Small Business Survey results show uncertainty amid recovery
Economists generally agree that Alaska’s recession is over, but small businesses — often the first to feel a downturn — are still recovering.
The Alaska Small Business Development Center Annual Small Business Survey, to be released this week, measures the overall health of small businesses in the state and offers a look at how they are fairing post recession.
Alaska SBDC Executive Director Jon Bittner says that he’s particularly interested in how the survey results identify barriers to business.
“Considering that 99 percent of business in Alaska is small business, things that slow or hinder their growth really impact our economy,” said Bittner. “During a recession or times of economic uncertainty, small businesses are hit first, and hardest.”
The top three barriers to small businesses remain the same as previous years:
1. Operating costs
2. Finding capital
3. Finding employees
Dawn Walsh, who co-owns Anchorage retail shop ShuzyQ with her daughter, Shawna Rider, is well acquainted with the cost of doing business in Alaska. She’s been a boutique owner for the last 15 years, and says that operating expenses present the biggest challenge to their business, specifically shipping costs and logistics.
For a company that orders inventory — shoes, handbags,and other accessories — from across North America and Europe, the balance between paying bills and receiving freight is a delicate one.
“We have some vendors who require us to pay our bills within 30 days, but it can take up to three weeks for freight to arrive and process,” she says. “This week, deliveries are delayed — Span Alaska called to give us a heads up that storms were impacting shipping from Seattle. You can’t always plan for that kind of thing.”
She also says that high costs of shipping make special orders for customers prohibitive, especially when many online retailers offer fast, free shipping.
Bittner agrees, noting that shipping costs, which become increasingly expensive the farther you travel from Alaska’s urban centers, are consistently cited as a major challenge by businesses across the state.
“This is the kind of issue that needs a solution on a larger level; solving the shipping challenge is a very difficult thing for the private sector to do on its own,” Bitter said. “If the state of Alaska wants to grow the economy, this is the kind of fundamental work that could really change the landscape for small businesses.”
Access to capital is a consistent barrier for small businesses. Twenty-five percent of Alaska SBDC survey respondents said they were seeking funding, with fixed capital for new equipment and building renovations being the greatest need followed by working capital for operations. Of those 25 percent, only half of them received funding, and more than half of survey-takers expect it to be difficult to obtain financing in 2020.
Bittner says that he sees an interesting shift in the sources of funding.
“This year, friends and family were the No. 1 source of funding for businesses; in prior years it was bank loans. We’re also seeing a surge in people seeking other non-traditional forms of finance like online lending, angel investing, and crowdfunding.”
Although bank loans are generally considered some of the best funding for a small business because of their low interest rates and dependable process, they can be difficult to attain, especially for businesses just starting out or those with an uncertain financial future. Capital from friends and family, online lending, and crowdfunding aren’t as strict in their lending requirements, but can also carry more risk for the business.
Bittner notes that angel funding is also difficult for businesses with uncertain prospects to obtain.
”This year we saw a huge jump, percentage-wise, in applications for angel funding but no increase in actual investments.”
Recent Department of Labor data shows that Alaska’s population is shrinking due to a combination of outmigration, decline in birth rates, and increase in death rates. Less people means less workers, making the competition for qualified employees fierce, and a strong economy in the Lower 48 makes it hard to attract new talent to the state to fill the gap.
Fifty-six percent of survey respondents say it is very or somewhat difficult to hire employees, the biggest reason being a lack of qualified applicants.
“During the last three years, lack of qualified applicants has been split evenly between applicants that lack technical skills and those that lack soft skills,” says Bittner. “Lack of technical skills is hard to address. There’s only 700,000 of us in Alaska, and we can’t have homegrown specialists in everything, but the strong economy in the Lower 48 is making it harder to attract what we don’t have to the state.”
He sees the lack of soft skills as a fixable problem that can start to be addressed during K-12 education, and identifies it as one that the state could solve by partnering with the private sector to invest in helping students become career-ready.
Hiring qualified staff hasn’t been an issue for Walsh.
“We’ve been really fortunate that people want to work for us,” she said. “When I ask my employees what they like about working at ShuzyQ, it’s always the customers. Plus, people come in because they want something to make them happy, and helping them find it is very rewarding.”
Additionally, Walsh says that ShuzyQ pays competitive retail rates and offers bonuses and flexible schedules to attract and keep employees.
Confidence in Alaska’s economy
The survey also measures business owners’ confidence in the economy.
In general, business owners are more optimistic about their own businesses than they are about the economy as a whole. When it comes to the economy, respondents are split roughly into thirds: they are equally likely to think the economy will improve (31 percent), worsen (33 percent), or are just uncertain (36 percent).
However, the number of businesses marking “yes” to whether or not they have confidence in the state economy dropped 16 percent from 2018.
“It’s interesting that we’re seeing declining confidence in the economy while at the same time most economists are agreeing that we’re coming out of the recession,” says Bittner. “For this level of pessimism, there must be another factor contributing to business owners uncertainty.”
Walsh thinks she might have the answer, for some retailers at least.
“This year was really challenging for us,” Walsh said. “We had the heatwave, and we ran out of sandals but couldn’t sell other shoes. BP announced they were leaving Alaska, Nordstrom closed which wasn’t good for retail overall, and online shopping is always our biggest competitor.
“But the biggest impact was when the budget came out at the end of June. People came back to the store to return their shoes, they were frightened and worried, some of them got pink slips. Politics definitely plays a role in stability, and we’ve been told that election years are harder on retail.”
Economic uncertainty is a sizable barrier to small business.
“You can plan for good times and you can plan for bad times, both are acceptable and viable parts of being a small business,” says Bittner. “But the hardest thing for a business to deal with is uncertainty.”
He sees businesses not planning for growth and instead focusing on trying not to contract.
“Instead of working to increase market share, people are using their capital to pay for operating costs to try to hold the line,” Bittner added. “The state needs to provide them with a clear vision on what’s to come, and offer stable taxes, a clear regulatory environment, and a strong economic plan for the future.”
Walsh says her team had to work harder than ever before just to keep the numbers similar to years prior. Despite the challenges, ShuzyQ finished 2019 within $1,000 in gross sales of 2018. Profits are still down 10 percent from pre-recession, but now Walsh considers these numbers her “new normal.”
Signs of economic opportunity
“Last summer I was very distraught, very concerned about the future of small business in Alaska because of the economy. It’s scary being a business owner,” says Walsh. “But now I have a lot more confidence than I did six months ago.”
Along with a strong quarter, she’s seeing more people get involved in their communities and local politics, and points to efforts in Anchorage to invest in downtown along with new housing developments — meaning more small stores and coffee shops springing up nearby — as signs that things are turning around.
Bittner is also optimistic.
“I still think that the Alaska economy has a lot going for it. There are strong growth opportunities in health care and tourism, and to a smaller extent in manufacturing. There are also interesting new prospects in the resource extraction industry as well as in renewables and energy efficiency. Military/federal spending is also going to be a boon, especially in the interior and rural Alaska,” he said. “All of this could lead to more economic opportunities for those who are willing to take advantage of them. If anyone has the wherewithal to overcome the barriers to doing business in Alaska, it’s Alaskan entrepreneurs.”
Gretchen Fauske is a marketing-minded economic developer fueled by a passion for entrepreneurship, innovation, and small business. She is the associate director for the University of Alaska Center for Economic Development, board president for Launch Alaska, and a Gallup-certified CliftonStrengths coach.