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Most Profitable Businesses in Hawaii

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You may have chosen to run your own business for any number of reasons: you saw a need in the market; you wanted to fully utilize your talents; you hoped to make a difference.  But ultimately, if you’re like most small business owners, you wanted to make money, and lots of it. 

But how?  As a business broker and CPA, we have the unique privilege of consulting with hundreds of small Hawaii business owners every year and seeing their profit and loss statements.  Through this process, we’ve identified some of the critical factors that separate the most lucrative businesses from the marginally profitable ones.  Some are characteristic of industries and largely beyond your control if you’re already in business.  But most are factors you can influence to enhance your profitability.

Industry Characteristics
The most lucrative companies in Hawaii benefit from strong “barriers to entry” for new competitors.  Examples include boating/ touring businesses with permits that are limited in number by the state, or distributors with exclusive rights to brand name products.  A barrier particularly important to select industries in Hawaii, with its large federal spending, is the SBA’s 8(a) program.  8(a) provides federal government contracting preferences, including sole-source bids, for qualified minority owned or disadvantaged businesses.  Restaurants and retail, by contrast, have low barriers to entry, and below average profitability.

Businesses in rapidly growing industries tend to be highly profitable, as demand outstrips supply and prices skyrocket.  In Hawaii, almost any business related to real estate and construction has been lucrative lately. 

If you don’t trust growth projections, choose a mundane, profitable field such as accounting, security, or home health care over the more “glamorous” but cutthroat tourism and restaurant businesses.  Glamour attracts new entrants, creating excess capacity and price competition.

Company Traits
Of course, industry isn’t everything.  There are extremely profitable restaurants and money losing real estate companies.  Strategy and management matter.

Lucrative businesses, as a rule, offer highly differentiated products and services.  One of the best ways to differentiate is through owning a blue chip franchise or brand.  The local Starbucks, L&L and Curves franchises are expanding rapidly while much of their unbranded competition struggles.  A profitable approach in almost any non commodity industry is to provide the highest quality product or service.  Competing on cost, especially in scale driven sectors against mainland giants (e.g., Costco, United Airlines, Subway) is a recipe for failure.

Two related paths to profitability are easier said than done: dominate your niche and invest sufficient capital.  A strong correlation between market share and profitability has been documented in countless industries by the Boston Consulting Group and others.  The correlation holds for small businesses in Hawaii.  In fields as diverse as dental care and food manufacturing, we’ve seen the well funded local companies that invest heavily and expand rapidly to dominate their industry earn the lion’s share of profits through economies of scale, brand awareness, and buying power.

No amount of investment will work if a company does not adapt to the unique needs of Hawaii’s market.  The local McDonalds franchises get it; they created the Spam Egg McGridle and other entrees found nowhere on the mainland.  However, other large mainland firms have failed infamously, including Bank of America (impersonal, outsourced customer service) and Brinks Home Security (high pressure sales tactics and incompatible equipment).

The key to making all of the above strategies work is strong leadership and the ability to attract and retain the best people.   Satisfied, effective employees differentiate your company and increase customer loyalty and retention.  In professional service firms, this factor is paramount—the top 20% of employees typically generate 80% of the profit.  When your primary assets walk out the door every night, you need to make sure they’ll want to come back in the morning.