Creative and painful destruction

Business owners need to know when to change — or to cut the cord

A recent Yukon News story by Jackie Hong highlighted at least eight Whitehorse businesses that have closed or announced upcoming closures.

Closing a business is a traumatic event. It can represent the end of a dream for the owner, the loss of a job for an employee and a gap on a community’s main street. Depending on how severe the final act, it can also mean major financial losses for owners, workers, creditors and tax collectors.

It is never much solace to people involved in a closure that turnover in businesses is an essential part of our capitalist system. Canal companies slumped when the railway was invented. Steam engine manufacturers were decimated by the diesel engine. Sternwheelers went the way of the Yukon’s Scimitar Cat in the face of competition from cars and trucks. The 8-track cassette tape didn’t stand a chance versus the iPod.

Even in areas without these major disruptions, competition is constantly steering capital and resources to businesses with even slight advantages in cost, product, management or other important factors.

Austrian economist Joseph Schumpeter called this “creative destruction.” He said that the “fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”

Many loathe the pain and disruption this relentless process involves. Schumpeter himself called it a “perennial gale” that businesspeople have to face.

But whether you like it or not, you have to live with it unless your organization has a monopoly or some degree of government protection.

So what does all this mean for the Yukon?

There are three scenarios.

The first is that this is “business as usual,” since in any given year some businesses start up and some shut down. The most recent statistics on small and medium sized businesses in Canada show that in 2013, there were 78,430 business births — as Statistics Canada calls them — and 83,240 deaths.

The U.S. Small Business Administration has good data on small and medium sized business survival rates. After three years, only around 60 per cent of start-ups are still alive. Meanwhile, new businesses are getting started. Yukon Bureau of Statistics data from 2015 shows about 15 per cent of Yukon businesses were only one or two years old.

The second scenario is that the Yukon is going through some kind of economic downturn so that the death rate of businesses is particularly high. The U.S. data above goes back to 2004 and clearly shows the negative impact of the financial crisis on business survival rates from 2008-10 for example.

This seems somewhat unlikely in the Yukon, given booming government spending and the low unemployment rate.

The third scenario is that something fundamental is changing in the Yukon economy that is affecting the mix of our businesses. This would include things like a shift from physical retailing to internet commerce, or a shift from businesses that serve the resource industry to those that serve Whitehorse’s growing population of government and administrative workers.

Unfortunately, the Yukon is too small to have convincing data to pick between these options. If even a handful of businesses exit around the same time, or decide to hold on till next year, this can dramatically skew our ratios.

Nonetheless, I think it is a good time for Yukon entrepreneurs and investors to stop and think about some big trends and what they might mean for our businesses.

There are a number of big trends that could change Yukon business fundamentals, either for better or worse depending on your business. One is the rise of internet retailing, which is giving traditional retailers significant worry across North America.

Another is Air North’s cheaper flights to Outside cities, which brings new customers to the Yukon but also may involve Yukoners spending more of their discretionary budgets Outside. The next wave of mining investments present a major opportunity for some kinds of businesses, but the coming boom in demand for labour and housing may be less helpful for businesses in other sectors.

Then there are a bevy of cost trends that are worth looking at, including rising commercial property taxes, the so-far unknown impact of the incoming carbon tax on energy bills, and the cost of competing for labour with government.

The flip side of the last trend is that there are a growing number of well-paid government employees, particularly in Whitehorse, that form a large market for a wide range of goods and services.

The key thing to remember that creative destruction involves opportunities as well as pain. Competing with Amazon to sell widgets will always be tough sledding. But there are lots of things Amazon can’t do in the Yukon, like re-wire a kitchen, install solar panels, help Yukon organizations design cool websites or give hot yoga lessons.

If you’ve been having a slow year (or two), it is critical to assess whether this is permanent or if one of the trends above will help. Business owners are naturally deeply committed to their businesses; I have seen a number over the years burn up cash in struggling businesses for too long.

If the writing is on the wall, it is often better to move quickly to cut the losses or refocus the business rather than hoping for conditions to change.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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