Challenges facing small businesses call for innovative thinking, say TD economists

    TORONTO, Oct. 11 /CNW/ - In advance of Small Business Week (October 14 to
20, 2007), TD Economics today released a new report that reviews the outlook
for five key external factors impacting the health of Canadian small business:
the prospects for sales, competition, labour markets, non-labour costs and the
climate for investment. Entitled Small Businesses to Benefit from Solid
Domestic Demand, but Challenges Call for Innovative Thinking, the report is
authored by Craig Alexander, Vice President and Deputy Chief Economist, TD
Bank Financial Group and is available in PDF format on TD Economics' homepage

    Executive summary

    -   Small businesses that are domestically focused, benefit from a high-
        flying loonie or are exporting overseas are expected to post solid
        sales growth in 2008.
    -   Exporters to the United States, firms that are part of a supply chain
        of companies that have a U.S. export focus and those that are
        adversely affected by a strong currency will face a more difficult
        sales environment.
    -   However, the sales outlook only tells part of the story, as small
        businesses will face a number of key challenges in the year ahead,
          - Fierce competition in both local and foreign markets;
          - Tight labour markets in urban centres across the country; and
          - Elevated energy and non-labour costs.

    "The overall assessment is that 2008 should be a decent year for small
business, but significant challenges will be present," said Craig Alexander.
"Small business owners cannot be complacent and must be innovative in
developing strategies to address the challenges."

    Sales outlook is positive

    Firms that are focused on selling to domestic markets, benefit from a
high flying-loonie, or have overseas trade-ties are likely to experience solid
demand for their wares. "The majority of small businesses in Canada are
oriented to selling to the domestic market and the outlook is for healthy
domestic demand growth next year," remarked Alexander.
    Conversely, businesses adversely affected by a strong Canadian dollar and
those heavily leveraged to trade with the United States (or are part of a
production chain with firms that export to the U.S.) will face a difficult
environment over the next twelve months, but conditions should improve in late
2008 and throughout 2009.
    Small businesses that export overseas will face a somewhat better
environment, since the appreciation in the Canadian dollar has been less
dramatic and global demand is expected to remain strong.
    "However, the sales prospects do not tell the full story, as all small
enterprises should be prepared to deal with a number of key challenges,"
observed Alexander.

    Competition in local and foreign markets will remain fierce

    Competitive pressures will not abate. Businesses will have limited
pricing power, and Canadian consumers are likely to put greater pressure on
firms to pass along savings from the appreciation in the Canadian dollar. The
strength in the Canadian dollar has also made imports more competitive in
domestic markets and import competition from low-cost labour centres, like
China and India, will continue to increase. Globalization is creating
competitive pressures in areas that had previously been insulated, like many
service industries.
    "This is not the time for small business owners to be complacent -- they
must strive to move up the value added chain by producing more sophisticated
goods and services. Product differentiation and the customer experience are
becoming ever more important. Identifying niche markets or underserviced areas
can also provide good opportunities, and branding has grown to be critical in
attracting business," summarized Alexander.

    Labour markets will remain extremely tight

    Small businesses regularly respond to surveys that they are having
difficulty hiring and retaining high skilled workers. Although employment
growth is projected to slow in the months ahead, the unemployment rate is only
expected to edge up slightly, implying that labour markets would remain tight
and wage pressures would persist. This is not just a Western Canada story, as
unemployment rates are likely to remain low in most major urban centres across
the country.
    TD Economics believes small business owners cannot simply wait for labour
markets to loosen. Businesses must develop strategies to attract and retrain
high skilled employees; they must also be prepared to hire younger staff and
provide training to get the workers to meet the needs of the business, which
also raises issues around retention.
    "While offering competitive compensation is necessary, the matter is far
more multifaceted. Today's workers are not just attracted by money," remarked
Alexander. "Benefits are a crucial part of the equation. The work environment,
work-life balance, commute times, flexibility in hours, the possibility of
working from home, employer-sponsored training, mentoring programs and a wide
array of other factors can also influence the hiring and retention of
employees. Even a company's social and environmental policies and community
reputation can have an impact."

    Energy and other input costs will also remain elevated

    Non-labour costs are also expected to remain elevated. Although the last
surge in crude oil prices to above US$80 a barrel in September will not be
sustained, prices should not drop below US$70. Based on this outlook, gasoline
prices should remain close to current levels, or only rise by a few cents.
There is greater upside to natural gas prices. Assuming normal weather
conditions over the winter, the outlook is for natural gas prices to rise by
12 percent in 2008. Businesses may also want to budget for modestly higher
electricity bills next year. The story is the same with material costs, which
are generally expected to advance at a slower pace than in recent years, but
remain at relatively high levels.
    "In many cases there is little that small businesses can do about high
input and material costs, as they are price takers and lack much bargaining
power with suppliers. Nevertheless businesses should search high and low for
methods to reduce non-labour costs," concluded Alexander.

    Don't wait for governments to respond

    The challenges facing small business may provoke a call for government
action, but businesses cannot wait or rely on public policy to come to the
rescue. "The challenges are here today, but government initiatives take time
to formulate, time to pass into legislation, and time to be implemented. Time
is not a luxury that small business owners have," remarked Alexander.

    Climate for investment to remain supportive

    Investing in new technologies is a strategy that for many small
businesses might lower costs in the future and boost efficiency. The good news
is that the climate for investment is expected to remain positive.
    Despite the financial turmoil in August, there is no reason for Canadian
financial institutions to significantly cut back on their willingness to lend,
for the simple reason that credit conditions were never loosened
inappropriately in recent years. Borrowing costs should not prove prohibitive,
as interest rates should remain relatively close to current levels. A stronger
Canadian dollar has also significantly reduced the cost of imported machinery
and equipment.

    Creative and innovative responses needed

    The central theme of the TD Economics report is that Canada's
entrepreneurs will need all of their skills and talents to look for
opportunities to overcome the challenges. Business-as-usual strategies won't
deliver, and small business owners will need to find ways to attract talented
labour and retain their employees, with non-monetary factors becoming
particularly important.
    Ways of reducing energy and non-labour costs need to be identified, and
competing on the basis of price or labour costs is a losing cause. The future
is in selling higher quality or more advanced products, exploiting niche
markets and ensuring customer satisfaction. Developing scale could lead to
cost savings, and exploring new ways to penetrate foreign markets might also
prove profitable.
    "The bottom line is that creative thinking and flexibility towards new
approaches, processes and strategies are called for. Of course, this is easy
to say, and extremely hard to deliver," concluded Alexander.

For further information:

For further information: Craig Alexander, Vice President & Deputy Chief
Economist, (416) 982-8064; Derek Burleton, Director of Economic Studies, (416)

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