In Waimānalo Town Center, East Honolulu Clothing Company bucks the tide of small mall exodus and welcomes customers with an opening day blessing attended by the Rev. Kaleo Patterson and store owners Maurice Fujie and Andrea Weymouth-Fujie. - Photo: Courtesy of Andrea Weymouth-Fujie

Small Business 101
Getting savvy in an uncertain economy

By Liza Simon | Ka Wai Ola

The nation's sliding economy is adding to the existing hardship of small businesses in Hawai'i's rural communities, home to many Native Hawaiians. Soaring gas prices, and consumer costs alongside cuts in jobs have taken a toll that is visible to the eye in the vacant storefronts of strip malls from Waimānalo to Wai'anae.

The owners of East Honolulu Clothing Co., Maurice Fujie and Andrea Weymouth - Fujie, said that their business, which includes manufacturing garments for hālau, has had more “roller coaster” ups and downs since they relocated last year from Honolulu to the Waimānalo Town Center, where several tenants have recently vacated or shut down amid unconfirmed reports that the complex is up for sale. “Because I can't count on steady trending, I do a lot more of the administrative work myself,” said Weymouth, who is thankful to have a marketing background. Husband Maurice agrees that hard times require hard work and using everything in your skill-set to save operating costs.

The couple echo the observations of many other Hawaiian neighborhood merchants in saying that the country-like location nurtures relationships with local customers, but the downside is attracting an adequate volume of customers without spending money on advertising – typically a casualty of a business slowdown that gives high-powered competitors with big advertising budgets an even greater edge.

In Wai'anae, students in programs at MA'O Farms reap a healthy harvest of new skills from the social enterprise business model. - Photo: Courtesy of MA'O Farms

In spite of this, the couple have reaped some success by cultivating their new country locale as a gathering place; this has included inviting musician friends to put on Friday night “backyard jams” in front of the store and showcasing crafts of unique Waimānalo artisans, including items that reflect the “horse-country feel” of the nearby stables. “So neighborhood residents feel good about picking up a baby lū'au gift here, instead of driving to a big chain store where they might find better prices,” said Weymouth. Still, right after the Aloha Airlines shutdown that laid off some residents in the nearby Hawaiian Homestead community, Weymouth said the Waimānalo Town Center became a “ghost town” – a sign that when the going gets tough, even loyal customers will bypass friendly neighbor haunts in favor of Big Box bargains.

Weymouth's comments also point to some of the reasons why one marker of the economic slowdown is a business exodus from country to city. This, too, is visible to the eye. In stark contrast to vacated rural strip malls, downtown Honolulu boasts a new bumper crop of futuristic-looking office towers, some of them recently acquired by large U.S. continent investment firms Morgan Stanley and Arroyo Realty Partners. As the urban core gets slicker, it becomes a more powerful magnet for customers with disposable income and for bigger business operations able to hire more people at higher salaries. Many economic development experts worry that the disparity between town and country business climates is about a lot more than differences in income.

“If Wai'anae parents are gone to Honolulu to work from 6 a.m. to 7 p.m., then you are creating an inability to be home with kids supervising homework. So the economic disadvantages of a neighborhood spiral into education and home life, where poverty persists across generations,” said Dana Hauanio, director of Honolulu Minority Business at the University of Hawai'i.

From Hauanio's perspective, any economic downturn in Native Hawaiian neighborhoods adds to the social injustice of a historically higher rate of poverty for the Kanaka Maoli residents. Two OHA studies done recently by noted local economist Seiji Naya show that Hawaiians make up less than 20 percent of the overall population but account for a full third of people living in poverty in the state. The same studies showed that only seven percent of all Hawai'i businesses are Native Hawaiian-owned and produced only two percent of total state sales. One sad fact from Naya's research is that the only category where income stream was larger for Native Hawaiians than other groups was in public assistance.

From his extensive compilation of statistical fact, Naya concludes, among other things, that small loans for start-up and struggling Hawaiian businesses can help to bridge an income gap that is bad for all of Hawai'i because it prevents the poor from affording higher education – which Naya calls “the best long-term equalizer of economic disparity.” Naya's recommendation to level the playing field in the short-term with low-interest business loans has been put into practice by many nonprofit and government agencies – notably OHA, which offers qualified Native Hawaiians the low-interest Mālama loan program.

And at a time when Rebecca Soon of the Pacific Gateway Center says, “We're definitely seeing a huge jump in small enterprises unable to make it,” the nonprofit agency supports low-income entrepreneurs in many ways, including “a multi-kitchen food incubator” facility in Kalihi that functions like life-support during the initial first three years of a business that Soon calls critical for a small-fry entrepreneur. “This should be a growth period when you are establishing a customer base, but it's impossible to know how competition might outdo you,” said Soon, adding that newbie businesses need to do a lot of experimenting to discover what appeals to public taste, but these days must also balance their experiments with carefully counting the pennies that go into operating costs.

“Let's say you're marketing new liliko'i jam and transportation costs for the delivery have pushed the unit cost of each glass jar by 20 cents. As either a manufacturer or merchant, you can pass the cost along to your customer, but this will make your product less appealing.” The other choice is to absorb the cost and sink your profits.

Rebecca Soon shows off a kitchen in Pacific Gateway Center's culinary incubator, which has turned dozens of goodies such as vegetarian lau lau and a tūtū's favorite kind of chocolate chip cookie into hot new store products. - Photo: Liza Simon

Soon, the center's director of economic development, says the goal of loaning to entrepreneurial poor people is not just to help with daily survival but to “create long-term wealth and community empowerment, which is not reliant on government social services, often vulnerable to cuts every few years if a new administration adopts a different policy.” Soon says her agency follows the Nobel Peace Prize award-winning model of the Grameen Foundation, which has helped people escape poverty by supplementing collateral-free loans for income-generating business with financial literacy classes, team-building between loan recipients, and partnerships with microfinance institutions.

“One of the biggest stumbling blocks for minority poor people wanting to make a go at business enterprise is having access to capital,” said UH's Hauanio. Naya's studies underscore reasons why this is true for the overall Native Hawaiian population: larger families, less savings and a much lower rate of land or home ownership that provides the financial advantage of home equity.

In today's weakening economy, however, many poverty-fighting loan programs warn against the tendency of small business operators seeking any extension on credit lines, even when financial emergencies strike. As the subprime mortgage crisis demonstrated in the housing sector, unscrupulous financial institutions aggressively targeted low-income borrowers in selling expensive loans when cheaper loans were available. Costs of financial services can bury small business in a cycle of debt, loans and lowered credit scores. In order to lift up the low-income minority, we must empower young people at an earlier age with information about the double-edged nature of costly credit and other financial products, said Hauanio, who makes the observation confirmed by Seiji Naya's research – that a proportionately small number of Native Hawaiians at UH seek degrees in business and finance. Hauanio hopes this changes, because business survival in today's weak economy requires an understanding of complex global developments.

The home-loan crisis, for example, reverberated through worldwide financial markets and is a big factor in the slow economy. Rebecca Soon said responsible lending institutions are reacting by giving more consideration to credit scores, which are used as an indication of person's ability to be financially responsible. But she has had to teach would-be entrepreneurs at Pacific Gateway about how their choices may unintentionally lower their scores. She mentions, for example, that opening a new charge card at a retail store will drop your score. This is because one calculation that goes into a final credit rating is the average length of time a consumer has held credit cards. The longer you've held on to your plastic, the higher your average.

Credit scores are supposed to be race and ethnicity blind under federal law. This is also true for banking institutions, which are not only prohibited from discrimination, but must also by law reinvest in the areas where they operate, regardless of the community's level of prosperity. Nevertheless, a poverty-stricken location for a business often counts as negative for a would-be borrower in the eyes of some lending institutions. Soon said more people are turning to Pacific Gateway after their dream of operating in their low-income home community was curtailed by a bank loan denial.

Certainly this works against the goal of poverty-busting business development, and there may be some cases where it is unlawful discrimination, but in a free market economy, where government regulation of banks is theoretically kept at a minimum, it is expected: “It is only natural from the bank's perspective if they are trying to get returns on investment for shareholders, then they are going to look at every risk factor involved,” Soon said, noting the recent bank failures on the U.S. continent that have led overall to the tightening of loan standards.

In spite of all these challenges, Soon said that local businesses show plenty of creativity in inventing new business models, tapping into markets and coming up with new products. She adds that a high percentage of business failures go for a second startup that then becomes profitable.

In addition to becoming financially informed and frugal in hard times, some have found that it works well in low-income neighborhoods to combine business and social enterprise and take direct aim at raising a community's standard of living. This is the model championed by MA'O Farms, which grows and markets organic produce in Wai'anae and throughout O'ahu under a nonprofit founded by Kukui and Gary Maunakea-Forth. “With gasoline costs driving higher food costs, we know it is more important than ever to reduce our dependency on outside produce and grow what we need for our own healthy nutrition,” said Gary. The couple run their business in conjunction with several “youth leadership programs,” which have received OHA grant funding. In an associate's degree program, MA'O teaches Leeward Community College students to take agricultural products “from seed to new product development and sales.”

Gary said he and his wife set out to change the old Hawai'i plantation paradigm of minimum wage-dominated agricultural labor by training and educating their workforce to take on full responsibility for the 'āina. Interestingly, he and wife Kukui made a go of a more traditional retail business by opening up a health food café across from McDonald's in Wai'anae. The venture lasted four years before they made a strategic decision to concentrate full time on farming. “We were over-extended. You can only be a Ma 'n' Pa to one community business at a time,” said Gary. Meantime, MA'O continues to grow with the nurturance of a very supportive community. “An economic slide can also be an opportunity for starting up new ventures that fit with new concepts – such as today's interest in sustainability,” said Gary.

To weather the cooled business climate, UH's Hauanio said small businesses in Native Hawaiian neighborhoods need to get larger and create multiple skilled jobs. It's not a new idea, but she has seen more examples of Native Hawaiian-owned and operated “Strategic Growth Initiative Companies” in the sectors of technology and construction, one of which garnered a multimillion dollar contract with the military and fills high-paying positions with a local labor force at an outlying site.

“The old saying that 'It does take a village' really applies to business too,” observes Soon, who says that business operators often benefit by collaborating with each other and finding not only ways to save cost, but new ways to expand their entrepreneurial dreams. “Plus, the burden is really on the consumer to patronize their neighborhood establishments. Sure you can go to Wal-Mart and get prices cheaper, but Wal-Mart only invests 5 percent of its revenue in its local workforce. The rest goes outside of Hawai'i, so in the long run, you're contributing to a draining of resources away your community.”

For more information on minority business, credit and business start-ups: For credit use www.cccs
hawaii.org. For business www.pacificgatewaycenter.org.