Boulder Small Business Fighting Effects of Recession

The Rocky Mountain news featured Colorado small businesses in the front line of recession battle. There are two businesses and their approach particularly stood out. They are, Wheatridge based Vibrant Solar and Boulder based, Boulder Ice Cream. Vibrant stands out for its marketing strategy and Boulder Ice Cream for its operational efficiency.

In times of recession it is all the more important to invest in marketing and develop customers and that is exactly what Vibrant Solar is doing:

"When things are tight, you need to work harder to find customers," said Mark Simmons, Vibrant Solar's vice president of sales and marketing. "This is the time to increase marketing costs, not decrease them."

The company has virtually doubled its marketing budget. It is mailing postcards with personalized messages to potential customers, asking them to contact the company online.

Operational efficiency is no something to achieve just for the recessionary times. It is about keeping the costs down and continuously driving them downwards to keep more of the revenue the business brings in. Boulder Ice Cream has been focused on keeping their fixed costs, costs that are incurred regardless of the sales volume, down. This helps them to manage the low sales volume without making further cuts:

Boulder Ice Cream was careful to not increase its overhead along with its sales. The company doesn't provide health or retirement benefits and uses contract workers to ramp up production during peak selling season, allowing the company to hold steady with six full-time production workers.

What do you think?
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Pricing Experiment by a Boulder Spa Sensorielle

One of the Boulder Net member, Jewl Petteway owns and operates Sensorielle spa in Boulder. As Jewl describes it,

We have been around for 4 years. We are a natural/organic holistic, wellbeing spa... Our treatments are based in nature. Our spa was built with non-toxic paints, and sustainable materials whenever possible.

What is interesting this time and differentiates this spa from others is their introduction of new pricing. Starting February 1st of 2009 Sensorielle is starting a daring pricing experiment they call, Pay-all-you-can pricing. In the recently conducted Boulder Employment Poll, around 25% reported as being unemployed. As the economic conditions deteriorates people starting to cut back on their spending. Even the de facto necessities like cable and Internet are getting cut, so it is no wonder that people will be cutting back on personal grooming and other spa expenses.

In the recent New York Times article it was stated that more of the tasks that are typically outsourced like coloring your hair and walking your dog are coming back home. While the upshot is people saving money on these tasks, every such service people do it themselves it takes away contribution to economic output.

All of these consumers could praise themselves for their newfound frugality in the midst of an economic downturn. But every step they take toward self-reliance — each shrub they prune themselves, each cupcake they bake from scratch — hurts the people and small businesses that have long provided these services professionally.

Sensorielle's Jewl says she realized that people will cut back on spa and related expenses. So she is trying to entice customers to come back by asking them to pay for the service what they value and what they can instead of the posted prices.
Let us help you feel great by offering our loving sanctuary to you.

We[Sensorielle] offer you professional, quality therapists and estheticians at a price you can afford. We offer a healing sanctuary where you can relax, get stress-relief, upliftment, beauty, happiness, and feel a great sense of overall well being. We ask in return that you pay what you truly can for our services.

It is a tricky pricing scheme but it is better than lowering prices to attract customers, because from what I see and read Sensorielle is a premium service and hence it should be offered at a premium price. Any price reduction now will not only signal inferior quality but also will make it very difficult to return to normal prices when the economy turns around.

We understand that a rational person, as defined by Microeconomics, will pay nothing more than the absolute minimum they have to. But as the field of behavioral economics show, people are not rational, they are Predictably Irrational. If the pricing and promotions brings about customers to the Spa, I bet that most will still pay closer to the list price.

What do you think? What will you pay when you visit their spa?

Wild Oats Rent Does Not Stop

Whole Foods announced its fiscal second quarter earnings yesterday. The acquisition and integration costs of Wild Oats are still eating into Whole Foods' earnings. Wild Oats home office at Boulder is still a big part of the expenses, at $4.3 million. Whole Foods has been reducing staff in the Boulder office, it reported 27 employees at the end of second quarter (April 13th) and a current number of 5 employees and expect this to drop to 0 by the end of third quarter.

Even when the labor charges drop, their 8-K says rent payments do not stop yet. The rent payments are $2-$3 million per quarter and they do not indicate how long this would continue.

An interesting calculation is to see how much Whole Foods accounted for the staff . Assuming the higher end of their rent, $3 million, they spent $1.3 million on 27 employees.

How Crocs made its first Million in sales

The May issue of Inc magazine talks to CEO Ron Snyder of Crocs, Niwot Colorado, about how they made their first $1 million in sales.

With only one factory, in Canada, Crocs lacked the capacity to ramp up its production from 30,000 to 300,000 pairs of shoes a month. "There was no chance we could fulfill the order," Snyder says. Fortunately, he had a few contacts in Asia and was able to find a contractor in about a month. Soon, Crocs was shipping thousands of pairs of shoes. "Saying no never occurred to us,"

Since this first million they have come a long way and their stocks was hovering around $75 before falling to $10-$12. Crocs made revenues of $194 million just in the first quarter of 2008. Interestingly, the very first factory in Canada they had used to supply their sales is what they are shutting down now. Is there more room for Crocs' earning growth?

Crocs Earnings Report Deserves a Closer Look

Just a day before Niwot, Colorado based Crocs reported its 2008Q1 earnings (SEC filing) I wrote about its practice of capitalizing software development costs. Yesterday after Crocs (CROX 11.81, +1.85, +18.6%) reported a loss including one time charges for closing down operations in Canada, its shares jumped almost 20%. WSJ blog also predicted a high stock volatility.

For the quarterly earnings we do not have much insight into the components but some of the components do deserve a closer look before predicting a stock turnaround.

1. The Cost of Sales grew faster than revenues, leading to a significant erosion in gross margin. This leads to questions, whether they increased sales by slashing prices and extending higher commissions. How far can they go to increase sales further?
   
2. They use FIFO (First in First out) for inventories. The higher cost of sales is accounted for by the increasing raw material costs. The current cost of sales in the income statement represent the cost of materials when they acquired them, may be an year or two ago. Since then costs have been on the increase due to run up in oil prices. Their gross margin is bound to go down more.
3. Cash position is weak as they generated no operating cash flow and ate into the cash reserves.
4. Their SG&A is also on the rise indicating a higher fixed cost that is independent of sales.
5. They indicate to us that the $12.1 million ($20 million total for the year) after tax charge on closing down Canadian operations is one time charge. In GAAP terms, this is still above the line but most companies tend to signal this to investors who also agree with this one time classification. But we need to find out whether the company is taking a big bath, adding many costs to the restructuring that are usually not one time charges. We do not have data to say either way.
6. Capitalizing Software development costs. We need to see if some of these costs get written off as part of the one time charges.

Before rushing to buy the stocks at current levels, investors do need to ask these questions.