CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM Elements Spa & Salon owners Jamie Cheng, left, and Bree Komagome, both former attorneys, recently celebrated the two-year anniversary of their business that they left the legal profession to open. Cheng said they've focused on retaining employees and their payroll has increased 47 percent since their salon opened.

Thinking outside the box

Small businesses in Hawaii have to specialize to survive the tough big-box world

STORY SUMMARY »

While the arrival of more big-box retailers and name-brand national chains in Honolulu's urban core has resulted in raised rents and the closures for many neighborhood businesses, there is still room for Hawaii's small businesses to thrive.

Businesses that have learned not to compete head-on with the big-box retailers and national chains and elect to specialize and differentiate themselves from the masses have found that they actually can profit from an increased customer base.

Still, Hawaii's small businesses must never forget that competition is fierce and that it's only going to get tougher,

Only about two-thirds of new employer establishments survive at least two years and only about 44 percent survive at least four years, according to the Small Business Administration in Hawaii. And when it comes to retail, those odds are even more daunting.

Still, small business that offer specialized service, expert knowledge, convenience and exclusivity often find that they have an edge on their larger competitors.

DENNIS ODA / DODA@STARBULLETIN.COM Hot Mama is a maternity and nursing store in Kaimuki that is owned by Paige Bradbury, left, who is reflected in a mirror as she holds up a top by Olian. Bradbury has tried to stay ahead of the competition by offering exclusive merchandise and unparalleled service. On the right, customer Yuko Ishimura is reflected in the dressing room while looking at a dress by Noppies.

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When Paige Bradbury opened up Hot Mama, a maternity and nursing store in Kaimuki, like all parents she thought there was no other "baby" like hers in all the land.

"In 2005, I didn't have much competition," Bradbury said. "But now, several other maternity retailers like Old Navy and Motherhood have opened."

While the arrival of more big-box retailers and name-brand national chains in Honolulu's urban core has resulted in raised rents and the closures for many neighborhood businesses, Bradbury used her creativity to birth a new strategy.

"We live on an island so it's all virtually one neighborhood. Any competitor cuts into your market share and makes it more challenging to turn a profit," Bradbury said. "I used to sell 40 a week of a certain item, but now everyone carries it and I'm lucky if I sell five."

Big-boxes and mainland chains create critical mass in the regions that they anchor, boost traffic and pump up sales for surrounding businesses. However, small-business owners like Bradbury often fear that they will be obscured by national chains.

To prevent that from happening, Bradbury streamlined and tweaked her business model. She's remodeled, hired more help and created brand-loyalty programs to increase comfort and service for her customers. She's also worked on differentiating her store by carrying exclusive items that her competitors don't have the rights to sell.

CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM Tracy Ubongen received a treatment from Mayleen Lau, master stylist at Elements Spa & Salon.

"Corporate entities are taking over," Bradbury said. "I have to rely on really good service and specialized attention. I have to make sure that I have exclusive brands and high quality, and I'm constantly trying to make sure that I'm not looking like any other place on the island."

Bradbury is not alone. Plenty of businesses like Battery Bill's LLC in Mapunapuna and Elements Spa & Salon in Honolulu, and the islandwide icons City Mill and Big City Diner, have learned that when they don't try to compete head-on with the big-box retailers and national chains and elect to specialize and differentiate themselves from the masses, that they can actually profit from an increased customer base.

"We had an open market in 1988 -- there was nobody here and we sold lots of car batteries. Sears was our only major competitor," said Bill Ogawa, owner of Battery Bill's.

After Costco arrived, Ogawa spent $100,000 in advertising for two years trying to keep up with his competitor, and when that didn't work, decided to change his business plan.

"We lost 30 percent of our business when Costco arrived," he said, adding that the company stayed afloat by catering to corporate customers on contract.

But, after Wal-Mart and all the other retailers arrived, Ogawa was forced to develop another niche -- entirely. He downsized employees and space, but expanded the business's focus from a primarily auto and marine battery shop to include all types of batteries, even computer batteries.

"We sell any kind of battery that you need," he said, adding that the store has a high percentage of repeat customers because employees offer expert advice on which batteries will supply them with the most power for their money.

Offering specialized service and expert knowledge is a way for small businesses to edge out their larger competitors, said kamaaina retail analyst Stephany Sofos.

"As great as these big businesses are, they can't do everything," Sofos said. "The little guys who can offer the increased convenience of neighborhood locations and enhanced services or niche products still will pick up business."

DENNIS ODA / DODA@STARBULLETIN.COM Paige Bradbury, center, owner of Hot Mama, has remodeled, hired more help and created brand-loyalty programs to increase comfort and service for her customers. On the left, Bradbury helped customers Yuko Ishimura, left, and her husband, David Derauf, who is holding their 4-month-old son, Evan Derauf.

Still, Hawaii's small businesses must never forget that competition is fierce and that it's only going to get tougher, she said.

Only about two-thirds of new employer establishments survive at least two years and only about 44 percent survive at least four years, said Jane Sawyer, a spokeswoman for the Small Business Administration in Hawaii. Yet the number of small businesses in Hawaii is growing, Sawyer said.

According to the latest statistics available for Hawaii, the number of people who claimed that they were self-employed grew by 9.8 percent to 72,429 in 2005 from 65,983 in 2004, she said.

When it comes to retail, the odds of success are even more daunting, Sofos said.

"According to the last census, nothing has really changed," she said. "Some people have come and some have gone, but our population has stayed relatively flat. It's the same with our visitor numbers -- they've only been declining. Yet, our retail is growing, so do the math."

The amount of retail square footage in Hawaii has risen by about 15 percent in the last three to five years and there's another 15 percent on the horizon, she said. Oahu has added 1.5 million square feet of retail in the last three to five years and there's another 1.5 million square feet planned, Sofos said.

"To put the influx of retail in perspective -- that's huge. It's almost the size of Ala Moana Shopping Center," she said. "We've added an Ala Moana in the last few years, and we've got another to go."

While Sofos said demand from retailers -- particularly from the mainland -- who want space in Oahu is unabated, there are signs that the market could be saturated in some categories.

"There's a hunger for space, but I've seen many tenants rolling," she said. "Personally from my observation, I think Hawaii customers value convenience and pricing. If a business doesn't have it, there are five people down the road that will take their spot."

The big-boxes and national chains have made it to Hawaii and are here to stay, said Bob Sigall, Honolulu-based business instructor, consultant and author of the book, "The Companies We Keep."

"I've been here 34 years, and for a long time the sentiment in the community was that Hawaii could not support big-box retailers," Sigall said.

"It was thought that our land cost and shipping and taxes and electricity were too high, but they've all shown that this sentiment isn't true. They are coming to Hawaii, and they are doing great, and the public is reaping the benefit for lower prices."

Still, in many cases, the big boxes and chains have been category killers for Hawaii businesses, Sofos said.

Barnes and Noble and Borders killed off the Honolulu Book Store, Lowes and Home Depot killed off most of the neighborhood hardware stores, and Best Buy killed off the Samsung store, she said.

Wal-Mart has killed off many small tourist-based retailers and Sam's Club and Costco have taken market share from many of Hawaii's local grocery stores, Sofos said.

"People will tell you constantly that they want the local experience, but they enjoy familiarity," she said. "That's why people seek out Starbucks and McDonald's in places like Beijing, China, or Athens, Greece. And that's why they like big-box retailers and chains."

Companies that are in an industry that Costco does well in are going to have to get out of their business model and shift to something that works, Sigall said, adding that City Mill and Battery Bill's are examples of small businesses that lasted after the big players came to town.

"City Mill said the big boxes are initially going to be far away, but they will come here, so we need to plan for it," Sigall said. "They were smart and concentrated on becoming the neighborhood place to go. City Mill customers would have to drive farther to go to Home Depot or Lowe's, and it would take them longer to get in and out of those stores."

Still, when it comes to doing business in Hawaii, Sigall, who serves as a director for the board of the advocacy group Small Business Hawaii, doesn't put competition from the big boxes and national chains in the top three challenges that small-business owners face.

"There's just a high cost of doing business in Hawaii in general," he said. "We pay 50 percent more in electricity than California, and our general excise tax is equivalent to about 18 percent. In other states, you don't get taxes on services. Here, businesses do and they have to build that into the price of goods."

High shipping, land, rent and mortgage costs, as well as high labor fees, also play into the mix of challenges, said former attorneys Jamie Cheng and Bree Komagome, who recently celebrated the two-year anniversary of Elements Spa & Salon -- the small business that they left the legal profession to open.

"Salons have notoriously high turnover rates. We've learned that it's better to nurture our employees rather than have them turn over," Cheng said, adding that their payroll has increased 47 percent since their salon opened because of the number of people that they've added.

The salon's unique product mix also has paid off, Komagome said.

"When we took over the business, it was just breaking even or losing money," Komagome said, adding that small salons in stand-alone locations like theirs face the added difficulty of having to create traffic.

By diversifying their business model to make it stand out against competitors, the salon has been able to make it past the rigorous first year, she said.

"We offer everything from cut and color to hair extensions, waxing, makeup application and lessons, and massage and facial therapies," Komagome said.

Cheng and Komagome also have upped the level of customer service that their salon offers by opening it up for children's birthdays and other group business.

And, customers are given in-store credit for referrals.

"We try to create brand loyalty by offering something that no other salon does," Cheng said.