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Small Business - A Special Advertising Supplement sponsored by Scotiabank - Monday, October 22, 2001

How small businesses can survive

Monday, October 22, 2001

The world economy has come full circle from a reliance on old-fashioned cyclical goods such as trucks and washing machines to a fascination with technology.

Now it's back to the basics of getting along in everyday life.

The promise of high technology and the rush of capital to telecoms and computer companies were based on a premise that productivity would rise and profits would flow in a measure of the money spent. Indeed, much of the productivity promise was kept. After all, how many firms could operate without computers and access to the huge databases that we now take for granted?

In telecoms, the amount of optical fibre available around the world rose to about 25 million kilometres last year from 3.4 million in 1993. But what undid this part of the telecom "miracle" was a laser-light trick. By adding multiple wavelengths of light to each strand, every fibre gained 140 times its usual capacity. The world now has more bandwidth than it needs.

Long-distance capacity is a buyer's market, and optical-network firms have found their business models no longer work. In short, high tech and connectivity and much of the dazzle of technology happened too fast. Before the jobs and money return to technology, demand for computing speed and for bandwidth will have to catch up.

So what does work? In a market in which lenders are leery of taking risks, it follows that the business model that will function well will be one that requires little capital or that can take advantage of capital already in place. Service businesses such as public relations fit the model, of course, but those fields become more crowded as layoffs increase.

"The market is fed up with costly promises," says Garth Whyte, senior vice-president of national affairs at the Canadian Federation of Independent Business, a 100,000-plus-member lobby and research organization for small business. "We are in a back-to-basics economy. We find that small businesses that know their customers and that provide an identifiable product or services expect to adapt to the new economic realities. They can use technology, but they remain wedded to their basic businesses."

A new reality of the market is that the wealth effect, the propensity of people to spend money based on their level of assets, is running in reverse.

"People see that their investments in their RRSPs are worth less. They want to reduce their spending so as to be able to shore up their investments," Whyte says. "They will want to move spending to products and services that stretch their dollars. We see a move in spending from travel to home repair. There will be a reluctance to travel to Florida, especially as the Canadian dollar is falling, and a move to ski vacations [at home]."

Today, small businesses that succeed will be those that can make it through spending cuts driven by the wealth effect and those that can operate without heavy capital investment. "Consulting services that help clients to stretch their money and low overhead firms that can do what downtown firms do in expensive offices should also be able to succeed," Whyte says.

What has not changed in the contraction of the economy is people's needs for basic services and products.

Small-business owners/managers report feeling that, the more basic the service, the more secure it is, Whyte says. "As well, the more local the service, the more likely it is to get through the recession. The single lesson -- be close to your customers."

Consumer products also should do relatively well, not only because people have to eat and have shelter, but because, as incomes fall, progressive taxes tend to fall more than proportionately.

On the way down, the tax system provides relief, so that spending on groceries should not change very much, says Pat McKeough, a Toronto-based portfolio manger and publisher of a market newsletter, The Successful Investor.

If the Canadian economy continues to decline, firms that can provide services with domestic inputs should do relatively better than those with imported inputs, McKeough says.

Sectors fit to handle recession

1. Food-specialty retailing: greengrocers, for example
2. Repair services: appliances, cars
3. Home improvement: alternative to buying new homes
4. Motels, bed-and-breakfasts for people switching from air travel to automobile trips
5. Rerun movie houses and less expensive entertainment
6. Personal services, such as grooming
7. Security services
8. Recycling services for computers, other goods previously discarded
9. Equipment sharing and brokerage services
10. Expert shopping services for high-ticket goods to find best prices

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