Financial crisis in the specialized aquarium branch

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Financial crisis in the

specialized aquarium branch

A research on how specialized aquarium shops finance their business

during the financial crisis

University of Groningen

Faculty of Economics and Business Administration

Master's thesis

Frank Bouwkamp

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Financial crisis in the

specialized aquarium branch

A research on how specialized aquarium shops finance their business

during the financial crisis

University of Groningen

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Preface

At the moment of this writing, I am in the fourth and final year of the Faculty Economics and Business Administration of the University of Groningen. My Master specialization is Small Business and Entrepreneurship. This specialization is about entrepreneurship, becoming an entrepreneur, and starting your own business. In conclusion of my study, I have to write a Master thesis about a study related subject. I decided to write my thesis about the financial crisis in the specialized aquarium branch.

The subject of this thesis is a deliberate choice. My father and I have shared the hobby of having a tropical aquarium for more than 20 years. It started with having freshwater fishes and since 2006, we moved our interest to saltwater and marine fishes. For a saltwater aquarist it is not easy to obtain saltwater products and animals, especially not in the north of the Netherlands. There are only a few aquarium shops in the northern provinces who sell saltwater products and animals, and usually these shops are not specialized in saltwater but in freshwater. This means that they often do not have many product choices and poor quality of marine life. Here comes my frustration and because I am a Small Business and Entrepreneurship student, I once said to my father that I could do this a lot better and want to start a specialized salt- and freshwater aquarium shop in the north of the Netherlands. For the course Entrepreneurial Skills II in 2009, I wrote a business plan for starting an aquarium shop in Groningen. An important step when setting up a business is obtaining finance. Setting up an aquarium shop, and especially a saltwater aquarium shop, requires a considerable amount of money. However, in times of financial crisis, it is not easy to obtain money from family members, friends or even banks. I had an interesting conversation in 2009 with an aquarium shop owner about obtaining money from banks during the financial crisis. This conversation raised my interest and therefore I decided to write my thesis about this topic.

I am pleased with the entire track, because I hardly suffered from any problems during my research. Of course there were some misfortunes, but I solved these problems in time. The first problem was the scope of my research. I wanted to conduct my research in the three northern provinces of the Netherlands, but there were not enough interesting aquarium shops in these provinces. After carefully evaluating this with my University instructor, drs. A.B.W. Mintjes, I decided to change the scope to the entire Netherlands. This change of scope had no negative effects on my research and resulted in more interesting aquarium shops. The second problem was that many aquarium shop owners did not want to provide financial data. I solved this by changing questions in 10-point scales. Remarkably, none of the small business owners had any problems with filling in these questions. This change was the most important decision for the continuity of this research and I am very pleased with the results.

I would like to thank my 1st instructor, drs. A.B.W. Mintjes, for his useful feedback, insights and tips. Whenever I had a question, I could phone or mail him and I received clear answers which really helped me in conducting this research. Furthermore, I would like to thank the financial advisors of the ABN-AMRO bank and ING bank for their clear interviews and the small business aquarium owners for their time and effort to fill in my questionnaire and invite me in their shops. Their open answers really contributed to this research.

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Summary

This research tries to provide more insight into the animal pet shop branch during the financial crisis. Little academic research has been done in this sector, especially not in financing specialized aquarium shops in times of financial crisis. Small business owners of specialized aquarium shops can use this research to check how they are doing compared with their competitors. In order to conduct this research, a combination of literature research and interviews has been used.

The financial crisis affects almost every business sector in the Netherlands. Consumers spend less money which affects many businesses negatively. These businesses receive less orders, hardly make any profit and have to fire employees in order to survive. The housing market and the automobile industry are the most obvious examples. According to the Dutch pet shop branch Dibevo, the number of pets is still increasing. Dibevo states that in times of crisis, many consumers are not spending less money on products for their pets and that the financial crisis does not affect the pet shop industry very much. By far the most kept animal as a pet is an aquarium fish. However, little research has been done in this sector. It is therefore interesting to figure out how specialized aquarium shops are doing during the financial crisis. There are 667 potential shops that sell aquarium fishes. This research is only focused on specialized aquarium shops, which are shops of which at least 70% of the turnover is realized by selling aquarium related products and animals. After careful selection, 70 shops were suited for this research. These shops were either contacted personally or by e-mail. There was a response rate of 43% which means 30 aquarium shops wanted to be involved in this research. Furthermore, to hear their side of the story as well, two interviews with financial advisors of the ABN-AMRO and ING bank have been conducted.

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1. Introduction

The credit crisis has plunged the world economy into one of the deepest recessions since World War II. The financial crisis finds its roots in the United States real estate and subprime lending crisis (Krugman, 2009). Commercial and residential properties saw their values increase considerably in a real estate boom that began in the early nineties and increased for nearly a decade. Increases in housing prices coincided with a period of government deregulation that not only allowed unqualified buyers to take out mortgages but also helped to improve the relation between traditional investment banks and mortgage lenders. It was easy to obtain loans for credit cards and mortgages which made consumers enthusiastic (Bernanke, 2009). These developments introduced financial agreements like mortgage backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices (Vink and Thibeault, 2008). Such financial institutions enabled institutions and investors around the world to invest heavily in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in these financial agreements reported significant losses. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The global financial crisis really started to show its effects in the middle of 2007 and 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments have had to come up with rescue packages to bail out their financial systems.

The financial crisis has also reached the Netherlands. It started on October 3th 2008, with the takeover of Fortis bank by the Dutch Government. The stocks of Fortis Bank decreased with 63% and stockholders made heavy losses. As a result, the Dutch Government decided to provide the ING bank a capital injection of € 10 milliard and AEGON a capital injection of € 3 milliard. On 8 October 2008, the bank of Iceland (Icesave) could not meet her financial obligations. This was a disaster for many Dutch Icesavers. However, not only banks have trouble with the financial crisis. The financial crisis affects almost every business sector in the Netherlands. Consumers spend less money which affects many businesses negatively. These businesses receive less orders, hardly make any profit and have to fire employees in order to survive. The housing market and the automobile industry are the most obvious examples. According to the Dutch pet shop branch Dibevo, the number of pets is still increasing. In more than half of the Dutch households, one or more pets are kept. Dibevo estimates that there are 1,8 million dogs, 1,7 million rabbits and rodents, 4,5 million ornamental fowls, 0,25 million reptiles and amphibians, 3,3 million cats and 19 million aquarium- and pool fishes kept as pets in Dutch households. Furthermore, Dibevo states that in times of crisis, many consumers are not spending less money on products for their pets. Because assumingly this branch is not affected by the crisis very much, many small business owners in this branch still need to finance their business. There are different possibilities for pet shop owners to obtain finance. The largest amount of these loans are used to pay rent for the location, replenish inventory and pay for electricity and salaries. Because of the financial crisis and the problems with banks worldwide, many banks are now more reluctant in providing private- or business loans (OECD, 2008). Several banks have changed the loaning conditions in order to reduce their risk. It is therefore interesting to see whether small business owners in the pet shop branch have trouble in obtaining loans from banks. The focus of this research lies on specialized aquarium shops. Aquarium fishes are by far the most kept pet in the Netherlands. Little research has been done in this sector, especially not in the Netherlands.

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7 This study tries to find out which types of financing small business owners in the specialized aquarium business in the Netherlands use to finance their businesses, and to what degree the banking crisis in the Netherlands affects the providing of loans to these businesses. Banks might for example change the interest rates, want more certainties (collateral) or change the loaning period. Furthermore, the crisis can affect the number of customers and their expenses. These conditions can affect the continuity of these type of businesses. Therefore, this research is written for small business owners of specialized aquarium businesses and for starting entrepreneurs who can use the results of this research to their advantage when comparing their own business with their competitors. To be able to conduct a proper research, the following research question is formulated:

What are the consequences of the financial crisis on specialized aquarium shops in the Netherlands?

In order to answer the research question, it is important to analyze the research question and to formulate sub questions. The sub questions are the main structure of the thesis. The following sub questions are formulated in order to answer the research question:

1 What is a specialized aquarium shop?

2 Which sources of business financing are defined in the literature?

2.1 Which sources of business financing are suited for the aquarium branch? 3 How does the financial crisis influence the way banks are financing businesses? 3.1 How does the financial crisis influence the way banks are financing aquarium shops?

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2. Theoretical framework

In this chapter, related theories for answering the research question are described. These theories can provide an overview of the different research topics. The first paragraph briefly describes an SME, entrepreneurship and the entrepreneur. The second paragraph tries to define what exactly a specialized aquarium shop is and provides information about these shops in the Netherlands. The third paragraph describes the different sources of business finance and describes which of these sources are common in the specialized aquarium branch. The fourth paragraph describes the pecking order theory of finance.

2.1 SME, entrepreneurship and the entrepreneur

This paragraph describes the definitions of an SME, entrepreneurship and the entrepreneur. There are many definitions found in the literature regarding these topics and the most important ones are selected for this research. For each of these topics, an own definition is created which will be used as a guideline in this research.

2.1.1 SME

SME means Small and Medium-Sizes Enterprise. According to Bridge (2003), the literature describes several different definitions, which overlap at certain areas. According to table 1 of the Department of Trade and Industry in the UK, the following firms can be distinguished:

Type of firm Number of employees

Micro firm < 10 employees

Small firm < 50 employees (includes micro)

Medium firm 50 – 249 employees

Large firm > 249 employees

Table 1: Firm type and number of employees required

According to the Bolton Report (1971), a small firm is one that has a relatively small share of its market. Furthermore, an essential characteristic of a small firm is that it is managed by its owners or part-owners in a personalised way, and not through the medium of a formalised management structure. Moreover, it is also independent in the sense that it is not part of a larger enterprise and that the owner-managers should be free from outside control in taking their principal decisions.

Nooteboom (1994) states that the most important characteristic of a small business is its diversity. Other core characteristics mentioned by Nooteboom (1994) are small scale, personality and independence of the small firm. When comparing these visions, there can be concluded that they have a lot in common. For this research the following definition of an SME is created:

Small and Medium-sized Enterprises are enterprises which have fewer than 250 employees. Self-employed One person in the business

Micro-business Up to 9 employees Small business 10 to 99 employees Medium-sized business 100 to 250* employees *Outside Europe up to 450 employees

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9 SME‟s have the following characteristics:

 they are managed in a personalised way and not through a formalised management structure;

 they are not part of a larger enterprise and the owners are free from outside control in taking their principal decisions;

 they obtain a small share of the market.

With regard to the specialized aquarium branch in the Netherlands, there are only small aquarium firms (including self-employed and micro firms). Most of these firms only have a few employees and their annual turnover does not exceed € 50 million.

2.1.2 Entrepreneurship

Drucker (1970) states that the word entrepreneurship has a wide range of meanings and there is not a definition that completely describes all the aspects of entrepreneurship. There are a considerable number of approaches to entrepreneurship and to examine these theories, entrepreneurship can be divided into entrepreneurial “Schools of Thought” approaches. Each school divides entrepreneurship into specific activities on macro and micro view. Drucker (1970) also states that entrepreneurship involves taking risks. The entrepreneur always searches for change, responds to it, and exploits it as an opportunity. Drucker (1970) believes that entrepreneurship and innovation are not inborn characteristics. They are behaviours that can be learned.

According to economist Schumpeter (1950), entrepreneurship has something to do with innovation, such as new products, new production methods, new markets and new forms of organization. Wealth is created when such innovation results in new demand. Schumpeter also states that entrepreneurship is about doing things different than your competitors.

Miller (1987) states that entrepreneurship can be seen as „any attempt to create a new business enterprise or to expand an existing business by an individual, a team of individuals or an established business‟. When these views of entrepreneurship are compared, there can be concluded that they have a lot in common. Innovation, creativity, taking opportunities and creating value for the society are all aspects that are mentioned in these views. Therefore, the following definition of entrepreneurship is created for this research:

Entrepreneurship is the process of seeing opportunities and chances, and taking these

chances in an innovative and creative way for the purpose of generating valuable products or services that can result in the creation of wealth for the individual and value for the society.

Entrepreneurship is an important aspect in the aquarium branch. Introducing new products, markets and techniques create new demand. Furthermore, many aquarium shops are selling tank-bread fish which are raised in captivity instead of taking them from their natural environment. This is positive for the sustainability of the environment.

2.1.3 Entrepreneur

According to the Merriam Webster online dictionary, the word “Entrepreneur” is from origin a French word “Entreprendre” and means “To undertake”. In a business context it means to start a business. The French feminine word for entrepreneur is “Entrepreneuse”.

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10 In the middle of the 18th century, the word "Entrepreneur" was used to describe the owner or manager of an industrial enterprise. Ardichvili and Cardozo (2000) defined entrepreneurs as people in the pre-start-up, start-up and early phases of business ownership. This definition is only partly suited for the aquarium branch, because some of these specialized aquarium shop owners are not in the early phases of business ownership.

According to the Dutch tax collectors office (2009), an entrepreneur is someone who has an own company or is planning to start an own business. There are a few conditions. First, an entrepreneur is responsible for his activities concerning the enterprise and he is primary linked to this enterprise. Secondly, the enterprise has to be managed on own account and finally he is completely responsible for the debts of this enterprise.

Drucker (1990) defines an entrepreneur as a catalyst for economic change who uses purposeful searching, careful planning and sound judgement when carrying out the entrepreneurial process. Ronstadt (1984) sees an entrepreneur as a person who undertakes a wealth-creating and value-adding process, through incubating ideas, assembling resources and making things happen. When comparing these definitions and views of an entrepreneur, many of these definitions overlap at certain areas. Therefore, the following definition of an entrepreneur is created and used for this research:

An entrepreneur is a person who is in a certain phase of business ownership and has the knowledge, confidence and foresight to operate in an uncertain environment. The person is a catalyst for economic change who uses careful planning and preparation to undertake a wealth-creating and value-adding process.

This definition is suited for the entrepreneurs in the specialized aquarium branch, because many of these entrepreneurs operate in different phases of business ownership and they have the knowledge to operate in an uncertain environment. They are up-to-date about the latest developments for their business and most of the entrepreneurs in this branch are positively involved in the wealth creating and value adding process.

2.2 Specialized aquarium shops

This paragraph provides a definition of a specialized aquarium shop. The pet shop branch can be distinguished into three types of shops. First there are pet shops (franchise organizations like Discus, Pets Place, and Faunaland), who do not only sell aquarium fishes, but sell a wide range of animal species like dogs, cats, rodents and birds. These type of pet shops are not focused on selling products for one type of animal species, but generate their income by selling products for several types of animals. Most of these pet shops are not suited for this research.

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11 three different types of shops. First, there are freshwater aquarium shops, who only sell freshwater aquarium fishes. Second, there are saltwater aquarium shops, who only sell marine or saltwater aquarium fishes. Third, there are aquarium shops who sell both freshwater and saltwater aquarium fishes. For this research all three types of specializations are used, so there will not be made a distinction between financing a saltwater aquarium shop or a freshwater aquarium shop. Therefore the following definition of a specialized aquarium shop is created:

A specialized aquarium shop is a pet shop of which at least 70% of the turnover is realized by selling aquarium related products and animals.

The argumentations and motivations regarding this definition are stated in chapter 3, Methodology. This research is focused on the Netherlands. Table 2, provides an overview of the number of shops which might be suited for this research. The details of the number of shops and the calculation are explained in Appendix 1.

Netherlands

Number of aquarium related pet shops 667

Table 2: Number of pet shops which sell aquarium products

According to table 2, there are approximately 667 shops which might sell aquarium related products or animals in the Netherlands. These numbers are not tested yet by the definition, which will be analyzed in the methodology chapter. This means that the actual number of shops will be lower, because the greater part of these shops is not specialized. Most of the specialized aquarium shops are located in the middle and southern provinces of the Netherlands. This is because the market in these regions is larger and the shops are closer established to their suppliers, located in Breda, Spijk and Den Haag.

2.3 Sources of business financing

This paragraph describes the different sources of business financing. Figure 1 provides an overview with the different sources of business financing found in the literature. Not every source is well suited for financing a specialized aquarium shop, but nevertheless they are briefly mentioned and explained. Furthermore, the advantages and disadvantages of each financing source are provided.

Figure 1: Development and financing of entrepreneurial firms

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2.3.1 Internal Financing

Internal financing, in figure 1 mentioned as "Founders", is the most popular source of business start-up money. Internal financing means that the business is financed by your own pockets. The advantages of this type of financing is that you are not bounded or in debt with a bank and the capital is immediately available. This means that you do not have to obtain any loans and you do not have to pay rent. Disadvantages of this type of financing are that there will not be an increase of capital and it is rather expensive, because it is not tax-deductible. According to Hubbard et al. (1995), when a firm is internal financed, it uses its profits as a source of capital for new investments instead of finding the capital elsewhere. Internal financing is the opposite of external financing, which means bringing money from outside the firm for investments inside the firm (Carpenter, 2002). This type of financing is well suited for specialized aquarium shops.

2.3.2 FFF Financing

FFF financing stands for obtaining finance from friends, family, or fools. It is sometimes referred to as "Love Money" (Pryde, 1998). It is the second most popular source of business start up money. Friends and families often believe in the owner and his vision, and are willing to invest their money in the business. Furthermore, they have a personal relationship with the entrepreneur, and through long experience, have formed the judgment that he can probably pull this off. Pryde (1998) states that in cases when the entrepreneur is not able to pull it off, friends and families will probably love him anyway and figure they had the pleasure of being in something which could have been very big, if the cards had fallen the right way. They still think that he is great and very courageous to have tried it. However, obtaining finance from families, friends or fools is also a very risk full operation, because of the possibility of destroying the relationship if the business fails or the terms of the deal are misunderstood by one or both parties. Love money has the advantage that it is typically cheaper and more "patient" than other forms of capital. On average, private business loans from relatives and friends have interest rates 2 to 3 percent lower than the market rates and 1 to 2 percent higher than high-yield savings rates (Advani, 2009).

2.3.3 Bank Financing

Once the entrepreneur has organized either a grant and/or equity, he is more likely to be successful with any application to his bank. According to Beck et.al (2009), getting bank finance is essentially a selling exercise, the entrepreneur needs to sell the concept of his business idea to the bank. Banks will assess the levels of risk of the proposal and need to satisfy themselves that the potential rewards match the risk. The most important argument is whether the proposed business venture has the capacity to repay the debt. There are usually three types of finance, short term, medium term, and long term finance. For each of these financing types, the most important or best suited options are briefly described.

Short-term finance

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13 have a current account credit at one or more different banks. There are two options regarding this type of financing. There business can have an account receivable or debt from the bank, or are in debt with the bank. This means that the entrepreneur and his business have an agreement with the bank that he can overdraw till a certain limit. The bank checks beforehand if the income of the entrepreneur is sufficient enough, this is called credit worthiness. The bank often demands the lodging of a deposit or security, for example collateral or stock exchange securities. Hutchinson and McKillop (1994) state that smaller business have more trouble in obtaining bank finance than larger firms. This is an important conclusion which may affect a considerable amount of specialized aquarium shops.

Medium/Long-term finance

Medium and long-term finance are usually debts of which the payback period exceeds more than one year (Blommaert and Blommaert, 2000). When the payback period is longer than one year, but shorter than ten years, it is called medium-term. Examples of medium-term finance are mortgage loans and private or family loans. An example of long-term finance is a mortgage loan with collateral. This type of loan is often supplied by banks and have a building or landed property as a collateral. This means that in case of non-payment, the bank has the right to sell the collateral of the borrower and use the return to pay-off the borrowers debt. This privilege gives the bank extra certainty that the debts will be paid back. Bester (1985) states that the rent of such a loan is often lower than for a loan without collateral or blank credits. A mortgage loan with collateral usually has a duration of 20 till 30 year.

2.3.4 Business Angels

Business Angels are like friends and relatives, informal investors willing to support the entrepreneur in various ways. According to Scholtens (1999), business angels are wealthy ex-entrepreneurs who participate in young and expanding firms, often operating in a business sector in which they have build up experience. Brown (2007) adds that the best business angels are always looking for good deals which they call "sourcing". Most business angels do not invest in an idea. Rather, they look for smart, talented executives, give them financing and let them find their own way (van der Haar, 1999). Business angels are especially appropriate for early-stage companies with no revenues, or established companies with sales and earnings. They normally invest between € 50.000,- and € 350.000,-. Business angels usually demand a yield of at least 15%, this is much higher for risk full projects. Van der Haar (1999) states that the company should have the possibility to increase in value or to generate money in order to make an exit strategy for the business angel possible. Furthermore, it is important that the owner is open for coaching from the business angel, especially for the parts that are underdeveloped by the owner.

2.3.5 Venture Capital

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14 (1999), venture capital is usually provided as equity or as a convertible or subordinated loan. Close relationships between the firm and the venture capitalist appear to be a feasible instrument for small businesses to raise finance. However, empirical evidence shows that even venture capitalists actually extend relatively little finance to firms in the early stages (Scholtens, 1999). Venture capitalist usually invest between 2 million and 5 million Euros.

2.3.6 Government

Governments can play an important role in supporting the SME sector, particularly where there is market failure or where incomplete markets inhibit the provision of adequate financing on terms suitable for the SME's stage of development (OECD, 2006). The Government can be seen as a supplier of capital to the business sector (Scholtens, 1999). The Government not only provides start up money, but also provides invaluable assistance, such as mentoring and developing the business plan of the entrepreneur. Government financing facilities generally are well-meant but usually have more goals that pure small business financing (i.e. regional policies) which makes them rather complex, meaning that transaction costs are usually high (Scholtens, 1999). This may result in a prohibitive cost for small businesses. Entrepreneurs who want to start a business in for example one of the northern provinces of the Netherlands, can ask for financial support at the Investerings- en Ontwikkelingsmaatschappij Noord-Nederland (NOM). According to Kluwer (2008), there are 60 million Euros available for the three northern provinces. The Ministry of Economic Affairs provides 40 million Euros and the remaining 20 million Euros are provided by Samenwerkingsverband Noord-Nederland (SNN). However, Wiersma (2009) states that most of the specialized aquarium shops are ignored by the NOM, because the NOM is focused on companies that realize most of their profit outside the Northern provinces and aquarium shops are mostly regional focused. This also is the problem for other provinces in the Netherlands. It is therefore unlikely that specialized aquarium shops will receive financial support from the Dutch Government.

Figure 1 also mentions public equity (markets) as a financing possibility, but this is only suited for a small number of firms and is not suited for specialized aquarium shops. Summarizing the financing possibilities, it can be concluded that most of these sources of business financing are not suited for specialized aquarium shops. The most suited financing possibilities are internal financing, obtaining finance from friends and families, or bank finance. These three sources of business financing will therefore be used as the main guideline for this research.

2.4 Pecking order theory

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3. Methodology

In the previous chapter, the financing possibilities for specialized aquarium shops were described. Not every financing possibility is suited for financing a specialized aquarium shop, therefore a small selection is made which will be the main focus for this chapter and the other chapters of this research. The first paragraph provides the study design in which elements like research type, data collection method and business ethics are briefly explained. Furthermore a conceptual model is created and makes clear the relationships between the variables. The second paragraph is focused on how to measure each of these variables.

3.1 Study design

This paragraph describes the research type, the research design, and the business ethics. Furthermore an conceptual model and an overview of the main research question with the corresponding sub questions are provided.

3.1.1 Research type and research design

The literature makes a distinction between three types of research. These types are describing, exploring, and examining research (Baarda and de Goede, 2001). The most suited research method for this research is describing research, because this research is not focused on formulating hypotheses or theoretical developments. It is more important to describe the characteristics and the relationships of the variables. Baarda and de Goede (2001) also state that objectivity and/or neutrality are very important for this type of research. Furthermore, most of the (sub) questions can be answered by using the literature or by conducting interviews and questionnaires.

The next step is to choose the research design type. The choice of the design type depends on the information that is required. According to Baarda and de Goede (2001), there are two designing types of research: quantitative research and qualitative research. This research is more focused on quantitative research. Quantitative research is useful when interviewing a large number of respondents, for example all specialized aquarium shop owners in the Netherlands. This makes it easier to present tables and figures with results about how small business owners of specialized aquarium shops finance their business during the financial crisis. However, some aspects like opinions, experiences, and desires of aquarium shop owners or banks are more related to qualitative research. This means that there might be some overlapping.

3.1.2 Business ethics

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16 research should be finished at the end of February, which means that time is also an important pressure for the researcher. Money is also an important aspect with regard to this research. The topic of this research is about finance and most small business owners are reluctant in providing financial data of their business. If necessary, the Chamber of Commerce can be used to collect financial data. This requires a small financial compensation for the interviewer. However, not every business is obliged to provide their financial data to the Chamber of Commerce. This was partly solved by asking for estimations regarding financial facts and numbers. If small business owners did not want to provide any financial data, this was taken into account and accepted by the researcher.

3.1.3 Conceptual model

This sub paragraph provides the research questions and the corresponding conceptual model. The main research question is:

What are the consequences of the financial (banking) crisis on specialized aquarium shops in the Netherlands?

With regard to this research question, the following important aspects can be pointed out. First, it is important to define what exactly a specialized aquarium shop is. Second, it is important to figure out which financing sources there are, and which are suited for specialized aquarium shops. Third, it is important to find out how banks finance businesses, and specially how they finance specialized aquarium shops. Every question should consist of the financial crisis as well. Furthermore it is important to find out if specialized aquarium shops have suffered from the financial crisis, or if it did not affect them very much. Therefore, the following sub questions are formulated and a conceptual model is provided in figure 2.

1 What is a specialized aquarium shop?

2 Which sources of business financing are defined in the literature?

2.1 Which sources of business financing are suited for the aquarium branch? 3 How does the financial crisis influence the way banks are financing businesses? 3.1 How does the financial crisis influence the way banks are financing aquarium shops? 4 How does the financial crisis influence the overall performance of aquarium shops?

Figure 2: Conceptual model financing specialized aquarium shops

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3.1.4 Data collection method

In order to conduct proper research, data needs to be collected regarding the research questions. There are many ways to gather the required information, like desk research, observation, questionnaires, and written or oral interviews. For this research, desk research, questionnaires and interviews are used. Desk research, like for example the Internet is important, because it helps to gather information about aquarium shops. Other important sources are the branch organization Dibevo, the Dutch Chamber of Commerce and the branch reports of banks. Questionnaires are made in order to interview specialized aquarium shop owners. Interviews are helpful when collecting opinions, attitudes and knowledge. The preference is to conduct oral interviews with these entrepreneurs, but when they do not have the available time, written interviews are also accepted. In these cases, the entrepreneur receives the questionnaire and has the opportunity to fill in the questions whenever he wants it. In case of oral interviews, appointments with the entrepreneurs are made and the interview takes place at a certain location at a certain time, usually in the shop of the entrepreneur. With regard to the sub questions, question 1 is an important question for this research, because it defines what a specialized aquarium shop is. This question can be answered by providing an own definition of a specialized aquarium shop and by using the Dibevo branch reports. This definition can also help to include or exclude shops for this research. Question 2 is an important question, because it summarizes the different sources of business financing which are defined in the literature. Question 2.1 specializes this question and is focused on the aquarium branch. Not every financing possibility is suited for the aquarium branch. In order to answer this sub question it is necessary to conduct some interviews with aquarium shop owners and with the business department of a bank. Questions 3 and 3.1 are very important question and make clear whether there are differences between financing a aquarium business (aquarium branch) or a business of another branch. In order to answer these questions it is important to conduct an interview with aquarium shop owners and with the financial/business department of a bank. It is interesting to find out if there are different views between the aquarium shop owners and the bank, but also between the banks. Question 4 makes clear to what extent specialized aquarium shops suffer from the financial crisis. There can be other factors like a decrease of customers which influence the overall performance of aquarium shops. Table 3 provides an overview with the questions and the answering sources.

Question Answering source

1 What is a specialized aquarium shop? -Own definition with Dibevo branch reports 2 Which sources of business financing are

defined in the literature?

-Academic literature, (Pryde, 1998), (Scholtens, 1999), (De Jager, 2008) (Timmons and Spinelli, 2009) et al. 2.1 Which sources of business financing are

suited for the aquarium branch?

-Interviews with pet shop owners -Interview with business/financial department ABN AMRO and ING bank 3 How does the financial crisis influences

the way banks are financing businesses?

-Interview with business/financial department ABN AMRO and ING bank 3.1 How does the financial crisis influences

the way banks are financing aquarium shops?

-Interviews with pet shop owners -Interview with business/financial department ABN AMRO and ING bank 4 How does the financial crisis influences

the overall performance of aquarium shops?

-Interviews with pet shop owners

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18 3.2 Measuring the variables

This paragraph describes how each variable is measured. It starts with describing how the selection for a specialized aquarium shop has been made. Furthermore, it describes how each of the financing possibilities are measured, and it describes how the financial crisis on bank finance is measured. Finally, it describes how the influence of the financial crisis on the overall performance of specialized aquarium shops is measured.

3.2.1 Measuring a specialized aquarium shop

In order to conduct a research, some variables have to defined properly. The in chapter 2.2 formulated definition of a specialized aquarium shop makes clear which shops will be included and which shops will be excluded for this research. The formulated definition of a specialized aquarium shop is:

A specialized aquarium shop is a pet shop of which at least 70% of the turnover is realized by selling aquarium related products and animals.

This means that animal pet shops can be included, as long as their aquarium department is large enough and at least 70% of their turnover is realized by selling aquarium related products and animals. The next step is to estimate the number of potential shops for this research. Because Dibevo did not want to provide a list with shops in the Netherlands, the Internet was used in order to estimate the number of shops. Furthermore, the interviews with some of the entrepreneurs provided information about the number of shops in each province. According to table 2 from chapter 2.2, there are approximately 667 potential shops for this research. However, after analyzing these shops and applying the formulated conditional definition, the actual number is much lower. The 667 shops include stores like Intratuin and Hornbach and pet shops with a very small aquarium department. Because these are not suited for this research, they are removed during the selection. After carefully analyzing and applying the conditions for this research, there are approximately 70 aquarium shops that are suited for this research, which stands for an estimated percentage of 10%. Table 4 provides an overview of the number of specialized aquarium shops which will be asked for an interview for this research.

Netherlands Number of specialized aquarium shops

suited for this research

70

Table 4: Number of specialized aquarium shops suited for this research

3.2.2 Measuring sources of business financing

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19 provides an overview with questions which were asked during the interview with small business owners of specialized aquarium shops.

3.2.3 Measuring the influence of the financial crisis on bank finance

It is important to make a distinction between the period before and during the financial crisis. In order to make this distinction, several interview questions were asked to small business owners of specialized aquarium shops. Questions regarding the financial possibilities of specialized aquarium shops during the financial crisis were asked and were supported by financial data like for example current account credit. Furthermore questions regarding the influence of the financial crisis on the sales of the shops were asked. Not only the entrepreneurs were interviewed for this research. In order to conduct a proper research, it is important to collect data from the financial suppliers as well. This means that the business department of two banks were also interviewed. It is interesting to figure out how banks deal with these financial issues and if they select branches. Appendix 3 provides an overview with the interview questions which were asked to the business department of the ABN AMRO bank.

3.2.4 Measuring the influence of the financial crisis on the overall performance of specialized aquarium shops

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20

4. Results

In this chapter, the results of the research will be presented. These results are obtained by interviewing 30 specialized aquarium shops and by interviewing the financial department of the ABN-AMRO and ING bank. Whenever the results have an extra value, because they are interesting or inconsistent with regard to the trends and developments, they will be presented in tables and graphs. The first paragraph describes the response rate of this research. The second paragraph presents the results of the interview questions with the aquarium shop owners. The third paragraph gives a summary of the interviews with the ABN-AMRO and ING bank, and provides the similarities and/or differences between these two banks.

4.1 Response rate

In this paragraph, the response rate of this research will be calculated. In order to conduct this research, 70 aquarium shops (paragraph 3.2.1) were asked whether they wanted to be involved in this research. Most of these shops were phoned or e-mailed, some shops were visited personally. Most of the shops in the northern provinces were personally visited, whereas the shops in the southern provinces were e-mailed. If shops did not respond at all, a reminder was send to the shops. Some shops refused to participate but were decent enough to mail and explain why they did not want to be involved. Most of the reactions are based on unwillingness to provide private information or the fact that they do not take part in these kind of researches. On the other hand, there were many shops that did not reply at all and presumably ignored the invitation. The number of aquarium shops that wanted to be involved in this research is 30, which makes a response rate of approximately 43%. This percentage is pretty high for such a research. Figure 3 shows the response rate in percentages.

Figure 3: Response rate in percentages

4.2 Results interview questions specialized aquarium shop owners

This paragraph provides the results that were obtained during the interviews with the small business owners of specialized aquarium shops. Some results can be explained in a short summary, whereas other results are more suited to be presented in tables or figures. Some answers are outliers compared with the other provided answers. When such an outlier really influences the result for that particular question, the outlier is removed for that question. Whenever an outlier appears for a certain question, it will be mentioned briefly in order to know that these exceptions also exist. Furthermore, each figure or table will be briefly explained and provided with a short conclusion.

43% 57%

Response rate

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21 Ownership and shop existence

With regard to the ownership and shop existence, there were two outliners, the lowest and the highest number of shop existence. The lowest number corresponds with an aquarium shop which was in business for 10 months. The highest number corresponds with an aquarium shop which exists for almost 188 years. These numbers really influence the results and are therefore kept out. Furthermore, 3 shops did not fill in this question. This means that 25 shops are used for this question. Figure 4 provides an overview of the ownership and shop existence.

Figure 4: Ownership and shop existence

Figure 4 states that the existence of specialized aquarium shops is almost 28 years. Most of these shops have been through hard times but still exist. This means that continuity of these kind of shops is pretty high. It also means that the demand for specialized aquarium shops is high. As long as people buy pets, there is a market for these shops. With regard to the business ownership, figure 4 states that on average they are owner since 1995, which is 15 years. There can be concluded that most of these businesses are family businesses and the son or daughter takes over the business of his or her parents.

Number of employees

Figure 5 provides an overview of the average number of employees of specialized aquarium shops. A distinction has been made between fulltime and part-time employees.

Figure 5: Number of employees

0 5 10 15 20 25 30

Existence shop in years Ownership in years

Reeks1 28 15

Ownership and shop existence

Fulltime Part-time Total

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22 Figure 5 states that on average there are 4,1 fulltime employees in each aquarium shop and 1,5 part-time employees. Because 4,1 and 1,5 employees do not exist, these numbers are lowered and raised to 4 and 2 employees. A small remark is that not every interviewee made the distinction between these types of employees, so the actual numbers can vary a little, but do not influence the results. The total number of employees is 5,6 which is raised to 6.

Financing the shop

The interviewees were asked how they financed their shop. With regard to the academic literature of chapter 2, the most suited financing possibilities were provided. Interviewees could choose between internal finance, family loan, bank loan, or other. Figure 6 provides an overview of the financing types and their numbers with percentages.

Figure 6: Financing shop

According to figure 6, by far the most used financing type for specialized aquarium shops is internal finance. There are 21 shops who used internal finance in order to finance the business. This is two third of all aquarium shops. However, the percentage is only 47%, which means that owners can use a combination of financing types for their business. It occurs that shops use internal finance and family loan in order to finance their business. Therefore the total number of answers exceeds the 30. Internal finance is popular among small business owners, because there are no other people involved, which means that you do not have any debts and do not have to pay rent. Everything that is invested with internal finance is own property and increases the owners capital. Furthermore the required owners capital for a pet shop is approximately € 15.000,- which is not very high. Therefore most entrepreneurs decide to finance internally. Figure 6 also shows that almost half of the interviewees (13 shops) use bank loan in order to finance their business. This stands for a percentage of 29%. Because not every entrepreneur has enough start-up capital, bank are often requested to provide a loan. The different types of loan are explained in the results of some upcoming questions. Family loans are also interesting for entrepreneurs, because family loans are usually grants or gifts with no or a very low percentage of rent. This is interesting, because it saves the entrepreneur money, but can also be risk full when he cannot repay the borrowed money. The last option is also used by a small number of owners. The option "Other" stands for all other kinds of loans that are not part of the previous three options. 4 shops used current account credit of the headquarter. This means that they are probably part of a franchise and they have this possibility to obtain money. Finally, there was one shop that used the VOF of his parents.

21 47% 13 29% 6 13% 5 11%

Financing specialized aquarium shop

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23 Difficulties obtaining finance during crisis

In most branches, it is not easy to obtain money from banks. Banks are more reluctant in providing loans to (risky) businesses. It is therefore interesting to find out whether a stable pet shop branch suffers from the same problems as the other branches. The results are presented in figure 7.

Figure 7: Difficulties obtaining loan during financial crisis

The results are not very surprising. The greater part of the small business owners do not have difficulties in obtaining a loan. This is in line with the answer of the financial department of the ABN-AMRO and ING bank, as long as these businesses are making no losses. For 30% of the small business owners, this question was not in order, because they either did not have a bank loan or needed a bank loan, or had no experience with obtaining bank loans (during the crisis). However, 30% of the small business owners do have troubles in obtaining a bank loan. Figure 8 gives an overview of the main reasons why small business owners of aquarium shops state that obtaining a bank loan is more difficult than before the financial crisis.

Figure 8: Difficulties when obtaining a bank loan

According to figure 8, the most commonly heard argument of small business owners of specialized aquarium shops is that banks have heavier loaning conditions. Business owners are privately responsible for their car or house when obtaining a loan. Whenever a business owner cannot pay his debt to the bank, the bank has the privilege to claim the business owners

30%

40% 30%

Difficulties obtaining bank loan during crisis

Yes No Not applicable 18% 37% 27% 18%

Difficulties when obtaining a bank loan

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24 car or house. This makes it more difficult and risky to obtain a loan from the bank. The second most often heard argument is that banks are reducing current account credit. This really makes business more difficult, because many small business owners of specialized aquarium shops use their current account credit to pay their inventories or gas/electricity bill. When banks decide to reduce the current account credit, this means that many specialized aquarium shops will face shortages on inventories which influences the profit and continuity of their business. Another often heard argument is that banks refuse to provide a new loan unless the previous loan has been paid for. An interesting example is about an aquarium shop employee that took over the business of his boss in 2006 and needed a bank loan. The bank accepted his request and provided him a very large amount of money without hesitation. In 2009, the same business owner needed a relative small amount of money for rebuilding his marine life department and the bank refused it. They stated that the business should be more profitable and should repay the previous loan first. The final group of arguments is about banks increasing the interest rates. Aquarium shop owners are given the opportunity to obtain a bank loan, but have to pay a higher interest rate. This is a serious problem for many aquarium shops, because they have higher costs. Not every aquarium shop can compensate these costs. A small remark about this question is that 9 business owners stated that they had no need for bank finance and 11 business owners did not faced any differences compared with the period before the crisis. These details should be taken into account, but are omitted from the pie chart in figure 8. More details about why banks are so reluctant in providing loans is explained in paragraph 4.3.

Other influences of crisis on aquarium shops

Besides the banking crisis, there are other crisis-related aspects which might influence specialized aquarium shops. Figure 9 presents the results of this topic.

Figure 9: Other influences crisis on shop

According to figure 9, the most commonly heard argument is that shop have less sales. According to some shops, customers are reluctant in buying a new aquarium, because this usually costs a large amount of money. People are spending less money on large new sales, but often buy more smaller or used products. This corresponds with the fact that many customers buy cheaper substitution products. This means that customers are not focused on quality, but on quantity and price. This is a bad development, because this can influence the health of the animals. In some occasions, people realize that the condition of their pet is decreasing and switch back to quality products. Usually this change involves financial

14% 24% 21% 19% 10% 12%

Other influences crisis on shop

Less customers Less sales

Customers buy cheaper substitution products Reducing personnel Other

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25 complications, because of the reduced condition of the animal. They have to buy medication and have usually spend more money than when staying to the quality product. Not every shop supports the fact that customers buy cheaper substitution products, because they state that they do not sell these kind of products and they only sell quality. As mentioned before, the crisis has his influence here, because larger and more expensive products are less often sold. Many people switch to the internet, were internet shops sell their products at lower prices and often without shipping costs. This influences the turnover of many shops and 19% therefore state that they had to fire or replace personnel. There are also contradictions in the answers regarding this question (other with 10%). Some shops state that they have less customers and a decreased turnover, whereas other shops state that their turnover and customers are growing and that they have hired new personnel. This really changes from one shop to another. Some shops stated that the bad weather or different opening hours were of more influence than the crisis itself. Furthermore, 12 % state that the crisis did not affected the shop at all. This is in line with the branch report of Dibevo (2008) that stated that the pet shop branch does not suffer from the crisis very much, compared with other branches like the automobile branch. Financial changes between 2007-2010

For this research, it is important to have a financial overview of specialized aquarium shops during the crisis. This corresponds with the period end 2006 till now. The first attempt to recover financial data failed, because many shop owners did not want to provide financial data. In order to solve this problem, a 10-point scale was used with the following distribution:

Decreased Increased

very much No change very much

1 2 3 4 5 6 7 8 9 10 NA

0 0 0 0 0 0 0 0 0 0 0

1 means that the financial aspect decreased very much between the period 2007-2010; 5 means that the financial aspect did not change very much between the period 2007-2010; 10 means that the financial aspect increased very much between the period 2007-2010; NA means not applicable.

Small business owners were asked to rate their financial aspects like turnover, bank loan current account credit for the period 2007-2010. If they did not use a particular aspect, they could fill in NA. Figure 10 shows the average results regarding these financial aspects.

Figure 10: Financial changes between 2007-2010

6,4 6,4 4,4 5,1 4,7 5,8 4,9 4,4 5,7 0 1 2 3 4 5 6 7 Turnover Owners capital total Family loan

Bank loan Other loan Borrowed capital

total

Bank credit Current account credit

Remaining capital

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26 The results of figure 10 are interesting because almost all of the specialized aquarium shops filled in this question. The first financial aspect is the turnover. The averaged grading for the turnover is a 6,4. This means that for most specialized aquarium shops the turnover increased, which is in line with the conclusion of the branch report of Dibevo (2008), that states that the pet shop branch is hardly affected by the financial crisis. The most often heard argument from pet shop owners is that customers spend more frequent, but at lower amounts. This means that the larger sales stay away and decrease, and the smaller sales increase.

The second financial aspect is the owners capital total (Dutch: eigen vermogen totaal), which has the same grade as the turnover. Usually these two aspects are in line with each other. Remarkably, 5 aquarium shop owners filled in NA, which means that they either do not have it, do not have any insight in it, or do not want to provide it.

The third financial aspect is the family loan, which is graded with a 4,4. The grade is only suited for those business owners that use family loans to finance their business. There were only 8 aquarium shops that filled in this financial aspect, because the other shops did not obtained or used a family loan. A 4,4 grade means that the family loan slightly decreased during the crisis. This also means that most small business owners of specialized aquarum shops did not used family loans during the crisis. Most often heard argument is that they either did not needed the family loan anymore, or that they were paying off the family loan. There are exceptions, because some aquarium shops were relocating to a bigger location or rebuilding their shop. For these shops, a family loan was the ideal solution, but this also influenced the grade. When these shops are kept out, the grade would be a 3,8 which is significant lower. This supports the previous conclusions even more.

The fourth financial aspect is the bank loan, which has an average grading of 5,1. This means that the financial crisis hardly had any effects on the bank loan. This can mean two things: first, it can mean that banks were more reluctant in providing new loans during the financial crisis and that shops had to repay their previous loan first. Second, it can mean that the number of shops that needed to obtain a bank loan did not increased during the financial crisis. This is more in line with the majority of answers, because most shops did not need a bank loan to finance their business during the financial crisis (figure 6 and 7).

The fifth financial aspect, the other loan, is in line with the previous two loans. Other loan stand for all other loans that are not part of any previously mentioned loaning type. The grade 4,7 implies that the other loan has not changed very much in the period 2007-2010. This supports the previous two conclusions.

The sixth financial aspect is the borrowed capital total (Dutch: vreemd vermogen totaal). There are two outliners which are taken into account in the grade 5,8. Two shops filled in a 10, because they borrowed money for their new building or for rebuilding their own shop. This implies the increase for this financial aspect. When these outliners are kept out, the average grading will be a 4,8 which is more in line with the previous answers. A small remark for this aspect is that more than two third of the interviewees filled in NA, because they had not borrowed any capital, but financed the business with internal money. Compared with the owners capital total, there can be concluded that the owners capital total increased more than the borrowed capital total, which is positive for most specialized aquarium shops.

The seventh financial aspect, bank credit, has not changed during the financial crisis for many specialized aquarium shops. More about this topic is explained in the interview summary with the financial department of the ABN-AMRO and the ING bank in paragraph 4.3.

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27 the current account credit. There was one outliner which was taken into account in this grade. One business owner filled in a 9 and stated that this was his first current account credit. When this graded is removed, the average grading will be a 4, which supports the statements of many aquarium shops even more. Paragraph 4.3 displays the other side of the story and explains this topic from a banks point of view.

The ninth financial aspect is about the remaining capital total (Dutch: overig vermogen totaal). With a 5,7 this means that the remaining capital total for specialized aquarium shops owners slightly increased during the financial crisis and supports the previous conclusions and the Dibevo branch report (2008).

Dibevo membership

Many of the previous results are in line with the branch report of Dibevo (2008). It is therefore interesting to see whether the majority of these shops are member of this pet shop branch organization. The results are in favor of Dibevo, because 90% of all interviewees are member of Dibevo. This percentage stands for 27 out of 30 shops. When comparing these 3 shops with the other shops, it is interesting to see that these shops are predominantly financed internally and have not faced many difficulties during the crisis. The most commonly heard argument of none Dibevo members is that they are not a member because they do not see the advantages of being a member. To become a Dibevo member, a shop has to pay a yearly membership-fee of € 326,-. When a business owner has more than one shop, the primary shop pays € 326,- and the other shops pay 40% of € 326, which is approximately € 130,- for each extra pet shop. Furthermore, Dibevo members receive a branch related magazine with a branch report and have cost reductions for vet and legal consults.

4.3 Results interview ABN-AMRO bank and ING bank

This paragraph provides a summary of the interviews with Y. Korte-Boekhold of the ABN-AMRO bank and A.L. Westerhoff of the ING bank. Differences and similarities between both banks are also provided.

Specialized personnel for the aquarium branch

The ABN-AMRO bank has no specialized personnel for each particular branch. This means that there are no specialists for the aquarium or pet shop branch. According to Korte-Boekhold, the animal pet shop branch is part of the retail branch. Their annual branch reports are more focused on the entire retail branch than on specializations like the pet shop branch. Pet shops are not mentioned which means that most of that branch information is not even suited for these kind of shops. Dibevo mentioned this in their branch report, which stated that unlike other branches in the retail industry, the pet shop industry is countercyclical and is more stable during the financial crisis.

The ING bank also has no specialized personnel for the aquarium branch. They do have branch specialists for supermarkets for example. The aquarium branch is part of the pet shop branch, which again is part of the retail branch. This answer is in line with the ABN-AMRO bank, which stated that they do have specialists, but not for a specific (sub) branch. The fact that these two banks are not specialized in this branch is in line with some of the interviews with aquarium shop owners. They state that many banks do not know these type of businesses and have no facts or figures about the pet shop branch. Many small business owners think this is unprofessional, because banks have insufficient insight in the market.

Requests from aquarium shops for bank loans

Financial crisis in the specialized aquarium branch

Financial crisis in the

specialized aquarium branch

A research on how specialized aquarium shops finance their business

during the financial crisis

University of Groningen

Faculty of Economics and Business Administration

Master's thesis

Frank Bouwkamp

Financial crisis in the

specialized aquarium branch

A research on how specialized aquarium shops finance their business

during the financial crisis

University of Groningen

Preface

Table of contents

Summary

1. Introduction

2. Theoretical framework

3. Methodology

4. Results

Response rate

Ownership and shop existence

Financing specialized aquarium shop

Difficulties obtaining bank loan during crisis

Difficulties when obtaining a bank loan

Other influences crisis on shop