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SMALL BUSINESS | BUSINESS MAKE-OVER: Southern California
Companies Learning How to Succeed

A family-owned business on Catalina finds out that. . . : No Store Is an Island

January 07, 1998|KAREN E. KLEIN | SPECIAL TO THE TIMES

When small-business consultant Nitin Bhatt began working on a make-over of Avalon Liquor & Gifts on Catalina Island, he asked owner Patrick Johnson to fax him a list of documents.

There was only one problem: Johnson did not have a fax machine.

"Here's my first recommendation," Bhatt said. "Since the store was founded by his parents 45 years ago and Pat's worked there since he was 13, they have not changed the way they do things. He needs to bring operations into the '90s and start interacting more with the financial and business world here in Los Angeles."

Although it's only 26 miles off the coast, Catalina Island is in many respects a different world. "On a laid-back island, I guess it's been easier for us to keep doing things the way we've always done them," Johnson said. "But there comes a time when you're hit with a problem and you have to wake up. That happened to us with the recession."

Johnson's business, founded in 1953, has struggled in recent years, in particular presenting cash flow problems related to the seasonal nature of island tourism. Avalon Liquor's sales during the winter season--when it caters to the island's year-round population of 3,000--are only about one-third of its sales during the summer months.

"Over the past few years, we have had to pay off our debt each summer when cash flow was good and then go back into debt during the slower winter months. It's gotten to be a vicious cycle," Johnson said.

Bhatt began by looking at the cash flow issue and quickly turned up several other problems. "I feel that this business has tremendous potential, but it needs a spark to get it out of a rut," he said.

The most obvious problem Bhatt spotted was a decrease in Avalon Liquor's profitability over the last three years--despite a steady increase in sales and an almost 5% reduction in expenses. "In 1994, this business had a profit margin of 27%--above the industry average of 24%. But by 1996, the margin had fallen to 12%," Bhatt said.

The key factor behind the drop was an increase in cost of goods sold. Over the last three years, Johnson's supplier has increased overall prices almost 15%--a big jump that ate into Johnson's profit margins. Because the price increases were not passed on to his customers, his business was shouldering the burden.

Johnson has had a long-term relationship with a supplier on Catalina Island who delivers his inventory to his back door. But over the last few years, that relationship has deteriorated, Johnson said, with mistakes cropping up on his invoices, customer service declining and individual item price increases of 2% to 5% being implemented without notice. Because Johnson's financial data is not computerized, he had not realized how much his supplier's prices had risen. "I've begged them to highlight the increases for me on their invoices, but they aren't willing to do that," Johnson said.

Bhatt found that Johnson could begin buying from Orange County suppliers and save up to 9%--even with increased shipping charges.

The profitability decline led Bhatt to question why Johnson would let such a problem go unchecked. The answer he found was not atypical for many small businesses: Johnson had mingled his personal and commercial accounts to such an extent that he did not have a clear picture of how his business was doing.

"His finances are all in the same pot," Bhatt said. "He needs to be very clear about separating his business and personal accounting. Better internal accounting controls are crucial, so a business person can spot problems like this before they actually threaten his livelihood."

Computerizing, with a link to his home computer and a part-time bookkeeper to set up his systems, is a must, Bhatt said. Currently, Johnson's wife, Victoria, keeps the store's books by hand, using the system that Johnson's mother taught her when she and Johnson took over the business a decade ago.

"A computerized system could keep daily logs of sales, expenses and income so you could track unfavorable trends, like rising costs, every six weeks instead of noticing them only at year-end," Bhatt said.

He recommended that Johnson select a computer provider who will include a value-added service such as the loan of a technician who can install the system, customize it for Avalon Liquor and provide training. It should include an inventory control system, Bhatt said. That will go a long way toward helping the store overcome another problem: shortages of merchandise during both high and low seasons.

"It is key for Pat to be able to track his product mixes and volumes and know what is selling well and what isn't," Bhatt said. "When I crunched some of the numbers, I found that his inventory turnover ratio is 11 during the high season, which is excellent. I also found that beer turns over faster than liquor, which turns over faster than wine. But if Pat doesn't know that, he has to guess when he buys his inventory and that leads to shortages."

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