Ithaca sails calmer seas during economic storm
Businesses, campuses trim expense plans
By Tim Ashmore • Staff Writer • November 8, 2008
Buzz up! Michael Horzing's plan to someday expand Brotchen, a coffee and baked goods shop on The Commons, is on hold indefinitely until he stops seeing his profits eroded by high wholesale prices of goods like flour.
As costs rise for Shangri-La owner Kim Min You, she has moved her store into a larger building and entered into an agreement with other business people to sell their gifts and crafts.
Horzing and You are among business people in Ithaca finding that while Tompkins County's economy hasn't been blitzed by the fall's financial crisis like some communities, it feels the effects. With a relatively steady combined workforce of 11,500 employees in a county with a workforce of about 60,000 people, Cornell University and Ithaca College have historically insulated the Ithaca area from ups and downs of the national economy. But that doesn't mean some of the effects don't get through.
Area economic sectors, including retail, housing, manufacturing and high-tech companies, continue to perform relatively well on the whole, but profits are narrowing and store owners and industry executives are preparing for coming changes.
Retail sales were down nearly 6 percent from August 2007 to August 2008, according to Elia Kacapyr's Ithaca economic index. Kacapyr is an economics professor at Ithaca College.
Whether it's lower prices or higher costs, retailers like Horzing and You are facing narrower profit margins. Horzing said he can't raise prices on pace with wholesale cost increases. You has lowered some of her prices on garments to “reach customers' budgets,” she said.
Dave Wrisley, manager at Schooley's Jewelers on The Commons, said the store has scaled back spending on advertising, primarily because advertising wasn't translating into more business.
Despite that, Wrisley said business has been on par with last year, and he saw a spike in sales in late September and early October.
Wrisley said he's trying to help customers choose jewelry that won't go beyond their household budgets.
Ian Golden, owner of Finger Lakes Running Company on West State Street, said that while he uses credit, the most troubling news he's recently gotten is his supposedly business-friendly Advanta card's rate has more than doubled since January to 26.31 percent.
The store's sales through October are down 16 percent from October 2007. For the first nine months of the year, business is down 30 percent.
Golden said the decline may be due to a colder October than last year.
In early October, Golden's sales were up 12.5 percent on the year. Golden said he's watched his business rise and fall with media coverage of the markets.
“When (bad news) is not in the headlines, (business) seems to be OK,” he said. “I think I sell things people need. People keep running and they need shoes.”
Large regional retailers like Bon-Ton, which has a store at the Shops at Ithaca Mall, face concerns resulting from consumer trepidation.
“All retailers are experiencing difficult times due to the macroeconomic environment,” Mary Kerr, vice president of investor and public relations, wrote in an e-mail. “Although our comparable store sales number for September was a negative 4.6 percent, Bon-Ton had one of the best sales results in our peer group. It is obvious that the consumer is very nervous especially with the news coming out of Wall Street the past couple of weeks. We hope that ... there will be positive news coming out soon due to the actions of our government to help to restore consumer confidence.”
If large corporations begin layoffs, the relatively strong Tompkins economy could slow. That was the message from Stephen Romaine, CEO of Tompkins Financial Corp., at a Rotary club meeting in October.
The financial shake-up is also affecting typically secure Cornell and Ithaca College jobs.
In a joint statement, Ithaca College President Thomas Rochon and Carl Sgrecci, vice president for finance and administration, said Ithaca College had already consumed its contingency budget for the 2008-09 school year and is asking each department vice president to cut their budgets 4 percent.
One way to do that will be to cut positions that have been vacated, they wrote. It's unclear how many Ithaca College jobs might be affected.
Contributing to Ithaca College's financial woes is lower-than-anticipated enrollment by about 223 students, the pair said in the statement, blaming lower enrollment on the national economy. Tuition, and room and board fees comprise approximately 90 percent of the college's operating revenue.
The stock and bonds market has affected the Ithaca College endowment as well. At the end of the 2007-08 school year, the college had $237 million in its long-term investment portfolio, the statement said. By the end of September, the fund was down $36 million. Through October, the endowment has continued its decline, according to the statement.
Cornell is facing similar problems, but the root is different.
During his state of the university speech, Cornell President David Skorton noted some layoffs had occurred at the campus and several of the university's funding sources — state funding, research grants and investment earnings — have declined or are expected to decline in the coming months. Enrollment continues to be strong and a steady income stream.
Two weeks later, Skorton outlined a plan to slow replacement hiring of non-professional staff from outside the university until March 31.
Employees working on projects funded by federal grants could be in jeopardy as fewer are awarded next year, Skorton said, though he didn't think any programs would be cut completely as a result.
Wall Street is affecting Cornell funding primarily through the funds New York state provides the university. Skorton said 20 percent of state funds come from Wall Street and the troubled financial industry. And although Cornell is a private university, four of its constituent schools receive state money. Skorton said he would not force the four to handle state cuts on their own.
High-tech Cornell spin-off businesses are more confident. And the jobs those companies provide bolster the shaky economy.
“They're the kind of individuals we should want,” Steven Kyle, a Cornell professor of applied economics, said of the small, high-tech businesses in Tompkins. “They're pretty clean environmentally, and they employ people of relatively high-income level.”
Businesses like e2e Materials LLC, a company that produces petroleum-free, biodegradable composites, bring out-of-town dollars into the county through venture capital and other investments. And consumers from all over the country buy the products e2e makes.
Mezmeriz, a company that makes tiny projectors for cell phones, and e2e aren't worried about investors pulling money out. Most of it is established through venture funds and angel investors — early stage investors with industry knowledge — who are used to high-risk investing.
“It's not a question of is the money there or not,” said e2e co-founder and president Pat Govang. “I think the folks that do this early-stage, high-risk investing have a risk tolerance that helps them look for opportunities in any kind of financial times. We're not seeing a slowdown in that aspect of the business.”
If venture capital, which many small start-ups rely on, has already been raised, it isn't in jeopardy. But the amounts raised may need to last longer as wealthy investors could be tighter with future investments, said Nasir Ali, executive director of the Seed Capital Fund of Central New York.
“The bottom-line impact is that if you have recently collected that funding, you need to figure out how you're going to make it last longer than you thought you would have to,” said Ali, who is invested in both e2e and Mezmeriz. “If you haven't raised funds, you're just about to do that for the first time, then you have to sort of worry about the impact, particularly since most of the angel seed investing that we do relies upon high net-worth individuals ... so those people, if they have an impact on their 401Ks or their investments and cash flows and so on the amount of money they might be allocated toward these investments may go down.”
Opportunities in area
For Brad Treat, Mezmeriz president and chief executive officer, the Wall Street shake-up means there will be qualified people looking for jobs that he can seek out.
“One of the things that it helps me do is it's going to enable me to find and recruit top-class people,” he said of the recent crisis.
Instinctiv CEO Justin Smithline sees an opportunity in the troubled market as well.
“Companies are instituting hiring freezes, so they're looking to more outside vendors to help with services they may normally have done in-house,” he said.
Instinctiv produces media search and discovery projects.
Treat's customer base is global. Just 20 percent of the cell phone market is in the United States, he said. While foreign markets are affected by the American crisis, Treat expects cell phone sales to remain strong.
“As a global marketplace, people are viewing communication devices as necessities, not luxuries. In relative terms, the cell phone is not that an expensive of an item. Think about big ticket purchases like a car, a home and washers and dryers, and those are the kinds of things that people will push out. “
The issue high-tech start-ups may face is the credit freeze, and not because they rely on credit — because consumers do.
“We're financed with equity, so (we're) not feeling the credit side,” Smithline said. “I'm sure it will be affecting our customers and, indirectly, us.”
Credit markets will affect manufacturing, however. GMAC, a big home and auto finance company that is part of General Motors, began restricting new loans for consumers with good credit, the Wall Street Journal reported last Thursday.
BorgWarner recently laid off about 330 employees in Ithaca and Cortland as part of a national restructuring amid difficult times for automakers. The news that credit continues to tighten in the auto industry is the latest bad news.
Emerson Power Transmission reported a 14 percent drop in sales through the third quarter and would not comment further on its earnings.
While it might be expected that the housing market would be in a similar situation, it's not. Community banks like Tompkins Trust Co. and First National Bank of Dryden avoided writing sub-prime loans and ducked the financial fallout other lenders face. Alternatives Federal Credit Union avoided the housing crisis as well.
The housing market is softening, though. According to figures from the Ithaca Board of Realtors, home sales from March to August have been at their lowest since 2005. The figures aren't drastically lower, however, and sales in September were up from September 2007.
Part of the problem with getting a home in Tompkins is selling a home elsewhere, said Herb Dwyer, a sales manager for Warren Real Estate.
“Other housing markets aren't as strong as they are here, so homes are sitting much, much longer on the market there ... and they're having problems buying a house here because they have to sell their (old home) first. It's too difficult for people to carry two mortgages.”
Joe Mareane, the new Tompkins County administrator who is moving from Onondaga to Tompkins County, is facing that dilemma.
“I can't buy before I see what I can sell my house for in Onondaga County. My goal here is to move once. My house in Onondaga County is a little bit remote. So it's affected by a sluggish housing market, at least in Onondaga housing market, and secondly its a long commute. The good news here is the market here is still holding up.”