It's win-win for vendors, retailers

By Catherine E. Toth
Advertiser Staff Writer

Clyde Kawahara invested $250,000 in production and software upgrades, expanded his warehouse by 4,000 square feet and hired additional employees in two departments.

Shelves at the new Wal-Mart on Ke'eaumoku Street are packed with local foods and other goods supplied by Hawai'i businesses. Deborah Booker • The Honolulu Advertiser

Since his company, Pacific Creations, became a supplier for the retail giant more than a decade ago, Kawahara has had to invest money to keep up with demand for his screen-printed resort apparel.

"Although we made a sizable investment, the payoff for us is clearly apparent," Kawahara said.

Since partnering with Wal-Mart, Pacific Creations has posted record sales — not only from its Wal-Mart account but from other accounts as well, as a result of improving the company's technology.

"The largest impact on our company is in improving efficiency," Kawahara said. "Wal-Mart is a leader in technology systems. This has, in turn, led us to improving our own equipment in order to integrate to their needs."

Opportunities for small businesses to become vendors for chain retailers are growing in Hawai'i, as Mainland-based companies move in with promises to stock their shelves with local products.

Wal-Mart, which opened its seventh store in Hawai'i on Ke'eaumoku Street in November, expects to purchase up to $110 million worth of merchandise from local suppliers this year, up from $90 million in 2003. The figures cover both Hawai'i-made products and imported goods that are distributed by local wholesalers. More than 300 local businesses provide goods or services to Wal-Mart.

"The local products are doing particularly well," said Wal-Mart spokeswomen Cynthia Lin. "Food is a major category. But we also do a major amount of purchasing in categories such as apparel, shoes, souvenirs, jewelry and electronics. It's really across the board."

Even local farms have seen a boost in business since large chain retailers such as Wal-Mart and Home Depot opened and featured their green goods.

Wal-Mart alone contracts with more than 30 local growers who provide everything from orchids to cut flowers to lei.

"There's really a lot of opportunity," said Frank Nomura, Hawai'i horticulture merchandiser for Wal-Mart who has seen small local farms grow because of the new opportunities. "I like to make long-range plans with growers and encourage them to grow with us."

Selling to chain retailers is one way for local businesses to boost revenue and increase exposure in different markets. But often times it comes at a cost.

Brent Fujimoto started supplying Macy's with his line of gourmet cookies three years ago when the department store took over Liberty House.

Since then, sales for Keith's Cookies have shot up. But so have expenses.

"(The partnership) pretty much doubled our sales," Fujimoto said. "But of course with that, expenses multiplied."

He had to invest in a second warehouse and additional equipment, doubling production to stock the shelves of every Macy's in the state.

Despite the financial investment, Fujimoto said the partnership has paid off.

"We money-managed it pretty close to our cash flow," he said. "We weren't affected that much."

The benefits for a small business range from increasing sales to getting wider product exposure, said Darryl Mleynek, state director of the Small Business Development Center at the University of Hawai'i-Hilo.

But there are risks.

Large retailers tend to demand competitive pricing from their suppliers, which can squeeze the profits of smaller vendors.

"The primary benefit would be the opportunity to earn a larger profit," Mleynek said. "But it always comes back to whether it's possible to make a profit and whether the risk is manageable.

"It's not difficult if you have a product they want and can provide it at a price they're willing to pay while maintaining a profit for yourself. But those are very large ifs. Many of the large corporate retailers are committed to buying locally. They are open to that as a possibility so there is an opportunity for local businesses. The question really (becomes) whether or not that opportunity is real."

Clyde Kawahara of Pacific Creations has plenty of reason to smile: His company is posting record sales, thanks in part to Wal-Mart. Pacific Creations has been a supplier for the retail giant for more than 10 years. Rebecca Breyer • The Honolulu Advertiser

"If they end up having a very large percentage of business going to a single (retailer), that's a high-risk situation," Mleynek said. "And that has to be managed very carefully. If they lose the account, they could literally be in bankruptcy. That's the worst-case scenario."

Hawai'i Coffee Co., which offers the Lion coffee and Royal Kona coffee brands, has seen significant sales growth since supplying Sam's Club in 1992. Its coffee and tea brands are in all Sam's Clubs and Wal-Marts in the state.

But those aren't the company's primary accounts. Hawai'i Coffee Co. brands can also be found in every major supermarket, Longs Drug Stores and Hilo Hattie locations. Its brews are also in McDonald's restaurants and 7-Eleven stores.

"We're up double-digits this year with Wal-Mart and Sam's Club compared to last year," said Sharon Zambo-Fan, vice president of sales for Hawai'i Coffee Co. "Every year we're growing with them. We haven't had a down year for any of our brands."

The Islander Group, one of Hawai'i's largest wholesale suppliers of books and music, began supplying Wal-Mart when its first store opened more than 10 years ago.

Since joining with Wal-Mart, the company built a new 50,000-square-foot distribution center in the Mililani Tech Park and hired 10 more workers. Over the past few years, that investment has totalled well more than $8 million.

And it has all been worth it, said president Jeff Swartz. Sales have grown by double-digits.

"Our book business has grown dramatically over the past several years as we have partnered with Wal-Mart to do more cross-merchandising," Swartz said. "We have returns on all of those investments."

The company also supplies other chain retailers including Longs Drug Stores, Borders, Kmart and ABC stores. Working with Wal-Mart, however, has helped The Islander Group sell its products to stores in California and Puerto Rice, Swartz added.

"We have found ... Wal-Mart to be one of the easiest retail partners to work with," Swartz said. "They are community-minded and have gone out of their way to work with local companies. ... We enjoy working with Wal-Mart. They've become a very important part of our business."

National — and sometimes worldwide — exposure, businesses say, is one of the biggest benefits to supplying a large chain retailer.

"There's no way we would be able to afford that kind of advertising," said Fujimoto, who has seen double-digit growth in sales on his Web site because of his product's exposure in Macy's. "They really take care of that."

Workers fold shirts at Pacific Creations at 214 Sand Island Road. Pacific Creations supplies Wal-Mart, and others, with resort apparel. Rebecca Breyer • The Honolulu Advertiser

In just one year of business, the Belmonts have a carved a niche for their gourmet topping in local specialty stores. Hawaiian Fudge Sauce is sold in a variety of boutique stores in Hawai'i, California and Washington. On Thursday their sauces made their debut at Hilo Hattie — their first chain retailer.

Next year, though, they plan to expand their business, hopefully landing an account with upscale retailer Neiman Marcus. That, they say, might launch their sauces worldwide.

"Who knows who might see our product and like it and want to invest in our company," said Dan Belmont, who started the company in November 2003 using his mother's fudge sauce recipe. "I think that exposure would be the biggest plus."

After using $5,000 of their own savings and another $5,000 in a loan from the Small Business Administration, the Belmonts began making sauces at the nonprofit Pacific Gateway Center in Kalihi. Within six months, the business was paying for itself.

They've approached DFS Hawai'i and Costco but decided the risk and investment to supply them with their gourmet sauces wouldn't be worth it.

"They practically wanted to buy our product without us making any money," Dan Belmont said. "It would be impossible for us to do something like that and stay in business."

But Longs Drug Stores, Macy's and Wal-Mart aren't retailers the Belmonts are targeting right now. They want to expand their business but retain their specialty status.

"We're at that next level, at that next point where we're ready to grow a little bit more," Dan Belmont said. "But it's all in the planning stages."

In order to expand to large retailers, they'll have to add bar codes and nutritional information to their sauces. For that, they'll have to take out another loan.

And that, Dan Belmont said, is a risky but exciting step.

"Obviously to grow you need to have money to make money," he said. "And I feel really good about that, actually. Our business is making money already."

Reach Catherine E. Toth at 535-8103 or ctoth@honoluluadvertiser.com.