Cracks in the Crystal Ball

Business forecast spending and investments in 2011

Back Longreads Jan 1, 2011 By Robert Celaschi

Let the economists make all the predictions they like about 2011. It’s the businesses of California that have their budgets on the line.

We asked a half-dozen companies how they placed their bets. It’s not a scientific survey, but rather a series of snapshots showing how the world looks from various business sectors.

Most companies showed at least a little optimism. Most are ready to spend more money in 2011 and reach out for new business. But their optimism is balanced with pragmatism: Those with the means to do so are looking outside the Capital Region for an economic boost.

Celebrating success

People don’t stop celebrating weddings, birthdays and anniversaries when the economy is bad. That has helped Icing On The Cupcake grow to a chain of three specialty bakeries in the past three years.

And the Rocklin-based company plans to keep growing.

“We definitely have more stores on the horizon. Our plan is to grow as healthily and organically as we can,” says Christee Owens, co-owner and president.

The weak economy has allowed the chain to nail down some favorable leases on storefronts in Sacramento and Folsom, deals that may not be there later on, she says. And the business has financed growth from its operating income.

“It’s not to say we wouldn’t take a loan if we have to, but until that time comes we want to stay within our means,” Owens says. “We try to run smart and as lean as possible.”

For 2011, she expects marketing to be the biggest component of the budget. Icing On The Cupcake even employs a marketing assistant.

“We don’t wait for the business to come to us,” she says.

The owners also are looking to run even leaner.

“We are not big on cutting corners,” Owens says. “We are not going to lessen the standards we need to have. But any excess dollars we have really pumped up the marketing.”

An example of lean marketing is the company’s bookmark program. The owners had custom Icing On The Cupcake bookmarks printed and then offered them to reading programs in local schools. Students who reach their reading goals can come in for a free cupcake. Typically, that means the rest of the family will show up too.

Icing On The Cupcake also donates its products to community events.

“It’s giving away money, so to speak, but it always comes back,” Owens says.

No lagging allowed

Insurance is what economists call a lagging indicator. When the contractors, manufacturers and wholesale distributors start doing better, they spend more with their insurance companies.

Warren G. Bender Co., a Roseville-based insurance brokerage, isn’t waiting for its current customers to bounce back.

“We’ve spent a lot of time evaluating our situation,” CEO Steve Bender says. “You can crawl back into your hole and wait for the sun to shine, but that won’t win the battle.”

The firm’s owners say they plan to expand the company’s sales and marketing reach with new hires and new geographic territory.

“We’ve always had some presence in the far north state and the northern coast, as well as down in the valley,” Bender says. “Our sales staff is expected to have a greater, more regular presence in those areas. And we are investing our capital into a greater presence south of the Tehachapis. We will be expanding beyond our typical geographical comfort zone.”

The outward push is partly because of the lagging recovery expected in Sacramento. Bender cited the UCLA Anderson Forecast released in December, which projects “almost imperceptibly slow growth” for California until the end of 2011. And even that outlook is skewed by a stronger Southern California economy.

Even as it reaches out, the insurance firm isn’t expecting significant growth to the bottom line for 2011. That means tapping into cash reserves to make a marketing push in the outlying areas.

“For ourselves as well as other businesses in the Sacramento area, that’s the risk factor,” Bender says. “If you believe in Sacramento and the Sacramento region, we will rebound. If you are going to be on the cutting edge in 2012, when we expect to see the rebound, you have to make the investment now.”

With today’s labor market, Bender has his pick of new hires. At the same time, the company isn’t going to be as forgiving with slow performance as it might have been in the past, he says. The company has to hire smarter and provide great training, but the new hires have to get up to speed faster.
 
Making the most of less

When your company depends on construction, 2011 doesn’t look like a great time to be in Sacramento.

“We think it’s going to get worse before it gets better,” says Steven Moore, chairman of Rex Moore Electrical Contractors and Engineers in Sacramento. “We think that next year is going to be a real struggle in the commercial construction side. We don’t expect the economy to change for at least three years, and it could possibly go five.”

The company is half the size it was during the flush years, and he says he expects it to stay that size.

“Even next year, unless the margins get better, we may not do as well,” he says. “The state has no money. The county has no money. The city has no money.”

Rex Moore did get jobs funded with federal stimulus this past year, a pair of military contracts in San Diego and at Travis Air Force Base in Fairfield. It didn’t make a significant difference, though.

Like other companies, Rex Moore has looked outside of California for more work. The company found someone to partner with in Arizona.

“Your first inclination is that you want to keep all your people working, so you take the work at cost,” Moore says. “We took some work at marginal levels, and we’re done. The work is so cheap you are better off waiting it out.”

To be sure, the company does have work. In fact, it has “a pretty good backlog,” Moore says. “We always get our share, but we’re just not very optimistic about next year.”

Housing starts are the key, he says. Until that market comes back, the company is hunkering down and waiting out the storm.

Betting on technology

Clark Pest Control already hunkered down during the early part of the recession.

“We felt it helped make us more efficient at what we were doing. It was not a bad exercise for us to go through,” says Robert Baker, operations manager of the Lodi-based company.

But now the hunkering down is done.

Even though the economy hasn’t bounced back, it’s creeping in the right direction, and Clark is betting that the rise will continue.

“We have decided to make a strategic effort to spend some more money on some technology and leveraging the technology to become even more efficient,” Baker says. That will mean more handheld computers for Clark’s technicians and more automation of some back-end business processes. And there should be some new hiring.

“We’re forecasting growth for next year,” he says. “Obviously, in the service industry, growth requires people.”

Some people may think of pest control as a luxury service, but the industry was born in the Great Depression.

“It has always been relatively recession proof in the sense that it is a service people have a high value for,” Baker says.

Clark did take a hit on home inspections for new owners. But other areas seem to have made up the loss.

“The insurgence of the bedbug seems to have a lot of people on edge,” Baker says.

Even during the recession, Clark opened offices in Reno and San Diego. Most of the growth has been organic, plus a couple of small acquisitions. The company hasn’t tapped its reserves.

“We do put a pretty good press on marketing,” Baker says. “And of course we are going into areas where we are not as well branded, so we are spending more on branding.”

Clark Pest Control isn’t expecting a return to normal, if “normal” is the wild and crazy economy of 2005 through 2007.

“I wouldn’t mind revisiting a modified normal of the 2003 period,” Baker says.

Reinvention

Rick Wylie doesn’t put a lot of faith in long-range budgets.

“What’s next November going to be like? How are you going to figure that out?” asks the president of Beutler Corp. “Ninety-day windows are as far out as you can really think.”

Then again, Beutler’s business plan has long been based on reacting quickly whenever a product line or service starts showing momentum.

Years ago, the core business was installing heating and air-conditioning systems in new homes. Now it’s a mix of three efforts: solar panels for apartment buildings, an add-on product to increase the efficiency of large commercial air-conditioning and refrigeration units and whole-home energy audits and makeovers.

“We’ve always been innovative, but in this type of climate it becomes less of a differentiator,” he says. Innovation once was icing on the cake. “Now it is the only cake we’ve got.”

Capital investment is a juggling act, Wylie says.

“You rely on your gut there,” he says. “We’ve got an existing business that is distressed. Our commercial construction division is certainly struggling with the greatly reduced business that is available. You’ve got to take your seed corn, and you can’t eat it. You’ve got to plant a little of it.”

The solar panel business has already yielded some big contracts. The residential energy makeovers, under the name of Advanced Comfort & Energy Systems, have been on the market for a few months and are starting to get traction, Wylie says.

Beutler spent the last couple of years developing the refrigeration add-on, called FlashCool. The marketing and sales effort is just now starting.

“We’ll expect to see jobs fulfilled there in February, March and April,” Wylie says.

On the other hand, he’s not betting for a rebound in the housing market. He’s cut core positions related to new construction.

“In some cases, thankfully, we’ve been able to redeploy the personnel into the new business units. It’s still a cost, but a cost with a hope of a short-term benefit,” he says. “Those resources are no longer just losses; they are investments in a future that is much more certain.”

Nothing’s wrong with Kansas

As SureWest Communications peered ahead to 2011, it saw easier access to credit markets, more cash flow, more revenue and more capital spending — much of it in Kansas City, Mo.

While SureWest grew out of the old Roseville Telephone Co., many locals may not realize that it has two primary markets. The other is in the Midwest.

“We see probably more opportunity in Kansas City than in California. I don’t think it is any secret that California’s economy is in very poor condition,” says Dan Bessey, SureWest’s vice president and chief financial officer.

Probably two-thirds of the company’s capital spending is to hook up new customers, what Bessey calls “success-based spending.” SureWest will still try to do as much of that in the Sacramento region as it can, even though many consumers are still cleaning up their own balance sheets.

The other major part of the capital plan is expanding the area and customer base that SureWest serves. One of the company’s targets is Olathe, Kan.

“We are going to increase our footprint in that area quite significantly,” Bessey says.

Still, SureWest does see business customers starting to pick up around Sacramento.

“They are starting to see more need for more bandwidth,” he says.

And a big project for 2011 in the Sacramento Valley will be building out the fiber optic network to cell phone towers so wireless carriers can handle data loads.

“The thing that impacts our industry the most over the long haul is not really recession,” Bessey says, though that certainly has made it harder for the company to grow. “The most significant thing is the advancement of technology.”

But when it comes to new jobs, SureWest isn’t the place to look. The network engineering staff can handle the growth, Bessey says. The marketing team is not likely to expand either.

Post new comment

2801536600 » If you have a visual disability, please type the numbers two one three three into the box. Your submission will be promptly reviewed by a validation service and sent to the site administrators.
By proving you are not a machine, you help us prevent spam and keep the site secure.

Recommended For You

A Look at 2011

It will be the best of times, and the worst of times

Economically, 2011 may go down as a year with a split personality. Sacramento is looking at a much different year than most of the country. Small businesses face a more divergent climate than large companies. Even among small businesses, many have more confidence in their own prospects than in the economy as a whole.

Feb 1, 2011 Robert Celaschi