viable business enterprises for rural alaska.jan'08

8/2/2019 Viable Business Enterprises for Rural Alaska.jan'08

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VIABILITY OF BUSINESS ENTERPRISES FOR RURAL

ALASKA:COMMUNITY FACTORS AND

ENTREPRENEURIAL STRATEGIES

JANUARY 21,2008

Institute of Social and Economic ResearchUniversity of Alaska Anchorage

3211 Providence DriveAnchorage, Alaska 99508

Prepared with financial support from: U.S. Department of Commerce, EconomicDevelopment Administration; Rasmuson Foundation; British Petroleum Foundation;

Wells Fargo; and the University of Alaska Foundation


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ACKNOWLEDGEMENTS

This study was designed and lead by Sharman Haley, Ph.D., with Virginia Fay serving asco-PI. Analysts and authors for specific chapters in the report include Virginia Fay

(Chapter 2), Cami Woolam and Sharman Haley (Chapters 3 and 4), Jane Angvik(Chapter 5 and Volume II), and Linda Leask (Executive Summary). Perry Eaton, DarcyDugan and Deborah Daisy contributed case study interviews. The survey research staffcarried out a very difficult survey: thanks to Virgene Hanna, Director of SurveyResearch; Pat DeRoche, Survey Supervisor; interviewers Irma Schrenier, Pansy Herring,Uyuriukarq Lily Ann Andrews Ulran; and the nine student interviewers. We appreciateand acknowledge research assistance by Ben Saylor and Mehgan Wilson; consultationand advice by Stephanie Martin; data entry by Darla Siver; and graphic design by MollyRideout and Clemencia Merrill. Our gratitude also to Alexandra Hill, Steve Colt, VirginiaFay and Linda Ketchum who helped edit and prepare the review drafts.We gratefully acknowledge the wise counsel of our board of advisors, listed individuallyin Appendix A. The study team would like to especially thank the hundreds of Alaskabusinesspeople who provided information through survey responses and interviews.

We very much appreciate the financial support of our project sponsors, U.S. Departmentof Commerce Economic Development Administration, Rasmuson Foundation, BritishPetroleum Foundation, Wells Fargo, and the University of Alaska Foundation; withoutthem this study could not have been done. The statements, findings, conclusions, andrecommendations are those of the authors and do not necessarily reflect the views of theU.S. Department of Commerce, Economic Development Administration or other projectsponsors.


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Establishing businesses in rural Alaska is hard but not impossible.Hundreds of businesses exist in rural communities around the state,and business owners have found ways to deal with the barriers createdby small markets, remote location, high costs, and harsh climate.

But many others have tried and failed to overcome the many dif-ficulties, and some may have business ideas but are reluctant to takeon all the risks involved in trying to establish a business in rural Alaska.

With support from the Rasmuson Foundation, BP Exploration(Alaska), Wells Fargo Bank, the U.S. Economic Development Adminis-tration, and the University of Alaska Foundation, ISER examined whattypes of businesses are viable in rural Alaska and under what conditions.

We named this research Viable Business Enterprises for Rural Alaska(VIBES). The research has several purposesto help prospective busi-ness owners better understand and deal with the challenges they will facein rural Alaska; to help government and private organizations understandthe kinds of help established businesses still need; and ultimately, to helpincrease the number and the diversity of businesses in rural Alaska.

This summary highlights the findings of a longer report (see backpage). We looked at businesses in small rural places that are off the roadsystem and have populations between 200 and 1,400 (see map). We iden-

Executive SummaryViable Business Enterprises for Rural Alaska: What Works?

By Sharman Haley, Ginny Fay, Jane Angvik, and Cami Woolam

University of Alaska Anchorage Institute of Social and Economic Research October 2007

Rural Alaska Communities Off Road System, Populations 200 to 1,400

tified businesses in these communities with the 2006 state business licensefile and then looked for relationships between business activity and community characteristics. We also took a random sample of 19 communitiesand tried to interview all business owners. (We do not name the surveyedplaces, because we promised respondents we wouldnt.) Finally, we did de-tailed case studies of some rural businesses, based on recommendationsof our project advisory board and others familiar with rural Alaska.

Which communities have advantages?

Before we summarize the findings of our business survey and casestudies, we first need to say that some rural places have location advantages that make business development more likely. Places that are closeto national parks, or have strong local commercial fisheries, or relativelylower travel costs from Anchorage are likely to have a larger, more diverse group of businesses. Places with larger populations are also morelikely to draw businesses, but location is even more important than size

These advantages may seem obviousplaces that can drawoutside money, either from tourism or from commercial fisheries, haveadvantages over places that dont have such resources. But its useful tokeep in mind that not all rural places are the sameand that some faceeven bigger challenges than others.


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challenges RuRalBusinesses Face

To find out what rural business owners themselves see as thechallenges of operating in small rural places off the road system, we in-terviewed 196 business owners in 19 randomly selected communities.(The table at the bottom of page 3 shows survey sample statistics.) Weasked them about both the problems they faced at the time they startedtheir businesses and in day-to-day operations since then.

Nearly half the business owners said they faced a number of chal-

lenges before they opened their doors. They had to, among other things,assess likely demand; identify markets; get necessary licenses, permits,and insurance; look for training in business management; find a locationfor their business; and get inventory.

Once they started up, about 12% of the new business owners saidthey faced challenges in learning about marketing and advertising, aswell as financial managementsetting up bank accounts, managing cashflow, using accounting software, sending out bills, and filing taxes. Another11% said they also had to learn about business operationsprovidingcustomer service, hiring employees, developing community relations, find-ing suppliers, and maintaining inventory. One in ten surveyed owners said

they faced problems in getting capital to start their businesses.Owners also reported continuing challenges in operating estab-

lished businesses. More than one-quarter said they still have some prob-lems with managing day-to-day operationsgetting licenses and permits,hiring and supervising employees, continuing to provide good customerservice, facing competition from other businesses, and getting and usingnew technology. About 20% identified financial management as a continu-ing challenge, especially having sufficient cash flow to cover expenses.

Just under 20% said they face challenges in trying to expand theirbusinessesattracting new customers or finding new markets, drawingup new business plans, and setting goals. About 16% said they strugglewith all the factors created by operating in remote locations, includingharsh weather, slow or inadequate communications technology, and thedifficulties and high costs of getting goods and supplies.

hoW can agenciesand oRganizations help?

Given all the difficulties in keeping businesses going in rural places,we asked owners what kinds of help they would most like from governmentor private organizations in their regions. Business owners most frequently

said more training would be useful, for both prospective and existing business owners. About 20% said classes on managing finances and creatingbusiness plans for prospective ownersas well as ongoing training ineffective business management for established ownerswould help.

Nearly 20% said improved infrastructure and communicationsboth telephone and Internetwould help rural businesses. Abou6% said there was a need for more financing for businesses, or at leasmore information about how businesses can get financing. Finally, 5%

said it would help if government agencies and others better understoodthe difficulties rural business face.

snapshotoF suRveyed Businesses

What do these businesses look like, that are meeting the challenges of operating in small rural places? The figures on the facingpage offer a snapshot of the businesses we surveyed.

The biggest share- nearly a thirdare retail stores selling groceries, fuel, and general merchandise. Various arts and recreation busi

nesses are next, accounting for 15% and including many Native artistsTransportation businesses, mostly air, made up another 11%, as did bedand breakfasts, hotels, lodges, and eating places.

Most of these businesses are relatively young, with more than onethird established since 2000 and less than one-quarter in operation before 1980. A big majority80%operate year-round. But businessesthat see most of their activity in the summerbusinesses offering tourisservices, for examplemay have only a skeleton staff during the winter.

The most common major business expenses (excluding payroland costs of purchasing goods among retail businesses) are utilitiesand supplies or materials, cited by half to two-thirds of business own-ers. More than a third cited freight costs. Around 10% cited taxes andcosts of licenses and permits.

Surveyed businesses were almost equally divided betweenlarger and smaller businesses37% had annual sales of more than$100,000 and 31% had sales of less than $10,000. About 60% ofbusinesses report their sales are concentrated either in their own com-munities or in the local area or region. A few sell mostly in other areas ofAlaska, and 11%more than one in tensell mostly outside AlaskaThe remaining 25% of sales are not concentrated in any one area.

Most surveyed businesses have at least some full-time employ-ees, and 28% have only full-time workers. Only 20% have no full-timeemployees.

How Can OrganizationsHelp Small Rural Businesses?

(Percent of Surveyed Businesses Identifying Type of Help)

Offer businessowners training

Improveinfrastructureand communications

Offer financing

for businesses

20%

18%

6%Learn more aboutchallenges ruralbusinesses face

5%

Challenges Businesses Facein Small Rural Alaska Communities

(Percent of 196 Surveyed Businesses Identifying Challenge)

Establishing businessMarketing business

Financial managementOperations management

Getting start-up capital

Challenges at the time of start-up45%

12%12%11%

10%

Operations management

Financial management

Attempting to growChallenges related to

remote location

26%20%

18%

16%

Challenges of day-to-day operation


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case studiesoF RuRalBusinesses

The last part of our research involved learning more throughdetailed case studies of some rural businessesmostly businesses thaare currently operating, but a few that have had to close their doorsOwners of both current and former businesses have learned lessonssome quite costly that can be useful to others. The table on the backpage summarizes what they most frequently told usand what they saidabout the challenges tracked quite closely with our survey findings.

What Do Surveyed Businesses Look Like?(196 Businesses in 19 Communities)

Grocery, fuel, generalmerchandise, and other tradeNative arts, bingo and pull-tabs,sport hunting and fishingguides and outfitters

Air and other transportationBed and breakfasts, hotels,lodges, and eating placesResidential and commercialrentals and leasesAll other businesses

Before 19801980s

1990s

Since 2000

Year-round4-11 months

Up to 3 monthsor variable

Most Common Types31%

15%

11%

11%

7%

25%

23%18%

24%34%

81%

15%4%

When Businesses Established

Months per Year Businesses Operate

Annual Sales of Surveyed Businesses

37%31%

20%12%

Less than $10,000

$50,000 - $100,000

$100,000 or more

$10,000 - $50,000

Materials and suppliesFreight

Business servicesRent or mortgage

Taxes

Most Common Major Expenses Cited By Owners*(Percent of 183 businesses identifying various expenses)

65%53%

37%23%

11%10%

Permits and licenses 9%

20%

28%52%

Employment at Surveyed Businesses(Based on responses of 192 businesses)

Businesses withno full-time employees

Businesses withall full-time employees

Businesseswhere atleast halfbut not allemployeesare full-time

Sales by Residence of Customer*(Based on responses of 187 businesses )

51%

25%

11%

5%

4%4%

Localcommunity

Sales notconcentrated

in singlelocation

Outside Alaska

Other Alaska

Local region Local area

( Based on responses of 167 businesses)

*At least 75% of sales, except for 25% of sales not concentratedin one area.

*Excluding payroll and cost of goods purchased among businesses with those expenses.

Utilities

sample sizeand Response Rate FoR Business suRvey

Total businesses identified in 19 communities: 398Businesses screened out: 128

(mostly those with annual sales below $3,000)

Total businesses in interview sample: 270Refused: 19

Unable to contact/no response: 55Completed interviews/Response rate/Confidence interval: 196/73%/7%


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4

Lessons from Case Studies of Rural Businesses(Detailed Interviews with Current and Former Business Owners)

Take a hard look at whether there will be enough demand for what you plan to offer. Identify either a neededservice or an opportunity in a growing industry. Examples in the case studies include a small on-demand air service providingneeded transportation in southwest Alaska; a company introducing bird watching tours in a remote southwest area with a number ofrare birds; and a southeast community growing commercial oyster seed for sale to oyster farmers.

Draw up a detailed business plan that accounts for all aspects of the business, including expenses, estimated

cash flow, management and training of employees, and marketing strategies. The owners of one business (a smalllogging company) invested their own money, took out loans, and worked very long hours for nearly a decade before debt forced themto close their doors. They hadnt calculated all their likely expenses, didnt realize the implications of contracts they signed, and didnthave the experience to manage a sudden increase in the number of employees. In another example, a tribally owned business signeda fixed-rate contract to digitize documents for the federal government, only to find out that the fixed rate didnt fully cover expenses.

Get expert help whenever possible, and find out about grant programs . A southwest resident planning to establish bird-watching tours was able to get a start-up grant from the Alaska Federation of Natives Alaska Marketplace program, as well as helpfrom state agencies working to increase tourism in rural Alaska. Those agencies provided technical help and brought representativesof national organizations to the southwest region to assess bird-watching opportunities and identify what bird watchers traveling tothe region would need. In another example, a southeast community hoping to star t growing commercial oyster seed got advice fromexperts in oyster farming, who also helped the community get a $65,000 grant from the state.

Be careful about how much debt you take on, and determine whether you could still make debt payments if your

business slowed down. One businessman has successfully operated a construction company in interior Alaska for 25 years, andin the early years he saved money from each contract to buy more equipment. Only when his business was established did he borrow.Another example is a general store established in the 1960s in a small northwest Alaska community. Incomes are generally low in thiscommunity and the costs of transporting good are high and rising. The owners (the original owner and his daughter, who took overin the 1990s) have kept their expenses down by not borrowing, using savings, and maintaining the stores refrigeration equipment.

Have experience in managing a business or get training. Many of the business owners we interviewed said they could haveused management help when they started their businesses, and a number said they could still benefit now from training that helpedthem understand contracts, manage cash flow, deal with growth, and carry out other aspects of day-to-day operations.

Dont expand too fast. The owners of one company that ultimately went out of business said a big reason was that they didntforesee the expenses and complicated logistics of expanding rapidly. Another business, a charter fishing operation, has operatedsuccessfully with one boat since the late 1980s, but the owner is still leery of taking on the additional responsibilitieslike hiring acaptainfor a second boat, even though he believes there is enough demand. Also, several owners said that when expanding,

businesses should try to minimize their risks, in case new demand isnt as large as they expected. Make the business a family business when possible. Several owners of small businesses told us that one of the big reasonsthey can stay in business is that relatives provide critical services like keeping books, acting as crew members, or booking clients.

Get community support, hire local people whenever possible, and develop good relationships with other localbusinesses. The operators of a remote lodge reported that they had stopped booking guided hunts in the fall, even though they lostincome, because local people said these outside hunters were taking food from local hunters. In another example, a southeast villagecorporation that established a local cruise-ship port to create a tourist destination worked with the community well in advance, to setlimits on the number of tourists, to explain how other local businesses could benefit, and to hire and train local people to act as guides.A number of business owners also said that good community relationswith local residents and community organizations all workingtogetheris another key to success, as is cooperating with other local businesses that offer services your customers may need.

Be prepared to deal with all the transportation, weather, communication, and other kinds of difficulties that arepart of running a business in small remote places.

Work hard, love what you do, andalways provide good customer service. Virtually all the business owners we talked tosaid these things cant guarantee successbut they are essential to any successful business.

conclusions

We knew at the outset that establishing businesses in ruralplaces was hard, but now we know a lot more about why it is sohard. We also know what business ownerspeople who have madeit past many barrierssay would most help them. What they mostcommonly want is trainingin planning; in managing finances; inmaking day-to-day operations more efficient; in expanding their busi-nesses. The business owners in both our survey and our detailed

case studies said it plainly: they are prepared to work hard and to

face difficultiesbut they believe good planning and managementskills are also critical to success in rural Alaska.

This summary is based on Viable Business Enterprises forRural Alaska, Final Report, by the same authors, available fromISER (907-786-7710) and online at: www.iser.uaa.alaska.edu

Editor: Linda Leask

Graphics: Clemencia Merrill, Molly Ridout, and Meghan Wilson


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TABLE OF CONTENTS

Executive Summary

1. Introduction................................................................................................................... 1

Conceptual Framework................................................................................................. 1Methods used in this Study........................................................................................... 2Structure of this Report................................................................................................. 3

2. Analysis of Business License Data ............................................................................... 4

Methods......................................................................................................................... 4Results........................................................................................................................... 7

3. Survey of Rural Businesses ........................................................................................ 15

Survey Methodology................................................................................................... 15Survey Findings .......................................................................................................... 17

4. Observations from Open-Ended Questions.............................................................. 25

Startup Challenges ...................................................................................................... 25Current Challenges...................................................................................................... 27Lessons Learned.......................................................................................................... 28Advice for Organizations............................................................................................ 29

5. Summary and Analysis of Case Studies.................................................................... 30

Methods....................................................................................................................... 30Results......................................................................................................................... 33Conclusions................................................................................................................. 37

Volume II: Case Studies

Volume III: Appendices

Appendix A: ViBEs AdvisorsAppendix B: Economic Multiplier and Business Hierarchy Models Literature ReviewAppendix C: ViBEs Survey InstrumentsAppendix D: Open-Ended QuestionsAppendix E: Detailed Community Information Variables and Data SourcesAppendix F: Detailed Business License InformationAppendix G: North American Industrial Classification System Two-Digit Codes


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Map 1.1 Rural Alaska Communities Off Road System, Populations 200 to 1,400


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Viability of Business Enterprises for Rural Alaska

1

1. Introduction

What types of business enterprises are viable in rural Alaska, where, and under whatconditions? The purpose of this research is to address these questions in a systematic,rigorous way. Business development in rural Alaska is challenging, but not impossible.

Many entrepreneurial Alaskans have overcome the barriers of small market size,distance, high costs, and a harsh climate to start and sustain successful businessenterprises throughout the state. However, others have tried and failed, and some mayhave good business ideas but fear the legitimate risks involved in putting them intoaction.

This study both describes the existing patterns of business activity in rural Alaska andidentifies community characteristics that are associated with successful enterprises ofvarious types. The research explores what businesses have been created, have grown, andhave succeeded. Additionally, we consider some businesses that failed and probes thereasons behind these events. A better understanding of these dynamics can be used tohelp guide business startup decisions, business planning, and loan decisions by

individuals, business assistance providers and lending institutions, as well as communityplanning and infrastructure investment decisions. The ultimate purpose of our research isto help increase the number and diversity of successful private sector business enterprisesin rural Alaska.

The communities we studied are small, rural places off the road system, with populationsranging from 200 to 1,400 persons (Map 1.1). As communities grow in population andcomplexity, more commercial operations can be supported by the demand for goods andservices from local residents. For some types of business activities transportation andcommunication links extend the market range beyond the local community.

To guide our analysis we established an advisory board composed of people who

promote and underwrite economic development business activities in rural Alaska(Appendix A). The advisory board provided guidance on regional differences and keycommunity characteristics that affect business viability in rural Alaska. They assisted theresearch team in determining the key businesses to be interviewed for the case studies.They also reviewed and helped interpret preliminary findings from the survey and theanalysis of the license file.

To conduct this analysis we collected data from four primary sources: the Alaskabusiness license file; a community database compiled from a wide range of publicsources; a survey of rural business enterprises; and in-depth, case study interviews withselected businesses that served as informative case studies. Data collection and analysiswas organized as three tasks: building and analyzing the business license and communitydata files; conducting the survey and analyzing the data; and conducting field interviewsand preparing written case studies of selected enterprises.

Conceptual Framework

The economic theory of regional economic development uses two key concepts: theeconomic multiplier and the hierarchy of trade centers. These concepts are brieflyreviewed here, and are discussed in more detail in Appendix B.


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A community can add new wage-paying jobs in three ways:

Method 1 (exports). Additional goods or services produced locally and sold tonon-local residents will bring money into the community to pay wages.

Method 2 (transfers). Additional money from outside the region (such as an

Alaska Permanent Fund Dividend) can directly pay the wages of local jobs. Method 3 (import substitution). A higher share of the money already in the

region can be spent locally rather than spent elsewhere, supporting local jobs.

In Alaska, goods sold outside the community are usually produced by harvesting orprocessing a natural resource such fish, timber, petroleum or arts and crafts from localmaterials. Natural resource production is constrained by the size and quality of theresource and is typically subject to large fluctuations in market prices.

As the population of a community grows, the size of the local market increases. A largermarket can support more total business activity and a broader spectrum of business types.As more consumer goods and services become available, more consumer dollars are

spent locally, reducing the leakage of money out of the local economy. Lower leakage isthe same thing as a higher economic multiplier. For example, suppose a restaurant in avillage serves sandwiches. If the bread is purchased from a local bakery, the fish from alocal fisher, and the lettuce from a local gardener, then more of the dollars paid forsandwiches will contribute to local employment and income. In contrast, if the bread, hotdogs and lettuce are flown in from Anchorage, a smaller portion of the dollars fromsandwich sales is retained in the communitythe leakage is greater and the economicmultiplier is smaller.

Because larger markets can support more specialized businesses as well as those found inthe smaller markets, there is a hierarchy of trade centers among communities. Thesmallest centers are typically called minimum convenience trade centers. These places

may have little more than one or two general retail stores. The next larger size places,known as full convenience trade centers, have moreand more variedbusinesses.These businesses in the full convenience center can tap the purchasing power of thesurrounding minimum convenience centers.

As one moves up the hierarchy of trade centers with larger market sizes encompassinglarger areas, the variety of businesses increases. The largest markets can supportspecialized retail, wholesale, and services. Although this explanation is somewhat datedbecause of recent shifts toward online retailing, and conditions in rural Alaska are uniquein many respects, the general notion of a hierarchy of trade centers supported byincreasingly large markets remains valid.

Methods Used in this Study

Analysis of the Business License File

We used the year 2006 Alaska business license file to identify rural businesses. We tiedthese businesses to a database of community characteristicssuch as population andincomeand analyzed the relationships between business activity and these communitycharacteristics.


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Survey of Businesses and their Activities

The business license file does not provide information on which businesses are active, thescale of their activity, or the length of time they have been in business. Businesses alsovary significantly in the identification of primary business activities in the business

license file. Especially in smaller communities, a single business may conduct a numberof activities because of the economies of scale provided by fulfilling a number ofbusiness niches via one business operation. Alternatively, one central business locationand staff may divide activities into a number of separate businesses for liability reasons.This information is not readily discernable from the business license file.

To overcome these limitations, we conducted a random sample survey of rural businessowners to clarify their activities and characteristics. We randomly selected 19communities and then attempted to conduct a census of all businesses within eachcommunity. Forty percent of these interviews were conducted in-person by University ofAlaska students hired and trained by us to interview people in the students homevillages. The other 60 percent were completed by telephone. The interviews asked aboutyears in operation, employment, gross sales, numbers and locations of clients, and theiropinions on the hurdles for rural enterprise. The survey contained both structured andopen-ended questions.

Business Case Studies

As a complement to the quantitative analysis, we conducted in-depth case studyinterviews with more than 20 individual businesses to describe in narrative detail and incontext the impediments to enterprise in rural Alaska, and to identify how successfulentrepreneurs have overcome these challenges. We selected these businesses based onrecommendations from our advisory board members, the Alaska Marketplace

competition sponsored by the Alaska Federation of Natives, and various regional sources.They were chosen to offer a mix of regions, business types, strategies, and lessonslearned. The open-ended interviews were designed to explore reasons for successorfailureand to generate useful examples of lessons learned that can be shared withothers.

Structure of this Report

In the next chapter we present our analysis of the business license file and how thesebusinesses relate to the characteristics of their communities. Chapter 3 describes thebusiness survey and reports the results obtained from the structured survey questions.

Chapter 4 summarizes the responses to several open-ended questions that we asked aspart of the survey. Chapter 5 describes the case study methodology and summarizes ourfindings. The case studies themselves appear in Volume II.

Several appendices, bound as Volume III, provide additional details about all aspects ofthe research.


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4

2. Analysis of Business License Data

Methods

Business License File Analysis

The principal information source for identifying rural businesses was the year 2006Alaska Business License file maintained by the Alaska Division of OccupationalLicensing. Business licenses were used to identify businesses by location and by type ofbusiness activity. This file contains records on over 70,000 licensed businesses, over athird of which are issued to persons indicating an Anchorage address. The distribution ofAlaska business licenses is shown in Table 2.1 and Figure 2.1.

We first eliminated records for all businesses located in road-connected and urbanAlaska. The potential problem with this approach is that there are a significant number ofbusinesses whose activities are primarily in rural Alaska yet the legal address is inAnchorage or another urban setting. The business license file lists the address provided

by the person filing for a business license, not the physical location of the business. Forthis reason, use of the business license file to identify rural businesses was supplementedwith other methods described below.

Table 2.1. Distribution of Alaska Business LicensesNumber of Licenses 2005

Address on License Licenses % of Total Per Capita Population

Total Alaska 70,551Non-residents 7,450 10.6%

Anchorage 27,541 39.0% 0.10 278,241Fairbanks 7,568 10.7% 0.09 87,650

Juneau 4,149 5.9% 0.13 31,193Mat-Su 8,234 11.7% 0.11 74,041

Kenai Peninsula 6,809 9.7% 0.13 51,224Ketchikan 2,378 3.4% 0.18 13,125Sitka 1,374 1.9% 0.15 8,947Other urban/road connected 5,270 7.5% 0.17 31,293Rural hubs

Craig 252 0.4% 0.18 1,417

Wrangell 307 0.4% 0.16 1,974Cordova 400 0.6% 0.17 2,288

Dillingham 217 0.3% 0.09 2,370Kotzebue 150 0.2% 0.05 3,120

Petersburg 506 0.7% 0.16 3,155Nome 311 0.4% 0.09 3,508Barrow 160 0.2% 0.04 4,199

Unalaska/Dutch Harbor 597 0.8% 0.14 4,297Bethel 383 0.5% 0.06 5,960Total regional hubs 3,283 4.7% 0.10 32,288

All other rural, non-road connected villages 2,787 4.0% 0.05 54,329 Source: Alaska Department of Commerce, Community and Economic Development, Business License File, 2006.


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Figure 2.1. Geographic Distribution of Alaska Business License Addresses

All other rural

4%

Rural hubs

5%

Other urban/road

8%

Ketchikan

3%

Sitka

2%

Kenai Peninsula

10%

Anchorage

39%

Fairbanks

11%

Juneau

6%

Mat-Su

12%

We next eliminated duplicate licenseslistings with the same business name andbusiness license number. In most cases, these duplicate listings were couples or familyholders of the same business license listing and number. We eliminated 375 duplicatelicense records from the rural business data. For both rural villages and regional hubs,

approximately 12 percent of sole proprietor business licenses had duplicates, suggestingbusiness owners consider licenses a useful mechanism to demonstrate an interest in abusiness in the absence of incorporating or forming a partnership.

Community Characteristics

We constructed a database of community characteristics to determine their influence onrural business viability. The database included measures of population, ethnicity,language, fuel and utility costs, Power Cost Equalization rates, high school achievementtest scores, adjacent public land status, transportation access, internet connectivity,community infrastructure, private land survey status, and other cost of livingcharacteristics. See Appendix E for a complete list of community characteristics variables

and their sources.

We merged the community characteristics data set with the pertinent variables from thebusiness license file (zip code, community, business activity code, primary and secondaryNAIC codes) so that each business record was tied to its community characteristics. Weanalyzed the data to identify those community characteristics that are most highlycorrelated with business formation and success.

There are a number of things that should be noted about this analysis:


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The analysis is a snapshot of one point in time as opposed to a trend analysis. Itmeasures the correlation between different community characteristics andbusiness viability rather than the effect ofchanges in a characteristic over time.An example of this is the impact of fuel costs, all of which are high in all of thesmall rural communities of analysis. In our analysis, fuel prices do not stand out

as a primary determinant of the number and types of business in non-roadconnected rural communities. However, this lack of correlation does not meanthat the price of fuel is not important. An analysis of changes over a ten-yearperiod might show that increases in fuel prices are strongly associated withreduced business viability.

Results reflect only licensed businesses. To the extent that businesses are operatedwithout licenses, they are underrepresented in this analysis. However, we found inour survey of businesses in 19 communities that the majority of businesses thatwere unlicensed had annual gross incomes below $3,000. As a result, we believethat the business license file represents active businesses in rural communities.Survey results also suggest that unlicensed businesses are not concentrated in any

specific business type or activity.

The business location is the community listed by the owner(s). Some, especiallyseasonal businesses, have owners who reside and list their address in othercommunities, especially Anchorage. This may lead to an under representation ofbusinesses in the villages analyzed. However, these businesses most likely havecomparatively less economic impact than businesses owned by local residentsbecause more revenue leaks from the community with non-local resident owners.

Similarly, if a business is owned and operated by an Alaska Native regionalcorporation, it is likely to be licensed in a regional hub rather than a smallercommunity. We suspect that this phenomenon results in an underestimate of

business activity, especially in the North Slope Borough where the regionalcorporation may own and license some business operations out of Barrow.

The type of business activity and NAIC codes are self-reported by purchasers ofthe business license. As a result of the complexity and large quantity of codes,coupled with businesses that conduct multiple activities, there are numerousopportunities for variation and errors in coding.

Despite these limitations, the business license analysis provides some interesting results.Because of the limitations of the business license data, these results are best interpreted asindicators of general conditions. The community business surveys (chapters 3 and 4) andcase studies (chapter 5 and Volume II) provide additional information on the impact of

changes in business costs and components over time. Those analyses also help to fill thedata gaps in the business license file.

Results

Rural Alaska Business Development and Hierarchy of Trade Centers

As predicted by business hierarchy theory, most communities possess at least one generalretail outlet (business type 42, see Table 2.2, Figure 2.2 and the discussion in Chapter


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One). The next most abundant business type is accommodations and food services,followed by arts, entertainment and recreation. The majority of communities have one ofthese types of business establishments. Transportation, other services, and real estate andrenting and leasing are the next most abundant business types. The hierarchy of Alaskarural businesses appears in Appendix F.

Table 2.2. Remote Rural Alaska Businesses by Type of Activity

Total # all % of all Business

communities businesses line code Type of Business Activity

2 0.1% 52 Finance and Insurance

3 0.2% 21 Mining

10 0.6% 92 Public Administration

11 0.6% 55 Management of Companies

18 1.0% 61 Education Services

24 1.3% 22 Utilities

31 1.7% 56 Admin. & Support, Waste & Remediation Services

41 2.3% 51 Information57 3.2% 11 Agriculture, Forestry, Fishing and Hunting

57 3.2% 23 Construction

63 3.5% 31 Manufacturing

73 4.1% 54 Professional, Scientific & Technical Services

82 4.6% 62 Health Care and Social Assistance

137 7.7% 53 Real Estate and Rental and Leasing

142 8.0% 81 Other Services

159 8.9% 48 Transportation and Warehousing

196 11.0% 71 Arts, Entertainment and Recreation

231 12.9% 72 Accommodation and Food Services

449 25.1% 42 Retail Trade (44&45 NAIC)1,786

Source: Alaska Department of Commerce, Community and Economic Development, Business License File, 2006.


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8

Figure 2.2. Number of Businesses by Type of Business Activity

449231

196159

142137

8273

635757

4131

2418

1110

32

0 50 100 150 200 250 300 350 400 450 500

RetailAccom. & Food

Arts, Entert. & Rec.Transp.& Warehous.

Other ServicesReal Estate & Renting

Health & Social Assist.Prof., Scien. & Tech.

ManufacturingConstruction

Ag., Forestry, Fish & HuntInformationAdmin.; Waste & Remed.

UtilitiesEducation Services

Business Mgmt.Public Admin.

MiningFinance & Insur.

Figure 2.3 shows that only 21 percent of all communities have more than 20 businessenterprises, yet this group accounts for about two-thirds of all enterprises. In contrast, themajority of communitiesabout 64 percenteach have fewer than 10 enterprises. Table2.3 describes this distribution in terms of number and types of businesses present andother community characteristics. The communities with more than 20 licensed businessesalso have more diversity of business types. Most of the communities with 20 or morebusinesses are larger communitiesonly one has a population between 200 and 300and they aremore diverse in racial composition. They have more adults in the laborforce, higher median household income, higher academic achievement and smallerhousehold size. (Definitions of these measures can be found in Appendix E)

More detailed tables showing the numbers of businesses by type in each of the 94 smallrural communities analyzed appear in Appendix F. Tables F.1.1 through F.1.3 show thecommunity-business matrix sorted in alphabetic order, by population and by the totalnumber of businesses in each community.

Figure 2.3 Distribution of Businesses Across Communities

Proportion of Communities with Less

Than 10, 10 to 19, and 20 or More

Business

20+

21%

10-19

15%< 10

64%

Proportion of Total Businesses in

Communities with Less than 10, 10 to

19, and 20 or More Businesses

20+

66%10-19

16%

< 10

18%


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9

Table 2.3. Number and Diversity of Businesses and Community Characteristics

Less than 10

businesses

10 to 19

businesses

20 +

businesses

Unit of measure n=52 n=22 n=20

Number of Business Licenses average (st.dev) 5.9 (2.3) 12.4 (2.24) 59.3 (36.6)Number of Lines of Business average (st.dev) 3.6 (1.4) 6.3 (1.4) 11.95 (2.9)

Population average (st.dev) 410 (189) 520 (194) 623 (247)

% Minority* average (st.dev) 8% (11%) 8% (4%) 42% (27%)

% Adults in Labor Force average (st.dev) 58% (10%) 58% (9%) 67% (9%)

Median Household Income median $ $33,084 $34,089 $42,270High school test scores average pass rate 36% 36% 59%

Average Household Size average (st.dev) 4.1 (0.7) 4.0 (0.6) 2.9 (0.6)

Types of Business Activities:

Ag., Forestry, Fishing** & Hunting % of communities 6% 14% 80%

Manufacturing % of communities 6% 23% 60%

Construction % of communities 6% 5% 80%

Arts, Recreation & Entertainment % of communities 33% 77% 95%Transportation % of communities 59% 66% 95%Food & lodging average # per community 0.63 1.32 7.8

Business services average # per community 0.23 1.05 5.3

Information average # per community 0.02 0.1 4.9

Scientific, Technical & Prof. average # per community 0.1 0.2 4.1

CFEC gross earnings % of communities 65% 86% 85%

Per capita CFEC gross earnings average $ $243 $424 $2,729Scenic public lands % of communities 8% 32% 60%

* In these communities the majority population is Alaska Native.

** Does not include commercial fishermen, who are required to have a fishing permit, not a business license.

Communities with:

A number of observations can be made regarding the pattern of business activities whenthe threshold of 20 or more businesses in one community is reached:

Most (80%) of these communities have some sort of basic, renewable resource-

based business activity classified as agriculture, forestry, fishing or hunting. Inrural Alaska this typically means businesses such as timber harvesting,mariculture, and guiding hunting or fishing.1 While some greenhouse, crops, andanimal farming exists, most of this business activity pertains to wild resources.

Manufacturing (60% of the 20+ businesses group) appears to go hand-in-handwith agriculture, forestry, fishing or hunting as these natural resources appear toprovide the raw materials for manufacture of products such as lumber, specialtysmoked salmon, wild berry, or other products.

Construction and real estate are also present. More specialized constructionbusinesses such as cabinet makers, electricians, and plumbers are developed as

the private business sector grows with more total businesses as well as more typesof businesses.

The number of transportation businesses increases, suggesting the community is asubregional transportation hub or has good transportation links. The Alaskaessential air service program also appears to play a role in the development of this

1 Commercial fishing operations licensed under the Commercial Fisheries Entry Commission are notrequired to also purchase an Alaska business license.


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10

sector. Transportation access probably also decreases the cost of shipping goods,fuel prices, and the overall cost of doing business attributable to remote locations.

There is a jump in the number and types of accommodation and food serviceestablishments, precipitated in most cases by adjacent scenic public lands andwaters or rich commercial fishing grounds. Coastal communities with both a

robust commercial fishery and a scenic national park or national forest lead thelist of communities with the largest number of businesses as well as the mostdiversity within and across business sectors.

This diversity in business types, activities and numbers supports the growth ofmore diverse business services (business type 81), as well as informationtechnology and professional services.

Natural resource based businesses, manufacturing, visitors and the accompanyinggrowth in accommodations and food services, all tap into markets beyond thelocal community and region and bring new dollars into the community.

True activity in the agriculture, forestry, fishing and hunting sector is most likelyunderrepresented because subsistence hunting and gathering are non-marketactivities not revealed in the data.

Some rural communities have business activities unexpected in lower-48communities, such as remediation services. Some of these are attributable toDepartment of Defense contamination cleanups (business type 56). Thesecommunities also offer other professional and technical services.

These findings are consistent with the basic premises of the hierarchal trade center andbusiness development models. Generally, as community populations increase, marketsize increases and the number and complexity of trade businesses that can be supportedalso increases. However, in non-road connected rural Alaska, local population alone doesnot appear to be sufficient to cause business growth beyond the local retail and foodservice sectors. Most of the communities that are growing more than a rural microeconomy are expanding their effective market size by capitalizing on exportableproducts and attributes to capture non-local dollars. This characteristic appears to bemore significant than local community population alone. Table F.1.2 (in Appendix F)illustrates this finding: while community population generally increases for thecommunities with more businesses, this progression is punctuated with smaller sizedcommunities.

Examples of ways communities are expanding the local market include hosting visitors toscenic attractions; using or harvesting local natural resources for sale as raw materials or,

more importantly, manufacturing these natural resources into finished products; or takingadvantage of opportunities such as defense contract site remediation projects. AppendixF.2 has more detailed listings of the types of business activities being conducted in theserural communities. The total number of businesses and the number of distinct businesstypes in each community is shown in Map 2.1. For example, Kaktovik has 11 totalbusinesses and 5 types of businesses. This is shown as (11,5) on the map.


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Map 2.1 Number of Businesses and Types of Businesses by Community

11

(Total businesses, Number of distinct business types)


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12

Rural Alaska Business Development and Community Characteristics

To analyze the relationships between business activities and community characteristicswe conducted a series of regression analyses. The dependent variables in our regressionswere the total number of businesses and the number of different types of businesses.

Our analysis considered several income variables including average household income,median household income, total community income, the percentage of IRS income taxreturns with income under $25,000, the percentage of IRS income tax returns withunearned income over $50,000, percentage of income from wages, percentage of incomefrom dividends, and total Commercial Fisheries Entry Commission ex-vessel earnings.

Similarly we analyzed a number of demographic characteristics such as race, population,average household size, language, educational attainment, community development quotastatus, and poverty rates. Our statistical analysis also considered community settings andinfrastructure including proximity to public conservation lands (national parks, nationalforests, national wildlife refuges, and state parks), internet connectivity, and runway

length. We also examined remoteness variables such as the cost of travel from thecommunitys hub to Anchorage and related variables such as the cost of fuel oil. We alsoconsidered local control and public finance variables such as local taxes, communityrevenues from inside and outside sources, and local option alcohol laws. In short, weattempted to find data on all community characteristics that might influence thedevelopment of private businesses in rural communities.

Results from regression analyses indicate that approximately 92% of the variation in thenumber of businesses in remote rural Alaska can be explained by the size of thepopulation, the degree of racial diversity, the cost of travel from the adjacent hub toAnchorage, the presence or absence of a national park, the total amount of commercialfishing gross ex-vessel earnings (as reported by the Commercial Fisheries Entry

Commission), and whether the community is a Tlingit community. Details on the finalregression analysis for total number of businesses are presented in Model 1 below.

Population is a measure of the size of the local market and its potential to support privatesector activity. Consistent with the hierarchy of trade centers theory, a larger populationsupports an increasing number of businesses. Population (pop05) is the 2005 communitypopulation from the Alaska Department of Labor and Work Force Development.

Percent Native population is from 2000 U.S. Census data. Almost all of the communitiesin this analysis have a majority population of Alaska Natives. With the exception of a fewcommunities that developed as logging camps or adjacent to national parks, percentNative in this study is primarily a measure of in-migration into the community. Percent

Native also serves as a proxy for remoteness as the communities with the highestpercentages of Native population are also the more remote.

Hub to Anchorage is the average price of air fare from the adjacent hub to Anchoragecompiled in 2004. This variable serves as a proxy for transportation costs.

National park status was developed from a GIS database showing land jurisdiction. If acommunity was within 100 miles of a national park, it was coded as being influenced bythe parka simple yes, no variable.


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13

Commercial Fisheries Entry Commission ex-vessel earnings are the three-year average of2004, 2005 and 2006 total community ex-vessel earnings.2

Tlingit was a yes-no variable indicating those communities with a majority Tlingitpopulation in Southeast Alaska. We used this variable to test if a Native culture with along tradition of trade and interaction with outside traders might explain some of the

variation in business development.

We also conducted statistical regression analysis to identify the most significant attributesthat lead to diversity of businesses measured number of different businesses types (Model2). Community population, airfare from hub to Anchorage and percent Native all provedto be significant. In contrast, however, national parks, CFEC gross earnings, and Tlingit

2 In cases in which earnings were suppressed for confidentiality reasons, the two year average or the oneyear for which earnings were available was used.

Model 1. Regression Predicting Total Number of Businesses in a Community(94 remote communities with populations greater than 199 but less than 1,401)

Dependent Variable: b_total (total businesses)Coefficients

UnstandardizedCoefficients

StandardizedCoefficients

B Std. Error Beta t Sig.

(Constant) 112.981 7.031 16.070 .000

2005 population .014 .006 .117 2.444 .017

% Native 2000 -100.556 6.431 -.768 -15.637 .000

hub to anchorage airfare -.058 .009 -.310 -6.591 .000

national park within 100miles

13.649 3.396 .186 4.019 .000

Gross commercialfishing earnings

1.89E-006 .000 .104 2.075 .041

Majority Tlingit (yes/no) 10.651 4.962 .104 2.146 .035

N=93 Adjusted R

2

= 0.84

Model 2. Regression Predicting Number of Different Types of Businesses(94 remote communities with populations greater than 199 but less than 1,401)

Dependent Variable: # business typesCoefficients

UnstandardizedCoefficients

StandardizedCoefficients

Variables B Std. Error Beta t Sig.

(Constant) 19.512 1.306 14.937 .000

2005 population .005 .001 .297 4.914 .000

% Native 2000 -7.054 1.645 -.391 -4.288 .000

hub to Anchorage airfare -.008 .002 -.308 -5.056 .000Average household size2000

-1.424 .407 -.310 -3.497 .001

Percentage of 2004 IRSreturns less than $25k

-55.501 20.753 -.199 -2.674 .009

N=93 Adjusted R2

= 0.69


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14

were not significant explanatory variables. Instead, the percentage of IRS returns withincomes below $25,000 and average household size were significant: business diversitywas higher in places with fewer low-income tax returns or smaller household sizes.

We applied these models to identify which of the 94 communities had significantly moreor fewer total businesses than predicted, and which communities had more or less actual

business diversity than predicted. The results of this exercise appear in Appendix F.3.1(sorted alphabetically) and Appendix F.3.2 (sorted by the magnitude of difference).

Smallest Communities and Regional Hubs

We conducted similar statistical analyses on the smaller communities with populationsunder 200 and on the rural regional hubs. The hub community analysis was limitedbecause there were too few data points relative to the number of explanatory variables.For the smaller communities we found no explanatory variables that could account forthe variations in the number and diversity of businesses. This analysis was also limited bythe smaller number of communities. A comparison of the characteristics of these threesize groupings of communities is presented in Table 2.4.

Table 2.4 Comparison of Community and Business Characteristics for Three

Community Population Size Classes

Less 200*

>200

1,400

Unit of measure n=72 n=94 n=10 Number of Business Licenses average (st.dev) 9.5 (8.7) 18.8 (26.9) 277.4 (130.6)

Number of Lines of Business average (st.dev) 4.8 (2.5) 6.0 (3.7) 16.5 (1.6)Population average (st.dev) 94 (50) 481 (220) 3,229 (1,338)% Native average (st.dev) 67% (34%) 85% (21%) 42% (26%)% White average (st.dev) 31% (34%) 13% (18%) 48% (23%)% Asian average (st.dev) 0.4% (0.9%) 1% (5%) 6% (9%)% Adults in Labor Force average (st.dev) 60% (12%) 60% (10%) 71% (6%)

Median Household Income median $ $34,613 $35,273 $54,967% poverty 19% (15%) 22% (11%) 9% (3%)High school test scores average pass rate 47% (18%) 40% (18%) 69% (2%)Average Household Size average (st.dev) 2.9 (0.6) 3.8 (0.8) 2.8 (3.3)Types of Business Activities:

Ag., Forestry, Fishing** & Hunting Average # per (% of) 0.5 (25%) 0.6 7.4 (90%)

Manufacturing Average # per (% of) 0.3 (19%) 0.7 10.4 (90%)

Construction Average # per (% of) 0.1 (7%) 0.6 17.4 (100%)

Arts, Recreation & Entertainment Average # per (% of) 1.5 (64%) 2.1 19.7 (100%)

Transportation Average # per (% of) 0.8 (49%) 1.7 20.8 (100%)

Food & lodging Average # per (% of) 1.5 (56%) 2.4 29.9 (100%)

Business services Average # per (% of) 0.5 (28%) 1.5 36.8 (100%)

Information Average # per (% of) 0.08 (8%) 0.4 4.2 (100%)

Scientific, Technical & Prof. Average # per (% of) 0.2 (18%) 0.8 18 (100%)CFEC gross earnings % of communities 61% 74% 100%Per capita CFEC gross earnings average $ $984 $964 $2,314Airfare hub to Anchorge average $ $900 $330 $385

Scenic public lands % of communities 39% 29% 80%

* In these communities the majority population is Alaska Native.

** Does not include commercial fishermen, who are required to have a fishing permit, not a business license.

Communities with Populations:


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3. Survey of Rural Businesses

We surveyed rural businesses in order to gather more detailed information than isavailable in the business license file. For example, the business license file does notindicate which businesses are active, the scale of their activity, or the length of time they

have been in business. We also sought more detailed information about their differentbusiness activities and locations. Especially in smaller communities, a single businessmay conduct several different activities filling different business niches in order to takeadvantage of the scale economies from a consolidated operation.3 Conversely, onebusiness with a central location and staff may divide its activities into a number of legallyseparate businesses for liability reasons.

To gather this information, we conducted a random-sample survey of rural businessesusing both face to face and telephone interviews. In this chapter we describe the surveymethodology and report most of the survey results. Analysis of the results from the open-ended questions follows in Chapter 4. The survey instrument with a tally of the rawfrequencies appears in Appendix C.

Survey Methodology

We used a cluster sample methodology, choosing a random sample of remote ruralcommunities and then attempting to interview all businesses in each selected community.Our sample frame consisted of all communities that met three criteria. These criteriawere: (1) the community contains at least one business in the business license file; (2) thecommunity has a population of between 200 and 1,400 people; and (3) the community islocated off the road system. A total of 94 communities met these criteria. From thisgroup of 94 communities, we then drew four separate sub-samples of five communitieseach. The four sub-samples were drawn to ensure that the overall sample included the

same range of population, income, employment, and geography as the 94 communities.For example, we sorted the 94 communities by population, divided the sorted list intofive equal parts (quintiles), and randomly drew one community from each quintile. Werepeated this process for median family income, the percentage of adults not working,and ANCSA region from north to south. This process produced a sample of 20 separatecommunities.

We expected that some small, rural business owners would be reluctant to tell a strangerabout their business, and even more reluctant to do so over the telephone. However,budget constraints meant we were unable to send interviewers to 20 remote communities.Our compromise strategy was to use in-person interviews by trained communitymembers whenever possible, and telephone surveys only when necessary. For the in-

person interviews, we recruited and trained University of Alaska students who werecommunity residents and would be in the selected communities during the surveyperiod.4

3 Economists sometimes call these economies of scope.4 They were either on-campus students planning trips home or distance-delivery students who reside inselected communities.


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We were successful in recruiting local interviewers for seven of the selectedcommunities. Five of these interviewers were community residents, and two, althoughnot residents, had relatives in their target community and knew it well. In three cases wesubstituted a closely matched community for the randomly selected community to takeadvantage of an available local interviewer. In these ten communities, our interviewers

conducted as many face-to-face interviews as possible while on-site, and the remainingbusinesses were interviewed by telephone. In nine of the remaining ten communities theinterviews were conducted entirely by telephone. While some phone interviews wereconducted by our local interviewers after returning to school, most were conducted byprofessional interviewers who had no knowledge of or personal ties to the community.Finally, there was one community (from the original desired sample of 20) where wewere unable to conduct any interviews.

The business license file provided our initial list of businesses to interview in eachcommunity. Because we knew that the license file was incomplete (missing newbusinesses and those without licenses, and including some no longer in business) ourinterviewers used a technique known as snowball sampling to conduct a census of

business activity. They asked each business owner about other businesses in thecommunity, and new contacts identified in this way were interviewed and asked in turnabout other businesses in the community. This allowed us to use local knowledge toexpand the list and improve our chances of identifying all the active businesses in eachsampled community.

In-person interviewers could go to the business location (listed in the license file) toconduct interviews. For telephone interviews we first had to identify a telephone number(information not in the business license file) using phone directories, business directories,web listings, and local informants.

Table 3.1 shows our survey sample statistics. The business license file identified 369

businesses in our sample communities. Of these, 101 were either not in business or weremultiple licenses for a single business. We identified 130 additional businesses, not in thelicense file, for a total of 398 active enterprises in the sampled communities. Our surveydesign excluded micro-enterprises with less that $3,000 in gross sales in 2006,entrepreneurs under the age of 18, public utilities, and social service enterprises that aresignificantly funded through public grants and revenues rather than customer sales. Wescreened out 128 businesses and attempted to interview 270. Of these, 19 refused, wewere unable to find any active contact information (phone number, active businesslocation, website or local knowledge) for 21, we were unable to contact 30 more despiterepeated calls on different days and at different times, and were unable to interview aknowledgeable respondent in 4 cases. We completed 196 interviews for a response rate of

73%. The estimated sampling error95 percent confidence interval calculated on adichotomous variableis plus or minus 7.0%.


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Table 3.1 Survey Sample Statistics

Total Business Licenses 369

Duplicate/Multiple Licenses 23

Out of Business/Not yet in business 69

Business Unknown 9

Licensed, Active Enterprises 268Unlicensed Enterprises (IDd from local sources) 130

Total Enterprises for Screening 398

Screened Out:

Owner is Under 18 2

Gross Sales


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18

Figure 3.1 Businesses by Line of Business

31%

15%

11%

11%

7%

5%

5%

4%

4%

3%

2%

2%

1%

1%

1%

0% 5% 10% 15% 20% 25% 30% 35%

42-45 Trade

71 Arts, Entertainment and Recreation

72 Accomodation and Food Services

48-49 Transportation and Warehousing

53 Real Estate, Rental and Leasing

51 Information

32-33 Manufacturing

23 Construction

11 Agriculture, Forestry, Fishing and Hunting

81 Other

31 Manufacturing

62 Health Care and Social Assistance

54 Professional, Scientific and Technical Services

21 Mining

55 Management

Figure 3.2 shows how the surveyed businesses were organized. Sole proprietorshipsaccount for almost one-third of all businesses, and partnerships are another 15 percent.Together, these two types comprise just under one half of all businesses. Different formsof corporations total 40 percent of businesses, and unlicensed enterprises are 12 percent.

Figure 3.2 Businesses by Form of Organization

33%

19%

15%

13%

12%

8%

1%

0% 5% 10% 15% 20% 25% 30% 35%

Sole Proprietorship

Private Corporation

Partnership

ANCSA

Unlicensed Business

Public Corporation

Limited Liability

Corporation

Figure 3.3 shows how long the surveyed businesses have existed, by the decade theywere established. The median business age is 13 years, which equates to being founded in1994. The oldest business we interviewed was established in the 1800s.


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19

Figure 3.3 Businesses by Year of Establishment

34%

24%

18%

17%

3%

3%

0% 5% 10% 15% 20% 25% 30% 35% 40%

2000s

1990s

1980s

1970s

1960s

prior to 1960

The large majority of the businesses in the survey81 percentoperate throughout theentire year. Among seasonal businesses, those open between 4 and 6 months of the yearare the next largest category at 9%, followed by nearly-year-round businesses (openbetween 7 and 11 months) at 6 percent. A few businesses operate 3 or fewer months eachyear.

Figure 3.4 Businesses by Months per year in Operation

154

18

11

4

4

0 20 40 60 80 100 120 140 160 180

12 Months

4-6 Months

7-11 Months

0-3 Months

Varies/Missing

We asked firms about their gross sales volume and about changes in their sales since2004. As figure 3.5 shows, the firms we interviewed ranged from zero sales to over$250,000 per year. Figure 3.6 shows that on average, larger firms were more likely toreport increased sales than very small firmsbut they were also more likely to reportdecreased sales. Two-thirds of the smallest firms reported no change in sales.


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Figure 3.5 Businesses by Annual Sales Volume

27

25

17

17

12

8

24

37

0 5 10 15 20 25 30 35 40

Less than $5000

$5,000 to $10,000

$10,000 to $25,000

$25,000 to $50,000

$50,000 to $75,000

$75,000 to $100,000

$100,000 to $250,000

$250,000 or more

Figure 3.6 Change in Sales Since 2004 by Annual Sales Volume

0%

20%

40%

60%

80%

100%

Micro($100K)

Decreased

About the same

Increased

We asked businesses about how many people they employed, and whether thatemployment was full or part time, seasonal or year-round. We converted the responsesinto an estimate of each firms full time equivalent (FTE) employment. Table 3.2 showsdata on both total employees and FTE employment. The businesses we interviewed

employed over 1,300 people with a full-time equivalent of 791 jobs. The 61 businesseswith over $100,000 in annual sales accounted for just under one-third of the firms in thesurvey, but almost two-thirds of employment and FTEs.


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Table 3.2 Full Time Equivalent Employment and Employee Headcount by Size of

Business

SalesUnknown

Micro($100K)

AllBusines-

ses

Total Number of Firms 29 52 54 61 196

Full Time Equivalent Employment

Number of FTEs Number of firms


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22

Figure 3.7 Percent of Companies Identifying Expense as Among their Three Largest

by Category of Expense

65%

53%

37%

23%

11%

10%

10%

9%

3%

0% 10% 20% 30% 40% 50% 60% 70%

Utilities

Goods, Materials & Supplies

Freight

Business Svcs

Rent/Lease/Mortgage

Machine Rental or Svc

Taxes

Permits, Licenses

Transportation

17%

5%2% 2% 2% 1%

Insurance

Unspecified

Bookkeeping

T

axPrep

Banking

Legal

23% of firms cited

Business Service costs as

among their largest

expenses

20%

11%8% 7%

Unsp

ecified

Air

Barge

Parc

elPost

37% of firms cited Freight

costs as among their

largest expenses

34%

28%

19%

9%

4% 3%

HeatingFuel

Ele

ctricity

Unsp

ecified

Telephone

Water/Sewer

Internet

65% of firms cited

Utility costs as among

their largest expenses


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23

We asked businesses about where their customers came from: their community, othercommunities in their local area, outside their local area but in their region of Alaska,outside their local region, but still in Alaska, and outside Alaska. We then asked thebusinesses to estimate what percent of their sales went to customers in those fourgeographic groups. Most businessesabout three-quarters of our respondentsreported

the great majority of their sales going to customers from just one of those potential areas(Figure 3.8). Over half (97 of the 187 who responded to these questions) said that 75percent or more of their sales went to customers from their local community; just 11percent said that customers from outside Alaska made up 75 percent or more of theirsales.

Figure 3.8 Percent of Companies with Most sales to Customers from a Specified

Region

Other Alaska

5%

No one area

with >75%

sales

25%

Outside Alaska

11%

Region

4%

Local Area

4%

Community

51%

We also asked about businesses gross sales, and estimated the volume of sales to each ofthese categories of customers. For this analysis, we divided the businesses into MostlyLocal Sales (the 97 businesses with more than 75 percent of sales to customers in thecommunity) and All Others (at least 25 percent of sales went to customers who were notfrom the local community). Figure 3.9 shows the results. The total sales dollars shownrepresent only the 19 communities we surveyed.

While we would expect the businesses with more local customers to have more localsales, the degree of difference is striking. Sales for the All Other group are almostevenly divided among customers from each of the five regions. These companies

comprise just under half of the companies we surveyed, and account for about 45 percentof total estimated sales. They demonstrate that while the most common type of remoterural business serves primarily its own community, many enterprises have succeeded intapping into economic opportunities beyond their local villages to bring new money intotheir communities.


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Figure 3.9 Percentage of Sales by Residence of Customer

Businesses with Mostly Local

Customers

Outside

Alaska

1%

Communit

y

92%

Local Area

4%

Region in

Alaska

2%

Other

Alaska

1%

Estimated Total Sales: $9.2

Million; 82 businesses with

more than 75% of sales tolocal customers

All Other Businesses

Local

Area

23%

Communit

y

18%

Outside

Alaska

23%Region in

Alaska

17%

Other

Alaska19%

Estimated Total Sales: $7.5

Million; 78 businesses with

less than 75% of sales tolocal customers

Table 3.3 compares the firms with mostly local sales to the all other group. Almost halfof all firms with mostly local sales are retail businesses. These firms tend to be either soleproprietorships or corporations, and have an average of 3 full-time equivalent employees.About one in five do not have a business license. Firms in the All Other category arenot as concentrated in any one line of business; arts, entertainment and recreation is themost common line, but accounts for only 19 percent of these businesses. These firms tendto be sole proprietorships, and have an average of 4 full-time equivalent employees.

Table 3.3 Profile of Businesses with Mostly Local versus Mostly Non-Local Sales

Mostly Local(More than 75 % of sales to

local customers)

All Others(Less than 75% of sales to

local customers)

Number of Businesses 97 89

Most Frequent Lines of Business Trade (45%)Arts, Entertainment &

Recreation (19%)

Most Common BusinessOrganization

Sole Proprietorship (33%) Sole Proprietorship (41%)

Percent Unlicensed 19% 26%

Start Year - Median 1991 1995

% of Sales to Local Community- Average

92% 18%

% of Sales Outside the Region -Average

2% 42%

# of FTE Employees - Average 3 4


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4. Observations from Open-Ended Questions

The final portion of the survey contained open-ended questions asking entrepreneursabout their experiences at start up, current challenges, lesson learned and advice forothers. We entered the text of each answer in the survey database along with up to three

subject codes to classify the answers. Verbatim examples from their responses appear inAppendix D.

Startup Challenges

The first question asked about the biggest challenges the entrepreneur had when startingthe business, especially in their first year of operations. As Table 4.1 shows, challengeswere most frequently faced in establishing the business, including finding training onbusiness management, identifying a market, researching market demand, finding alocation, setting up, obtaining licensing, permits and insurance, and obtaining inventory.Of the 196 respondents to the survey, nearly half reported experiencing challenges in

establishing their business.Marketing and advertising the new business was the second most frequent challengeexperienced by the survey respondents. Twelve percent of survey respondents reportedexperiencing challenges with marketing the new business, including product developmentand advertising.

Financial management presented a unique challenge, especially for first-time businessowners. Managing the finances of a business can be a significant challenge for a first-time entrepreneur with no experience with bookkeeping and tax accounting. Respondentsreported challenges in setting up bank accounts, learning to use accounting software,managing the cash flow, filing taxes, and billing and collections.

Challenges in operating the new business included customer service, communityrelations, hiring employees, finding suppliers, and maintaining inventory; 11% ofrespondents reported experiencing challenges in operating their business.

Start up capital was the fifth most frequent response to this question; 10% of the businessowners in this survey reported they had experienced challenges specifically in obtainingstartup capital, including looking for available funds or applying for a loan or grant.

The sixth category of responses to this question, Location, is especially relevant due tothe unique nature of the businesses included in this interview. Entrepreneurs, especiallyfirst-time entrepreneurs, in rural Alaska communities face the challenge of learning to runa business in a remote location with extreme weather conditions. Seven percent of survey

respondents reported experiencing a challenge due to their remote operating location.Three percent of respondents reported they saw no challenges in starting up theirbusiness.


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Figure 4.1 Challenges Faced During Start Up

1%

3%

7%

10%

11%

12%

12%

45%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Other

No Problems

Location

Startup Capital

Operations Management

Financial Management

Marketing/Advertising

Establishing the Business

The survey respondents were asked whether or not they received any assistance whenfirst starting their business; 56% said they had not, and 35% said they had. Of those thathad, about 60% had received assistance from a personal contact such as a parent, spouseor coworker, and 40% had received assistance from an agency such as the Small BusinessAdministration (SBA) or the Alaska Native Industries Cooperative Association(ANICA).

Respondents were then asked if they would have liked more assistance during the start-upperiod of their business. This question was asked as an open-ended question, and wereceived 293 responses from 196 business owners. Thirty-four percent reported that theywould have liked assistance in financial management, 25% said they would have likedhelp with computers, ecommerce and technology, and 24% said they would have liked

help with business planning.

Figure 4.2 Would you have liked (more) help when first starting your business?

What kind of help would you have liked?

34%

25%

24%

23%

22%

20%

0% 5% 10% 15% 20% 25% 30% 35% 40%


Computers, eCommerce, and other Technology

Business Planning

Start-up Assistance

Marketing and Sales

Managing a Business


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Current Challenges

Business owners were asked what challenges they face in running their business at itscurrent state of development. This question was asked in an open-ended format, and theresponses were coded up to three ways. There were 303 responses from 196 respondents.

Operations was the most often mentioned challenge. Business owners were currentlyexperiencing challenges in obtaining the necessary licenses and permits for theirbusiness, providing customer service and building a relationship with their community,and hiring and supervising their employees. Competition from other businesses was alsomentioned as a challenge, as well as obtaining or updating the technology they needed torun their business. Just over a quarter of the survey respondents reported experiencingchallenges in operating their business.

Financial management was the second most often mentioned challenge. Business ownersfind it difficult to manage sufficient cash flow to cover their operating expenses; 20% ofrespondents to the survey reported facing challenges in managing their businesssfinances.

Growth was the third most frequent challenge. Owners of mature businesses looking toexpand their operations faced many of the same challenges they faced when first startingtheir business, including attracting customers to their business and advertising theirproducts, creating a business plan and setting a goal, and identifying new markets fortheir products or services; 18% of the businesses in this survey reported finding itdifficult to grow their business.

Four percent of respondents reported that they experienced no challenges in running theirbusiness.

Figure 4.3 Challenges Faced in Current Operations

4%

5%

11%

16%

18%

20%

26%

0% 5% 10% 15% 20% 25% 30%

Nothing / None / Don't

Know

Other

Missing Answer

Location

Growth




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Lessons Learned

The survey asked business owners if they had learned any lessons in running a businessin rural Alaska that would be helpful for someone looking to start a new business of theirown. We received 300 responses from 196 business owners.

The most frequent type of lessons learned (25%) was in establishing the business.Respondents to the survey found the lessons they learned while planning their business,obtaining the necessary permits and licensing, hiring and supervising employees, settingup their establishment and obtaining inventory and supplies valuable lessons that a newentrepreneur would benefit from knowing.

Learning how to manage the finances of the business was the second most frequentresponse. Learning how to budget for their business, manage the cash flow, and accountfor the taxes their business paid were all considered valuable for a new business owner.Almost 20% of the respondents reported learning from managing their businesssfinances.

Learning how to manage the operations of their business was the third most frequentresponse. Respondents said that their own training and providing customer service andcommunity relations were valuable lessons for someone looking to start their ownbusiness; 14% reported they had learned lessons in operating their business.

Eleven percent of the survey respondents reported learning how to market the businessand how to advertise the products or services a business offered. Learning how to attractcustomers, develop a product or service, and dealing with competition from otherbusiness were all considered valuable lessons for a new entrepreneur.

Nine percent of respondents said they had no lessons to pass on.

Figure 4.4 Valuable Lessons Learned as a Business Owner in Rural Alaska

2%

4%

4%

9%

11%

11%

14%

19%

25%

0% 5% 10% 15% 20% 25% 30%

Startup Capital

Location

Other

No Problems

Marketing/Advertising

Blank/Missing Answer



Establishing the Business


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Advice for Organizations

The final question in the survey was whether the business owner had any advice fororganizations looking to help small businesses in their region. The 196 respondents to thesurvey offered up 278 responses to this question.

The most frequent response to this question was a request for more training for businessowners. Respondents reported wanting classes on not only the basics of managing abusiness, but also on managing finances, creating business plans, and ongoing trainingfor the owners of existing businesses; 20% of the respondents to this survey reported theywanted help learning how to run their business more effectively.

Eighteen percent of the business owners surveyed wanted organizations to improveaccessibility to rural communities. Responses included improved infrastructure andimproved communications access, such as putting in telephone or internet service, orimproving the existing telephone or internet services.

Six percent wanted organizations looking to help businesses in their region to offer morefinancing, or more information on how to get financing.

A better understanding of the challenges that business owners in rural Alaska faced wascited by 5% of respondent. Some respondents encouraged people who wanted to helpsmall businesses to spend time living in a remote, rural community to gain first-handexperience.

Figure 4.5 Advice for Organizations

5%

6%

14%

18%

18%

19%

20%

0% 5% 10% 15% 20% 25%

Understand challenges of doing business in the bush

Offer Fi

viable business enterprises for rural alaska.jan'08

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