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TENURE IN THE YELLOW PAGES

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TENURE IN THE YELLOW PAGES Powered By Docstoc
					TENURE IN THE YELLOW PAGES
Eugene L. O'Connor California Polytechnic State University San Luis Obispo ABSTRACT How many small businesses fail and in what time frame? Numbers like 50% in five years, 50% in one year, 90% in five years, etc. are quoted in press releases, textbooks and speeches. Alpander, et al quote Siropolis "Approximately 55 percent of all new ventures fail during the first three years".(1) This paper tries to find out what the approximate tenure is for 83 Standard Industrial Classification Codes. The study is of businesses in San Luis Obispo County, California. The length of time for the study was nine years. INTRODUCTION & METHODOLOGY The population of San Luis Obispo County is about 214,000, with an increase of about 30,000 from 1979 to 1988. Its major industries are government, agriculture and tourism. San Luis Obispo is the largest city and the county seat. A nearby university increased from 14,000 to 17,000 students during the period studied. The city has increased in population from 35,000 to 40,000 during the same period. One of two major north-south California highways bisects the city and the county. Two major tourist attractions, a California mission and Hearst Castle are in the county. Most of the businesses in the county are retailers, service firms and government entities. During the period 1980-88, the unemployment rate ranged from 3.2% to 4.8% in the county. The author's rationale for the study was prompted by the apparent high turnover of retail firms in San Luis - Obispo city. Shapero determined the tenure of small firms using a count of businesses entering and exiting the Yellow pages. (2) This study tries to approximate the same methodology. The reason for using the Yellow Pages is the belief that listed businesses are serious about being in business. The Yellow Pages declined to participate in the study citing privacy records. Using telephone directories for the years 1979-1989, a count of new businesses came by noting new names in each annual directory. Exits counted if prior names did not appear in the new directory. Firms that had been in business before the years studied counted as exits if they exited later. National chain outlets were not considered but franchises were if the owners were franchisees. The study did not include farms. SIC code selection was upon the author's knowledge of the community. Professionals such as attorneys or dentists are not included in the count. Where it was known, transfer of ownership without changing the name of the business counted as continuing firms. If the firm changed owners and changed the major activity of the business, the firm was counted as a new business. The number of years in business was a function of a firm's entry into, or deletion from, a directory. Tenure was in whole years regardless of starting or closure dates. LIMITATIONS Some businesses do not list by choice. Some home businesses do not list their phone as a business phone. Other businesses miss the deadline for listing. Some return sporadically because they are not certain of the effectiveness of the medium. Other limitations are multiple listings for the same firm forcing guesses about the major emphasis of the business. Scrambled merchandising is very common, particularly in smaller communities. Other firms employ the tactic because the original thrust of the business, or the target market, has changed. The author screened all citations to try to cull out as many duplications, wrong classifications, etc. as possible. The original sample size of 3,308 firms and the consistency of findings shows that the limitations are not serious problems. FINDINGS

NEW BUSINESSES Listings in the 1980 directory that were not in the 1979 directory counted as new businesses. San Luis Obispo County retailers and service firms dominate the business economy. Listings in the 1979 directory that were not in the 1980, or later, directories counted as closures. Each annual directory followed the same procedure. 1,056 (39%) firms of 2,711 continued operations during the period.(Fig. 1) 1,655 closed their doors over the same period. Attrition rates were slightly lower for the first three years of operations totaling 49.1% (Fig. 2) compared to the 55% mentioned earlier. Figure 3 shows the percentage of firms that continued after starting in the years 1980-89. After the fifth year, there is a pattern of about 27% continuing in business. Continuance of these firms may occur barring death, illness or large national or regional companies moving into the area. In fact, two large department stores have entered the San Luis Obispo County trading area. Two more have extended into the extended area. There is likely to be a higher attrition rate among woman's clothing stores and other specialty shops. The most active industries for new starts were restaurants (all dining establishments), beauty salons (hair cutting, hair styling and nail care) and antique dealers. The attrition rate for these three industries was 63.1%, 53.2% and 70.8% respectively. The retention rate by years of operation for restaurants is shown in Table 4. Eating establishments varied from fast food to elegant restaurants. The number of new starts was nearly twice that of beauty salons. An expanding population could account for some of the activity but not the bulk of it. The author estimates that about fifteen restaurants, as opposed to fast food places and pizza parlors, dominate the market. National franchises/chains dominate the fast food market. About half of the beauty salons went out of business over the period examined.(Fig. 5) There are very few of these firms with more than four employees in the county. Scrambled merchandising tactics grew during the period as firms added nail care and tanning facilities to their service offerings. Firms closed before 1980 in nearly the same proportion in various industries as did those that started after 1979 and then closed. Table I lists industries with an attrition rate over 50%. The first half of the table lists firms that have ease of entry. The high turnover of these kinds of businesses produces lower priced equipment for resale. Antique dealers take items on consignment. Some firms need little more than a telephone and a post office box. The second half of Table 1 lists industries where inventory and equipment needs are large but financing may be available using second mortgages. DISCUSSION The local university is polytechnic in nature and encompasses architecture, civil engineering, agriculture, printing, computer science and business majors along with many others. Graduates and students in the majors listed above try to apply their knowledge to a business. This is particularly true where little capital is necessary and there is a strong desire to stay in the county. The area is seen as a very desirable place to live. Many graduates, ex-students and others from out of the area have made a commitment to living in the area. To make a living, many people start their own businesses. The area has traditionally had a low unemployment rate and a surplus of student labor. Industries with ease of entry attributes attract the people mentioned above. In the author's opinion, this is the reason for so many new businesses such as gardening, auto detailing and computer retailers. Birch, quoted in Bates & Nucci, speaks of "a foundation of massive, continual failures".(3) The term "failures" is interpreted to mean failure to stay in business, whatever the reason. Bates & Nucci call these failures "a great volatility". They maintain that businesses with five and over employees closed at an annual rate of less than 3%. They claim that many discontinuances occur among firms with small gross sales (4) and they argue that new and younger

firms with a small group of employees account for most of the discontinuances or "failures".(5) Perhaps this is the reason for such a high attrition rate in San Luis Obispo County. No information about numbers of employees per firm was available. The author's knowledge of some firms suggests that the bulk of the firms had, at most, three or four employees. Brockway & Mangold argue "Assessing the economic health of a market area is the first step in identifying retail market opportunities for small business."(6) The author's personal experiences with many small businesses in the county found that few new businesses do a market analysis. Fewer yet make a business plan. This is perhaps another reason for the many business "failures" in the county. In some instances, the entrepreneur is unaware of the long hours, hard work, and pressure placed upon them. This may happen despite their experience in the industry as an employee. In all probability, closure will happen if they have no experience in the field. CONCLUSION The number of "failures" in San Luis Obispo County, shows a high attrition rate among thirty-one of the industries studied. The rate for all industries was also high. High is defined as greater than 50%. However, not enough is known about number of employees nor total sales per closed firm. The county is a unique macroeconomic entity in a rural setting. similar findings may occur among some of the several industries in other areas. The findings raise more questions than answers. Is there a causal effect between the higher attrition rate of an industry and higher interest rates for bank loans to long established firms? Does the rate intensify reluctance on the part of financiers and potential investors? Lack of a market analysis, lack of a business plan, lack of business expertise and/or insufficient starting capital are commonly thought to be major factors in business failures. If the findings of Bates and Nucci are accepted, should that group of would-be entrepreneurs who are likely to "fail" be assisted and how should this be accomplished? SBI's can be one part of the answer. There is a market for educating would-be entrepreneurs before they start a business. REFERENCES (1) Alpander, G. G., K. D. Carter and R. A. Forsgren, "Managerial Issues and Problem Solving - The Formative Years". Journal of Small Business Management, April 1990 p. 9. (2) Conversation with Al Shapero, SBIDA National Conference, New Orleans, February, 1981. (3) David L. Birch as quoted in Bates, Timothy & Alfred Nucci. "An Analysis of Small Business Size and Rate of Discontinuance," Journal of Small Business Management, October 1989, p. 1. (4) Ibid., p. 2-3. (5) Ibid., p. 6 (6) Brockway, Gary and W. Glynn Mangold, "The Sales Conversion Index: A Method for Analyzing Small Business Market opportunities", Journal of Small Business Management, April 1988, p. 46. TABLE 1 INDUSTRIES WITH THE HIGHEST ATTRITION RATES THAT HAVE SMALL CAPITAL REQUIREMENTS NO. OF ATTRITION CODE INDUSTRY STARTS RATE 7531B AUTO BODY REPAIR 55 92.7% 5521B AUTO DETAILING 38 84.2 7349A JANITORIAL SERVICE 54 79.6 8349* HOUSE CLEANING 28 78.6 5816A CATERING SERVICE 41 78.0 5999V ANSWERING BUREAUS 43 74.4 7393C SECURITY GUARDS 22 72.7 5913A ANTIQUE DEALERS 106 70.8 0782* GARDENERS 88 68.2 5039S FENCE CONTRACTORS 24 66.7 7692*

WELDING 65 63.1 2434* CABINET MAKERS 78 62.8 7342D PEST CONTROL 26 57.7 7231B BEAUTY SALONS 205 53.2 2293* UPHOLSTERERS 32 53.1 15 SICC's TOTAL STARTS 905 33.4% OF ALL STARTS INDUSTRIES WITH THE HIGHEST ATTRITION RATES WITH LARGER CAPITAL REQUIREMENTS THAT MAY BE FINANCED NO. OF ATTRITION CODE INDUSTRY STARTS RATE 3639* APPLIANCES-HOUSEHOLD-MAJOR 49 79.6% 5945A ARTS & CRAFTS SUPPLIES-RETAIL 24 75.0 5521B AUTO DEALERS-USED CARS 44 75.0 5734B COMPUTER-DEALERS 43 74.4 5911* SPORTING GOODS-DEALERS 29 72.4 5661* SHOE-RETAIL 36 72.2 5941A BICYCLES-DEALERS 21 66.7 5712* FURNITURE DEALERS-NEW 57 64.9 5814A RESTAURANTS 406 63.1 7999A ART GALLERIES-DEALERS 74 60.8 5992* FLORISTS 55 60.0 5161* NURSERIES-RETAIL 39 59.0 5944* JEWELERS-RETAIL 52 57.7 5713A CARPET & RUG-DEALERS-NEW 46 56.7 7212* CLEANERS/LAUNDRIES 25 56.0 5643* BAKERIES/DOUGHNUTS 47 51.1 16 SIC codes TOTAL FIRMS 1047 31 OF 63 SICC's 38.6% OF ALL STARTS 49.2% OF TOTAL SICC's 72.0% OF ALL STARTS


				
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