of any business. Some businesses fail despite doing a lot of things right, and some business succeed despite doing a lot of things wrong. The trick is not the copy the wrong things just because you see them, or not to throw out the right things just because the business failed.

Lots more businesses forced to shut doors
Economy - The bankruptcy rate jumps in the second quarter, with Oregon among the worst hit
Saturday, July 19, 2008
The Oregonian

Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy Newspapers.

Oregon came in with the third biggest percent increase between the first and second quarters.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

An additional 60,000 to 90,000 businesses probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation's 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.

"The climate is turning desperate for small businesses," said George Cloutier, founder of American Management Services, a consulting firm that helps small companies increase profits. "They are in crisis, and as these numbers show, it's getting worse and worse."

Larger enterprises typically have more capital to weather downturns, but many of them also are reeling from the sputtering economy.

"I've been doing this for 36 years, and this is clearly the worst I've ever seen," said Harding Dawahare, the president of the Lexington, Ky.-based Dawahare's clothing store chain, which employs more than 400 people.

It was 1907 when Dawahare's Syrian immigrant grandfather, Serur Dawahare, began packing his mules with bags of fabric and linens and peddling his goods door to door to coal miners in eastern Kentucky.

From those modest beginnings, Dawahare's grew to a 32-store clothing chain with outlets throughout Kentucky and a few stores in Tennessee and West Virginia.

However, Harding Dawahare did the unthinkable recently and filed for bankruptcy after amassing more than $9 million in debts. He said his problems began after a tough year in 2006, but it was the 2007 holiday season that did him in.

"We had a great third quarter, but if you don't have a good fourth quarter, you're not going to make it. And that's essentially what happened. The economy tanked in late November and it never came back, and we just couldn't overcome it."

More than 20 percent of the newly shuttered businesses were in California, which logged 3,141 bankruptcies in the second quarter.

Texas fielded the next-highest number of bankruptcies with 1,168, followed by Michigan with 702 and Florida with 635. New York was next, with 618 petitions, and Colorado had 547.

Commercial bankruptcy filings reported by Automated Access to Court Electronic Records are typically higher than official government figures because of a more thorough reading of the petitions.

Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert, has researched and written about the federal government's underreporting of business bankruptcies. He estimates roughly one in seven people who file for consumer bankruptcy do so in connection with their businesses.

Tom Clements' pet shop in Tampa, Fla., started seeing steep declines in business in April of last year.

"We didn't know what it was at the time, so we were trying to work through it," Clements said.

But as sales stayed flat for the next 15 months, Clements, 62, realized the economy was forcing customers to make tough choices. "Obviously, a puppy isn't something that everybody has to have."

With listed assets of about $2,605, Clements filed for Chapter 7 bankruptcy in June, owing more than $260,000 for back taxes, a property lease, auto leases, unpaid inventory, dog food, phone service, advertising, pest control, waste removal and other services.

"I absolutely loved that business," Clements said wistfully. "It's the kind of business where people were happy. You come, get a puppy or a dog, you go home happy. Unfortunately, I'm not a philanthropist."


Duncan McGeary said...

Oh, and how on earth do you get 260,000 in debt and have 2600 in assets?

Did it all come out as dog poop?

When did he notice that he was spending -- oh, I don't know -- A HUNDRED TIMES MORE THAN HE WAS MAKING!

Why do reporters use such lousy examples.

Duncan McGeary said...

Linda and I were talking about Powell's putting new and used together; she liked it because it gave her a range and choice.

I mentioned, I liked it because Powell could supplement his selections; having a couple of used books by a popular author isn't as good as having a couple of used books and several new ones.

But...I still maintain it works because Powell's is so big and strong in other ways, and has a reputation such that the customer quickly dismisses his initial reaction.

But if you are a smaller store without the reputation, putting used and new together may be a negative....

At least, for me, it's a turnoff everywhere but Powell's.

eyepublius said...

I once heard an interesting theory that small businesses are just as likely, if not more likely, to fail if they're OVERcapitalized as if they're undercapitalized. Reason being that the luxury of having loads of capital lets the business owner not be so careful about analyzing his costs. markets, etc. OTOH the owner starting out on a shoestring has to be watching every penny. Seems to make sense.

Duncan McGeary said...


I've always thought a business should grow; start small, make your mistakes early, learn and then get bigger.

I guess there is a fine line.

bruce said...

Sat next to a guy from the new garbage company the other night at the CC meeting, and asked about the numbers of customers. He only is familiar with them since January, and stated that while residential had been stable (but not growing,) commercial was way down. Just in the last few months.