Making It

Hawaii works hard for its money. We took a look at 12 different businesses—from Matson to L&L Drive-Inn to a downtown parking garage—to find out just what it takes to make a living in paradise.

We interact with all kinds of businesses everyday, just in the course of living our lives. It’s easy to forget, as we’re filling up our gas tank, or buying lunch, that, behind the scenes, someone is obsessing over the exact price of a gallon of gasoline, or the ingredients of a plate lunch, to make sure you’ll be back next week. The life of a business owner is a constant hustle, especially in Hawaii—the Milken Institute recently ranked our state as the single most expensive in the United States in which to do business, with costs 52 percent higher than the national average. To find out what it takes to survive in such a competitive environment, we talked to 12 different businesses and nonprofit organizations, in a wide range of different industries, about the nuts and bolts of their operation. Turns out there’s a rhyme and reason behind even the smallest details, down to the weight of an airline snack cart.

Matson Navigation Co.

How it works: Matson works with major distribution centers on the West Coast—Seattle, Oakland and Long Beach, Calif.—and ships goods to the Islands on 13 vessels. Hawaii is Matson’s core business, and it has been operating here continually since 1882. Matson handles 70 percent of everything shipped in from the Mainland, from light bulbs to mirrors for space telescopes. Companies such as Safeway rely on West Coast distribution centers, rather than building new ones on pricey Island real estate.

photo courtesy of Matson

Who’s on deck: The average crew size on a vessel is 21 people.

The Schedule: “We depart when scheduled, regardless of whether the ship is full,” notes Jeff Hull, director of public relations. If demand goes up, Matson calls in a reserve unit; if business is slow, it can cut down by one boat per week. But Hawaii’s island economy keeps demand fairly steady year-round. On the return trip, Matson ships a lot of air—the balance is Hawaii products, including nursery stock, pineapples and cattle.

Expenses: In the past four years, Matson spent $500 million on four new ships. And, to run any vessel, as well as operate the refrigeration systems for milk and Christmas trees, you need fuel. For every $1 per barrel increase in the cost of oil, Matson experiences a $2 million annual increase in its cost of doing business. A fuel surcharge, adjusted up or down as oil prices shift, adds to each customer’s bill. It’s currently 24 percent of the ocean freight charge.

Contain your excitement: 1,000 to 1,300 containers are carried by each ship. Each container can hold 51,744 aluminum cans, 24,000 heads of lettuce and 2,280 20-pound bags of rice.

—Kathryn Drury Wagner

Mark’s Garage, managed by Propark

How it works: A well-run downtown garage can wring $400 to $500 a month from each stall, thanks to efficient juggling of unreserved monthly parking and hourly parking. Most of that money goes to the building owner. The bidding for parking management contracts is highly competitive—parking firms typically end up with just 5 to 8 percent of a garage’s gross revenues. They make up for this in volume; Propark runs 57 garages on Oahu and Maui, including Mark’s Garage. You know, where you park for Hawaii Theatre shows.

Demand: The wait list for monthly parking at Mark’s Garage is two to three years long, with about 300 people listed.

Economics: According to a recent survey, downtown Honolulu has the third-most expensive daily parking rates in the nation, trailing only New York City and Boston. The real question, though, is why parking rates aren’t higher. With such overwhelming demand for parking, why not raise prices to match? “Parking has to be in support of whatever else fills up the building,” points out Richard Leong, president and founder of Propark. “If customers couldn’t afford to park downtown, it would be very discouraging. So building owners have to be sensitive to their tenant’s needs as well.”

Punahou School

How it works: $14,725 a year in tuition per child sounds like a lot, but Punahou School actually derives only 75 percent of its operating budget from tuition. The rest comes from a combination of endowment income and charitable contributions (12 percent) and various fees such as summer school, co-curricular programs and the cafeteria (13 percent.) John Field, vice president and treasurer of the school, says “Punahou is a large business, but we need to keep our focus on the collegial learning environment appropriate to meet the needs of our students, faculty and staff. At the same time, we must manage our costs so that we can manage tuition levels.”

Building an education: Major capital projects, such as the new Case Middle School, are funded almost entirely by charitable donations ($60 million of the total $63 million cost for Case Middle came directly from fund-raising).

Gross annual revenues: $75 million

Financial aid: In 2007, $3 million went to Punahou’s needs-based financial aid program, which benefits about 11 percent of students, with an average grant of over $7,000.

Punahou Carnival: In 2007, Punahou School sold 130,000 malasadas at its carnival. In 2006, it sold 8,000 jars of mango chutney and 2,000 jars of lilikoi butter. Carnival proceeds ($260,899 in 2004) generally pay for 15 to 20 percent of the school’s financial aid.

 

Kahala Shell Rapid Lube & Car Wash

How it works: Someone’s making a fortune off gasoline, but it’s not the dealers. The retail gas business is one of razor-thin margins and stiff competition. “Customers are being squeezed by rising gas prices at the pump, but we’re being squeezed by that at the same time,” says Bill Green, former owner and consultant to Kahala Shell. Although it pumps 150,000 gallons of gas a month, Kahala Shell relies on four additional revenue streams to survive: a car wash, a quick lube, a convenience store and a propane refilling station.

photo by Sergio Goes Kahala Shell’s quick-lube facility helps beef up its profit margins

Convenience store sales, for example, bring a 24 percent profit margin—much better than the 1 percent to 4 percent margin on gasoline. “We try to give people as many reasons as possible to drive through here,” says Green.

The ups and downs: Gasoline is one of the most price-sensitive products out there. “It’s literally an hourly concern,” says Green. “Two or three times a day, we’ll check prices and see what’s going on. It’s like a meter: If you get out of competition, within two or three days you can see your volume slipping.”

Plastic costs: The convenience of paying at the pump isn’t free. Kahala Shell pays more than $10,000 a month in credit card fees.

Taxes: 52.1 cents of every gallon of gas goes directly to the government (18.4 cents to the federal government, 17 cents to the state, and 16.5 to the city and county of Honolulu).

Price of paradise: Hawaii’s gas stations generally need twice as many customers to match the pumping volume of a similar Mainland station. We just don’t drive as much.

University of Hawaii Athletic Department

How it works: College athletes may not get paid, but a lot of money changes hands to make a university athletic department run successfully.

Nalo Farms

How it works: Large-scale agriculture in Hawaii may be on its last legs, but boutique farming is booming. Dean Okimoto caught the Hawaii Regional Cuisine revolution of the 1990s, which sparked a still-growing demand for gourmet, locally grown produce. “One of the biggest boons for agriculture has been this partnership with restaurants,” he says. Okimoto started growing salad mixes exclusively for Roy Yamaguchi in 1990; today, Nalo Farms supplies about 90 Oahu restaurants and 25 Neighbor Island restaurants with salad greens.

Cost: It costs Nalo Farms $1.80 a pound to bring a crop of greens to market, a figure that includes land preparation, water, irrigation lines, seed and labor costs. Delivery adds another 50 cents a pound.

High volume: Any one of the Roy’s restaurants will order about six to eight pounds of greens a day. All told, Nalo Farms sells about 10,000 pounds of greens a month on Oahu.

Turnover: One big plus of growing salad greens is their quick growth cycle: Okimoto is able to take a crop from seed to harvest in one month. In one year, one plot of land can produce eight separate crops.

Expanding the market: In addition to his main customer base of restaurants, Okimoto sells 25 percent of his output to local farmers’ markets, and is ramping up to sell his produce in supermarkets. “I’d like to have a 50-50 split between restaurants and retail locations,” he says. “The restaurants give us the best marketing exposure, but the farmers’ markets give us larger margins.”

 

Hawaiian Airlines

How it works: Few industries are more competitive than the airline business. Its capital-intensive nature means price wars are almost inevitable. Once Hawaiian Airlines buys its aircraft, fuels them up and hires the pilots and flight attendants, the incremental cost of carrying one extra passenger is very small. “The temptation is to sell that last seat for whatever you can get for it,” says Peter Ingram, Hawaiian Airlines’ chief financial officer. “It’s essentially found money, in the short-term sense. The challenge is that if you get into the practice of selling that last seat very cheaply, people come to expect it, and the market drives down prices and squeezes profit margins.”

Sardines: In a time of $39, $19 and even $1 fares, the airline’s best chance of recouping costs is to pack each flight as full as possible. In the first half of 2007, Hawaiian’s planes were 87.3 percent full, on average—significantly higher than the industry-wide average of 78.8 percent.

People movers: In 2006, Hawaiian Airlines flew about 17,000 people each day.

 

Major costs of business
27 percent: fuel
25 percent: wages/benefits
10 percent: airplane ownership expenses (rent, depreciation, interest)
10 percent: maintenance

Fill ‘er up: A typical Maui/Oahu flight consumes 350 gallons of jet fuel. Cost per gallon—$2.10. Cost per gallon in 2002—72 cents.

Weight-watchers: The airline can’t control the cost of fuel, but it can slim down—the lighter a plane, the greater its fuel efficiency. Everything is subject to scrutiny. Hawaiian is currently replacing its food-service carts with a lower weight version. Weight savings per plane? About 20 pounds.

 

City and County of Honolulu

This chart visually represents how the City and County of Honolulu spent your tax dollars in 2006. Each circle is proportional, so you can easily compare how much of the total $1.5 billion budget was spent by different departments. For most departments, we also represent—in scale—their major functions. There is, for example, one large circle for Public Safety, and then a breakdown into police, fire department, etc.

—Additional reporting by Joshua Duvauchelle

 

Servco Automotive

How it works: Beyond the basic push to sell as many cars for as much as possible, one of the biggest challenges for a car dealership is stocking the right mix of cars. With all the different available options for a given model—color, engine size, luxury packages—there are hundreds of possible configurations, and it’s impossible to stock them all. Dealerships can’t ship unpopular models back to the manufacturer, so it’s critical that they choose their inventory wisely. “Once the car is built, it’s going to be sold somewhere,” says Rick Ching, general manager of Servco Automotive. “The only question is for how much.”

Volume: A successful car salesperson will sell 10 to 20 cars a month. Servco’s two Lexus dealerships sell about 150 new vehicles a month.

Profit margin: Ching says Servco’s overall profit margin on new car sales ends up being a “single digit percentage” of the dealer cost. “It’s not as high as everyone thinks. There’s been a lot of pressure on new car pricing.”

 

 

Bank of Hawaii

How it works: You may think of your checking and savings accounts as sitting securely in the bank vault, but in reality, last month’s paycheck most likely paid for someone’s new car, or maybe a first home. It’s still secure, of course, but Bank of Hawaii has your money hard at work. Chairman and CEO Al Landon boils it down this way: “Lots of people allow us to manage their money, and we invest some of that at a higher rate.”

Where your money goes: The bulk of BOH’s income is made by loaning money back into the community in various forms, including mortgages, car loans, commercial loans and revolving credit lines. In 2006, it collected $425.5 million in interest and fees on loans and leases. The next largest piece comes from securities, which have a lower return, but are safer. BOH made $126.8 million from available-for-sale investment securities in 2006.

Market share: Landon estimates that BOH finances 20 percent of the state’s business activity.

Growth potential: Bank of Hawaii’s fastest growing segment is the small business sector, “which is consistent with what you’ll find in the rest of Hawaii’s economy,” Landon says. “It’s where a lot of the job creation is, and a lot of the value generation. Hawaii is particularly entrepreneurial.”

The Queen’s Medical Center

How it works: That big scary number at the bottom of your hospital bill is all but meaningless. “Ninety-nine percent of patients never pay the billed charges, because they’re covered by some form of insurance,” says Art Ushijima, president and CEO of The Queen’s Health System. Private insurance providers such as HMSA negotiate substantial discounts for medical procedures, and government-run insurance providers Medicare and Medicaid—which cover more than half of the hospital’s patients—pay even less. “If you participate in the Medicare program, you accept a set reimbursement for a certain procedure,” explains Ushijima. “Your actual costs may be more than that, but Medicare calls the shots, and you have to manage your costs to meet their number.”

Volume: The Queen’s Medical Center receives 21,000 inpatient admissions a year, and 275,000 outpatient visits. More than 1,600 trauma patients come through the emergency room each year.

Photo by Sergio Goes The Queen’s Medical Center invests $40 million a year in facilities, equipment and technology.

Bottom line: In 2006, the hospital made $24.2 million, including $4.8 million in operating income and $14.4 in investment income. The medical business can be mercurial, though; Queen’s is projecting a $10 million loss in operating income for 2007.

L&L Drive-Inn

How it works: The plate-lunch business is all about quantity. “We’ve got to make sure the food tastes good, but in the fast-food arena, people are looking for value. They expect large portions,” says Eddie Flores, CEO of L&L Drive-Inn and L&L Hawaiian Barbecue.

New territories: Hawaii’s plate-lunch market is saturated with competitors, so L&L has turned to the Mainland to find new customers. There are now 180 L&L locations nationwide, 51 or 52 of them in Hawaii. “It’s hard to keep track of them all,” says Flores. “We opened three this month.” L&L owns only 10 restaurants at this point, the rest are franchises. “It’s the fastest way to grow,” says Flores.

Join the team: New franchisees pay L&L a fee of $35,000, plus 4 percent of monthly sales, and cover all startup costs, typically totaling $350,000. In exchange, they receive a proven business model and a well-established brand name. “In the Mainland, we don’t advertise. As soon as people hear that we’re opening, we have 20 or 30 people from Hawaii just waiting to get in,” says Flores.

Gross sales: L&L brought in $80.6 million in 2006, an average of $448,000 in gross sales per location.

Keeping it real: Flores gives his L&L franchisees a little more freedom than other chains. “We train them, give them the recipes, but they can deviate from that. I’ve found that our customers accept the differences between locations. This particular L&L has good garlic fish; this other one has good katsu.”

Photo by Olivier Koning Eddie Flores, CEO of L&L Drive-Inn.

Good for you: A successful restaurant must be sensitive to customer demands. L&L now offers tossed greens and brown rice with its lunches, selling more than 50 “healthy plates” a day at its Keeaumoku Wal-Mart location.

Largest costs: 30 percent of the cost of a plate lunch goes toward the food ingredients, 25 percent toward labor costs.

Most profitable menu item: Any plate using chicken, which costs L&L just 30 cents per plate to include.

Least profitable menu item: The laulau plate. Each laulau costs $1.80, and with the kalua pork and other items, the entire plate ends up costing L&L about $3.50, just in ingredients.

Rent: L&L restaurants typically occupy 1,000 to 1,500 square feet of space, and pay between $2.75 to $4 per square foot a month. But Flores worries about Hawaii’s ever-soaring real estate values. “All the new shopping centers I’ve been dealing with, the lease rents have increased two- to threefold,” he says. “Some people are quoting $10 or $11 a square foot. My god; no one could survive with that.”