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Katrina's Lesson: Be Prepared

Besides the thousands of small businesses destroyed by Hurricane Katrina, the storm has had a ripple effect on entrepreneurs across the nation -- higher energy costs, the loss of both suppliers and customers along the Gulf Coast, and other operational disruptions. That's causing some to raise prices, a particularly difficult step for smaller companies already at a price disadvantage against much bigger competitors.

But it's also opening up some opportunities, in cities such as Houston and Baton Rouge, where evacuees have fled, and in the hardest-hit areas, where major reconstruction looms.

How are small businesses outside the disaster zone reacting? And what will the long-term impact be on those that are now forced to rebuild? BusinessWeek Online contributor Ann Hynek recently spoke with William Dunkelberg, chief economist for the National Federation of Independent Business, a Washington, D.C.-based advocacy group with some 600,000 members nationwide. Edited excerpts of their conversation follow:

The surge in energy costs have put small businesses of all types in a difficult position. Do they simply swallow higher prices at the pump and increases passed along to them, or raise their own prices to keep up?

The first impact of higher energy prices, gas, heating oil, whatever, on the small firm is on the bottom line, because you can't just pass those costs on by raising prices immediately. So as we get these spikes, it hits the bottom line. If they stay high, then what firms have to do is raise their prices and pass this on to their customers.

We call that the "menu cost." A good example would be a restaurant that is now getting all kinds of surcharges with all the deliveries of food every day, but in order to pass them on, has to reprint the menu, which is an expensive proposition.

And until they're pretty sure that the energy prices are going to stay high, they're not going to reprint those menus. Because if they did, and raised their prices, and then suddenly energy prices fell and their competitors had lower prices, they'd have to go through the expensive process of reprinting menus. Nobody likes to do that.

Small-business owners along the Gulf Coast are now faced with the daunting task of rebuilding. How has the storm affected how they'll approach that process?

Obviously, it exposed a lot of weaknesses. It wasn't a question of if it "Was going to be flooded?", it was a question of when. The government was certainly unprepared for that and I'm sure businesses, too. It's hard to kind of sit down and say 'Sometime in the next 10 years, this place may be flooded, so what should I do?'

A lot of the firms decided to take that risk and didn't design their businesses so that if they got 10 feet of water, they'd still be safe. You'll notice a lot of homes in Florida are built on stilts. But you didn't see any stilts on homes or businesses in New Orleans, even though they're built many feet below sea level.

So you didn't make those choices, all the way down to planning for 'Oh, if this fills up, what about all my business records and my inventory' -- all those things where you could've spent some extra time and money to make sure that you didn't get hurt, or hurt as much, by this kind of event. They didn't do that.

It's hard for an event that happens very infrequently to force a person to spend extra money when there's a lot of competition out there. But now you can see what happens if you don't spend that money.

A number of companies have lost both suppliers and customers in the region directly hit by Katrina. How does this impact small businesses that worked with them?

Small businesses are so diverse. Most of them, if you're talking about my barber shop, it's not really an issue. Service businesses, which small businesses dominate, aren't supplier-dependent anyway. Maybe 10% of small businesses are in manufacturing, and they do have to worry about supply chains, both ahead of them and behind them. So if your only customer was in New Orleans, you'd have a problem.

Small businesses always want to diversify on both sides. Have a portfolio of customers, so you're not just selling to Wal-Mart (WMT). Have a portfolio of suppliers, so if one goes out of business or gets washed away or burns down, you have another place to go to keep your business running.

With the Internet, it's easy to find additional market opportunities. There are trade associations and marketplaces to find more people and establish relationships and know where they are, so if you need something in a hurry, you can give them a call.

What do you think the influx of evacuees in cities such as Houston and Baton Rouge is going to do for their local economies, long-term and short-term? Are small businesses there seeing a boom?

Well, for short term, you've got a whole bunch of visitors showing up. It's like hosting a convention. There are a lot of people there spending money and renting all the available space. A lot of the fringe areas just outside the impacted region are seeing a lot of entrepreneurs who want to start over.

For the longer haul, if people decide to permanently relocate there, you'll have a big supply of workers looking for jobs.

When small businesses are planning for disaster -- both existing businesses and ones now recovering -- what are some things they should consider?

One disaster everyone faces is fire. Even though it's very cheap today to store your records via scanner and hard drive, you don't want to leave that in the store because a fire will destroy it. It's nice to have that off-premises.

There are more firms growing in the business-service area that actually will help you keep your records. There are record-retention firms. Some help you store your records over the Internet, and allow you to access them whenever necessary. Business records are important for a lot of reasons. You need to make sure they're safe, no matter what kind of a disaster you may face.

In your opinion, what's been the national economic impact of Katrina? And could the looming reconstruction effort actually provide a shot in the arm?

The total amount of GDP produced in Mississippi and Louisiana is about 3% of the nation's GDP. It's not very big. And the economy this year will grow by more than that. So if total GDP grows by 3%, and you lost 3%, you'll at least break even, even if the states became totally inoperable and contributed nothing, which won't be the case.

There were a couple-hundred thousand workers who helped produce the GDP in those states in August who are unemployed in September and not making anything because there's no place to make it. So you're going to see a surge in the number of unemployed people and that will have some impact on the GDP, but it will most likely be minimal.

I think the estimates are exaggerated. And that's the short run. In the long run, the rebuilding in that area will create a lot of GDP in terms of the need for workers, the demand for steel, lumber, and concrete.


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