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On the Road Again

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DQI Bureau
New Update

From time to time, I call Garage.com’s head of recruiting, Amy Vernetti, to

chat about Silicon Valley trends. She usually returns my call around 5 p.m., and

I smile at the faint crackle of static, the sporadic horn honk, and the

occasional "Ack!" that punctuate our conversation during Vernetti’s

70- to 90-minute drive from her Palo Alto home to Oakland (where she resumes her

second work shift after picking up her kids).

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The last time I called Vernetti, I was as interested in her perspective as a

hard-core commuter as in her recruiting insights. Like almost everybody I know

around here, I find myself increasingly inconvenienced, infuriated, and

exhausted by soul-sapping traffic. The California Transportation Department says

Bay Area freeway congestion in the heart of the Valley grew 26% from 1998 to

1999–representing a one-year leap in the daily delay from 29,300 to 36,900

vehicle hours. I’m betting numbers will soon show it jumped at least that much

again from 1999 to 2000. Local chatter about "windows" rarely means an

operating system anymore, but rather those brief traffic gaps when it’s safe

to try and drive somewhere.

With all our recent woes, logic would suggest those cars should be streaming

out again, now that so many dot-coms are splattered across the windshield of the

recession rolling through here at 400 megahertz. In fact, you can separate the

dot-come-latelys from Valley old-timers by how they react to gloomy news about

earnings shortfalls and layoffs. Newcomers: "Oh no! I’ve missed my chance

to retire by 30." Old-timers: "Maybe now we’ll finally get some

relief from the @#$%*&% traffic."

Vernetti is among a number of locals who have told me her commute nightmares

peaked a few months ago and things are looking up. Part of her rationale for

believing that also comes from recruiting young hotshot job candidates.

"People’s appetite to commute long distances has fallen in direct

proportion to Nasdaq," she reports. "It’s like ‘If I’m not gonna

make a gazillion dollars, I’m not driving to Timbuktu.’" Not wanting to

be named an accomplice to a vehicular felony (Ack!), I never argue with anybody

calling me from a traffic jam. But when Vernetti told me this, I hung up and

thought: Is a recession the time to get even pickier about where you’ll work?

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In any event, though, I’m sorry to disappoint locals, but my investigations

yield little evidence that traffic is measurably reduced–much less proof that

the exodus has commenced. For one thing, Officer Steve Oreglia of the California

Highway Patrol pointed me to the sobering view from the hills along the Valley’s

eastern border. A bumper-to-bumper parade extends east of here on Highway 680

for 30 to 50 miles some days during commute hours. "Because of the cost of

living, a lot of people are moving to the Central Valley. You can get a nice

home there for $225,000. But you only have one interchange to get back

here," he says. If traffic seems lighter, in general, he says it’s

probably just the spring arrival of longer daylight, fewer accident-prompting

storms, and school breaks. A bunch of new road projects are about to exacerbate

travel even more.

I worry most about those Central Valley commuters. I don’t think they’re

after a gazillion dollars like the young hotshots. They brave their exhausting

commutes to try to grab something resembling a comfortable middle-class life and

yard for the kids at affordable prices. If their Valley jobs disappear, the

mostly agricultural and bedroom communities in which they’ve settled won’t

be able to employ them. They may be finding themselves in a whole new traffic

jam–on the road to the unemployment office.

By Joan O’C Hamilton

in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

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Size matters

Mini-dots do it right

Small businesses use far different

strategies from the venture-funded dot-coms. That has helped them thrive

on the Web, where their bigger forebears went bust. Here’s how:
STAY STINGY



Small fry know how to use the Web to stretch a buck. Carrie Hardy,

founder of scrapbook supplier Scrappin’ Happy, frequently e-mails offers

to her 1,100 customers–at zero cost–instead of taking out $80 ads in

trade magazines. She says her business, which grossed $52,000 last year,

will grow 25% this year.

FOCUS FOCUS FOCUS



Thanks to the Web’s farflung reach, merchants can specialize in

narrow niches that otherwise might be too small. E-tailer Waggin’ Tails

zeroed in on super-premium pet kibble. With margins averaging 30%–vs 10%

for mass-market pet supplies–Waggin’ Tails is turning a small profit

on less than $5 million in sales.

TAP INTO NEW MARKETING CHANNELS



Little guys use the Net’s unique features–from auctions to

newsgroups–to reach new customers. Trudy Schnell, owner of collectible

store Kringle Kottage, had a Santa Claus cookie jar on her store’s shelf

for four years. When she listed it on eBay, it sold for $162. Now, some

30% of her $100,000 in annual sales comes from eBay, about half her online

business.

USE THE BUDDY SYSTEM



Small players can join online programs that help them operate like

larger rivals. Bookseller Kerry Slattery hawks books online that she doesn’t

carry in her Los Angeles store, Skylight Books. How? By using BookSense.com,

a collaborative selling program for independent stores, which she partly

credits for a 15% jump in 2000 sales.

PUMP UP THE SERVICE



Small Web businesses take that friendly corner-store service online.

When a customer of Garage-Toys.com complained that a $42.96 device that

helps drivers park cars in tight spaces had been $3.01 cheaper on the site

the week before, founder Paul Hinrichs personally whacked the price–and

made the sale.

Now, these mini-dots are proving they’re an online force to be reckoned

with. Indeed, they’re teaching their bigger rivals a thing or two–including

the value of common sense. Unlike some dot-coms with inexperienced executives,

the mini-dots are succeeding by employing the same strategies that

small-business owners have relied on for centuries: They’re sticking to niches

they know well. They scrimp on expenses, forgoing expensive portal deals and

using Net resources, from e-mail to customer-sharing arrangements, to save

money. And they’re banding together on the Web, presenting a bigger face to

the online world.

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So far, it seems to be working–so well that small businesses appear poised

to play a greater role in the growth of e-commerce than anyone expected. Small

companies will see their online sales grow 336% from 2000, to $120 billion by

the end of 2002, predicts ami-Partners, a New York consultant to small and

medium-size businesses. That will outpace overall e-commerce revenue growth of

249%.

Of course, size matters, even in the New Economy. But in some crucial ways,

the Net helps level the playing field for small outfits. For one thing, the cost

savings of selling online and dispensing with store rents or direct-mail costs

makes some businesses viable that otherwise wouldn’t be–say, a home-based

collectibles business.

Moreover, the global nature of the Web goes a long way toward negating one

key disadvantage of the small fry: geographic reach. Now, even a niche seller of

specialty pet supplies can amass enough customers to be viable. Finally, the

easy communications afforded by the Net may make more small businesses,

especially services such as graphic design, attractive to larger businesses

seeking to outsource jobs.

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The impact of a mini-dot explosion could have big implications beyond the

Web. By 2004, even the tiniest of these e-merchants–those with fewer than 10

employees and $3 million in annual sales–could account for as much as 10% of

the US gross domestic product, according to e-commerce researcher Keenan Vision.

Maybe so, but big questions remain about how much the Net will boost the

number of small businesses and what impact they’ll truly have on the economy.

For one thing, says William Dunkelberg, chief economist for the National

Federation of Independent Business, it’s possible the Net is simply shifting

existing sales online, not expanding markets enough to support many new

businesses. He adds, it’s likely that the most successful online businesses

will put the other mom-and-pops out of business, lessening the net gain. Most

traditional small businesses fail, and the same may well be true online.

And for all its advantages, the Internet presents a lot of challenges to the

little guys, too. In many parts of the country, pokey Net connections limit how

many visitors these sites can handle. And it can be tough for traditional

businesses coming online to handle both channels at once. Those factors may

explain why, for all the small businesses that have launched online, many more

have not yet moved beyond sites that are nothing more than online brochures.

According to ami-Partners, 22% of small businesses had Web sites in 2000, but

only 8% were engaging in e-commerce.

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Still, none of these challenges has stopped a growing number of small

businesses from embracing the Web as a new sales channel and productivity tool.

Many of the online newbies are longtime Main Street merchants or

industrial-goods manufacturers. There’s also a raft of service providers–computer

programmers, graphic designers, lawyers, and such–who have left Corporate

America to hang a shingle on the Internet.

The Web is spawning new breeds of small companies, too. They include tens of

thousands of people who never ran a business before but now make a living

selling collectible ornaments, antique toys, and other odds and ends on sites

such as eBay. About 13,000 stores have sprouted on the Yahoo! Stores section

alone since June, 1998.

What these disparate businesses have discovered is that the Net is less a

magic carpet to a newfound land of riches than a tool to turbocharge an already

sound business model. "The Internet is what the telephone was when it was

invented–a way to further our reach," says Wendy Haig, founder of

Washington (DC)-based Global Strategy, which counsels troubled dot-coms.

"With its vast reach, the Internet will enhance any small business that

uses it properly."

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How so? First, they’re using the Net’s access to a global customer base

to zero in on defensible niches, instead of offering all things to all Web

surfers. Pets.com, for instance, went bust in December partly because it tried

to sell all kinds of pet supplies–even huge bags of inexpensive dog food with

high shipping costs and margins under 10%. By contrast, Massachusetts based

Waggin’ Tails sells scarce items such as Provi-Tabs dog vitamins and Hi-Tor

prescription cat food. That allows the Web store to charge high enough prices to

turn a 30% profit margin on well under $5 million in annual sales.

In some cases, the Web’s global reach has allowed entrepreneurs to offer

entirely new types of narrowly focused services. Patti Glick, a San Francisco

nurse trained in podiatry, makes a living speaking at companies on foot health

and safety. Before, she had to do a lot of personal networking, such as mingling

at Toastmasters meetings. Now, by participating in various online podiatric

sites and women’s portals, Glick has drawn corporate customers intrigued by

her screen name, "footnurse." She expects to earn $30,000 this year

working part-time hours that allow her to spend time with her 10-year-old twins.

Small businesses also are using the Net to save big bucks–enough, in many

cases, to make a pipe dream a going business. Selling Beanie Babies and other

collectibles online out of a bedroom in his Oklahoma home, Perry Calton is

grossing annual sales in the low six figures.

Besides saving money, the Net also provides mini-dots a wealth of new

marketing channels. E-mail and discussion newsgroups can be far less expensive

and more effective than direct mail and print or TV advertising. Carrie Hardy,

founder of Colorado based scrapbook-supply site Scrappin’ Happy, sends

newsletters to 1,100 past customers and posts messages on scrapbooking

newsgroups. Instead of buying $80, three-line ads in trade magazines that never

drove any traffic anyway, she spends nothing and gets a far better response:

After mailing her February newsletter, sales doubled the next day.

No online marketing channel has proved more effective than online auctions,

pioneered by eBay in 1996. Besides spurring the formation of thousands of new

small businesses online, they have prompted existing businesses to branch out.

Some wholesalers are using eBay to go retail:

Andrew Waites took his Mississippi retail overstock business, Inventory

Procurement Services, directly to consumers over eBay–leading to what he hopes

will be a twofold-plus jump in sales this year, to $7 million, and a gross

profit margin online of 50%, 10 times the original business.

Finally, the Net has allowed far-flung small businesses to gang up and pool

their resources against their bigger and louder competition in ways they can’t

do in the physical world. The American Booksellers Association, which promotes

independent bookstores, runs a program called BookSense.com that allows members

to offer amenities only big chains could offer before, such as gift certificates

good at any member store. Moreover, their online customers can order any book in

print from their site, even if they don’t stock it themselves. Kerry Slattery,

owner of Skylight Books in Los Angeles, partly credits the program for a

higher-than-expected 15% rise in her store’s sales in 2000, to $1 million.

Daunting prospect

All that’s not to say the Web can turn any small business into a raging

success. Most entrepreneurs are running into obstacles on the Web that are hard

to overcome with limited staff and resources. One of the toughest jobs:

providing superior customer service. After all, to make up for what they may

lack in product breadth–not to mention customers’ ability to click instantly

to another site–they have to offer much more personal service.

Another challenge is Internet technology itself. Fast broadband connections

are still largely unavailable, especially in rural areas, leaving many small

businesses stuck with snail-like modem connections. And many worry that they

could lose a lot of customers if their connection goes down. Says Deepinder

Sahni, vice-president at researcher ami-Partners: "What we are hearing is

that they are hesitant to put their crown jewels–their companies–on the

Internet."

For many small businesses, the prospect of competing with the online

behemoths is daunting–for good reason. It may be only a matter of time before

the big guys notice how well they’re doing and jump onto their turf. So they

must stay vigilant, even paranoid, about differentiating their offerings.

That, however, is not the main worry of most small businesses that have moved

online. Their problem: too much business. When Jordan Dossett posted her

graphic-design portfolio a year ago on eLance.com, a Web marketplace for

freelance workers, she was buried under an avalanche of work offers from

companies as far away as Russia. So she quit her job as art director for a law

firm and opened The Design Studio in her Washington (DC) home. After hiring

three employees, she expects to rake in $350,000 in sales–and a tidy gross

profit of $250,000. "I had no idea the amount of demand out there,"

she says. "Suddenly, I’m slammed." Now, that’s a problem a lot of

dead dot-coms would love to have had.

Arlene Weintraub–BusinessWeek

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