If for the Chinese this is the “Year of the Snake”, it might be more aptly described for San Fernando Valley businesses as the “Year of the Big Squeeze.” Businesses of all types are expected to see a significant increase in fixed costs. Workers compensation and health care premiums are on the rise, gas and electricity costs are skyrocketing and the minimum wage jumped 50 cents beginning Jan. 1. Add to that the potential for an actors and writers strike, which could have a ripple effect for entertainment-related companies in the Valley, and the meltdown of tech stocks, which has made it tougher for companies to access capital, and you have the makings of a pretty tough year. “Two thousand one is going to be a year of extreme cost pressures,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. “You’re going to see uneven business patterns and a more skeptical financial community. Companies that don’t have a real-world business plan or products someone wants are going to be in trouble.” Premiums for workers compensation are expected to climb 10 to 20 percent, and health-care costs are projected to rise 13 percent this year over last. Natural gas costs have jumped from 23 cents to $1.43 a cubic foot with more increases on the way, said Kyser. Companies unlucky enough to be in Southern California Edison’s rather than L.A.’s service area will have to cope with the 9 to 15 percent rate hike approved by the Public Utilities Commission last week. Meanwhile, businesses can expect labor costs to climb this year as L.A. experiences one of its tightest labor markets in 30 years and the minimum wage jumps from $5.75 to $6.25. Taken alone, the increased costs won’t break the bank, but tally them up and companies are sure to feel the strain, said Sal Bianco, co-chair of a Valley Industry and Commerce Association (VICA) committee that is studying the problem of rising health and workers compensation costs. “Businesses are going to be rocked with increased overhead expenses,” said Bianco. “The big question now is the economy and whether we’re going to hit a hard landing.” It all adds up The Fed’s recent decision to reduce interest rates should goose the economy, but businesses will still have to cope with the increased expenses while being limited in what they can pass onto customers by competitive pressures. Take Precision Dynamics Corp. The Pacoima-based maker of medical devices is bracing for yet another increase in health insurance and workers compensation premiums on top of the hit the company took last year. In 2000, the company saw those costs jump $100,000 and $50,000 respectively to cover its 500-person workforce. “Everybody is experiencing the same thing,” said Bob Shaub, director of human resources. “I’ve heard of some companies getting hit with 100 percent increases in workers comp rates.” At the same time, the company must contend with the 50-cent increase in minimum wage it pays its lowest skilled workers to make the hospital ID bracelets and other products it sells. The increased wages place Precision Dynamics at a competitive disadvantage to companies in other states that adhere to the national minimum wage of $5.15 an hour. “I’m hearing some of the rumblings you heard in ’94 and ’95 when companies started looking at other states,” said Shaub. Don Shain, general manager of the Caf & #233; Bizou a chain of three restaurants based in Sherman Oaks expects the increased costs to wallop the restaurant industry, which traditionally has a low net profit margin. “There’s not a lot of fat,” he said. “Taken individually, the added costs wouldn’t be a problem, but when you add natural gas, workers compensation, minimum wage, it becomes a problem.” Particularly nettlesome for restaurants is the minimum wage increase. Unlike the majority of other states, California doesn’t allow restaurant owners to count tips as part of a waiter’s compensation. As a result of the minimum wage increase, restaurants are being forced to boost the hourly wage of waiters who are already making a killing in tips. That creates an inequity for kitchen employees, who typically work without tips, said Shain. Caf & #233; Bizou already pays its kitchen employees more than minimum wage, so the 50-cent increase won’t benefit them. “The restaurant owner is being forced to give well-paid dining room employees a boost when he’d really rather pass it on to the kitchen employee,” said Shain. “It creates a big inequity.” Don’t forget the strike While increasing fixed costs will be a big concern for most businesses in 2001, the looming strikes by the actors and writers cast an ominous shadow over the entertainment industry. The industry will face a bleak second half if the Screen Actors Guild, the American Federation of Radio and Television Artists and the Writers Guild of America do not reach new contract agreements with the studios by July. A strike is sure to have a profound ripple effect on a myriad of businesses in the Valley, said Kyser. “We’re talking the post-production houses, the people who provide food services on the sets, everybody,” he said. Indeed, Gail Ringer, general manager of Ringer Video Services Inc., said a strike could be devastating to her four-person company, which transfers videotape to film for studios, independent film makers and some ad agencies.
ECONOMY—Companies Face Rising Costs as the New Year Begins