Let The Good Times Roll – Again

This may not be the Booming 1980s, but Hawaii's economy is quickly moving higher. The Bishopstreet Boys are leading the way.

August, 2000

Isle economists have been saying a recovery is underway for the past two years. Many in the business community haven’t been receptive to the message, often preferring to mouth mantras of self-pity and self-doubt.

How 1990s. As the Hawaii Business Top 250 shows, for the second year in a row, Hawaii’s economy is on the upswing. It isn’t exactly on a rip, but given where we’ve been, it sure is beginning to look like one.

Indeed, companies on the Hawaii Business Top 250 this year haven’t enjoyed such a large spike in combined sales since the early 1990s. That figure is more than 9 percent above the previous year. The last time there was a gain of this magnitude was when combined sales grew 11 percent in 1991 over the previous year.

“This is called an expansion,” says Bank of Hawaii’s Chief Economist Paul Brewbaker. “If you are not participating then you’ve got serious problem as an organization, because it’s not the economy…. If you think the recession is some excuse you get to use to explain why you’re doing a (terrible) job, wake up. And I don’t care whether you’re a business manager or a legislator.”

The Bishopstreet Boys at the Millennium

The biggest gainer within the top five companies was First Hawaiian Bank parent BancWest Corp. (NYSE: BWE), which posted a stunning 51 percent increase in sales from 1998 to 1999. The performance moved BancWest from number five to number two. “It’s the first time I’ve been optimistic in almost 10 years,” says BancWest Chairman and CEO Walter Dods. “The economy is definitely improving. We’re seeing lots of good signs. Real estate is recovering. Our delinquencies are going down. Our business loans are increasing. So we are very pleased with what we see as a rapidly recovering economy.”

Conglomerate Hawaiian Electric Industries (NYSE: HE) held onto the number one spot for the third year in a row, and even grew sales a tad from $1.485 billion in 1998 to $1.523 billion in 1999, after forecasting a year of weak sales based on what was expected to be continued sluggishness in Hawaii’s economy. Instead, HEI got a pleasant surprise. Says CEO Robert F. Clarke: “I think clearly the economy in 1999, particularly in the second half was better than we saw in the past.”

Healthy Insurance Sector

Hawaii Medical Service Association (HMSA), this year’s number four stayed relatively flat, although the insurance category it is a member of was one of the bright sectors with almost 33 percent growth. HMSA CEO Robert Hiam says, “Unfortunately we’re seeing an increase in medical trends driven predominantly, not only here but across the country, by drug costs. Of increases in the 18 to 25 percent range annually on drug costs. And a lot of that’s new products. A lot of that is direct to consumer advertising of the newer more expensive drugs and so I’m not sure that’s going to go away for a while.”

Insurance companies are also encroaching on what used to be the primary territory of financial services firms. In fact, that’s what’s helped The Manufacturers Life Insurance Company post the fifth largest increase in sales this year, more than 100 percent (see related story on page 27.)

Construction Deconstructed and Really good Real Estate

The biggest disappointment in this year’s Top 250 is the poor performance of the construction industry. This key sector was down more than 10 percent. But there’s been enough activity in recent months that economists feel confident that it will right itself by next year’s tally.

 

“I’d be looking for the cyclical sectors-construction and real estate—to shine,” says Bank of Hawaii’s Brewbaker. University of Hawaii Economic Research Organization economist Carl Bonham says contracting job counts were up around 11 percent in the first quarter of 2000, so he expects construction sales numbers to look different this year.

“At some point there’s going to be a year or two years of pretty strong growth and it may be mostly in the contracting or real estate side,” says Bonham.

That’s already clear for real estate firms. Top 250 real estate companies grew sales a whopping 26.5 percent in 1999. Schuler Homes Inc. led the way, rounding out this years top 10 companies with $506.8 million in 1999 sales, an almost 80 percent increase over the previous year. (See related story on page 26.)

Alexander & Baldwin, Inc. (NASDAQ: ALEX), a long-time believer in Hawaii’s real estate market, has been taking advantage of lower prices for much of the past decade. Most people don’t know that A&B is the fifth largest landowner in Hawaii and has also been moving in the mainland real estate market. CEO W. Allen Doane told shareholders A&B’s 1999 annual report: “The good news is that Hawaii continues to be a sound real estate investment for those who are able to make opportunistic property purchases.” (See related story on page 36.)

And rising real estate prices should have a larger, positive effect on all-important consumer confidence. “If the average homeowner saw their prices recover completely from the ’90s and post a little gain, then they start to feel wealthy. For anybody who bought a house or condo post 1987 they felt poor for the whole decade and turning that around is pretty important,” says UH’s Bonham.

 

New Economy not quite ‘N Sync

Bonham says insurance, finance and real estate are all higher this year because they all use new technologies effectively.

“We simply need to take advantage of computers in our businesses. One of the places that you should be seeing that is in financial services. We’ve got 18 percent almost 19 percent increase in sales here, but their job counts are down. And their job counts have been down pretty much the whole decade. And so they’re doing more with fewer employees, which is what the New Economy is about basically.”

What’s happened at Hawaii’s two largest banks helped to boost the Top 250’s financial services industry sector gains. Says Pacific Century Financial (NYSE: BOH) Chairman and CEO Lawrence Johnson: “We spent a great deal of time on the New Era redesign, which is taking at look at every single process that we do within the company, and looking for ways to do it better and cheaper and at the same time be able to provide better service to our customers.”

The redesign is expected boost the Bank of Hawaii’s bottom line. Says Johnson, “By the fourth quarter of this year earnings will be up to appoint where we can say New Era has a value to us of 40 million dollars a year net after taxes.” More than 1000 positions will be eliminated as a result of the reengineering process.

While multi-billion dollar financial sector consolidation deals have been a fact of life since the mid-1990s, Hawaii’s smaller moves have resulted in greater efficiencies for local institutions. First Hawaiian merged with Pioneer Federal Savings in 1997, while competitor Bank of Hawaii merged with First Federal in 1998. City Bank and International Savings, subsidiaries of CB Bancshares, merged in July of 2000. There may be more consolidation in the future, but the big guys have enough on their plates for now.

Says Pacific Century’s Johnson: “I don’t believe that there will be more consolidation here in Hawaii. Possibly some of the smaller banks may decide to get together, but because of the market share that Bank of Hawaii has and First Hawaiian has, there’s no opportunity for consolidations for themselves or for ourselves.”

“There may be some minor moves, but there’s not a whole lot more to occur,” says BancWest’s Dods.

Tough for Tourism

Technology will likely play less of a role in strengthening Hawaii’s primary industry, tourism. Notes UH’s Bonham: “It’s pretty hard to clean a hotel room with a computer. You’re not going to see big productivity gains in that kind of services sector.”

Still, the tourism sector managed a decent 5.8 percent increase in 1999 sales, even with troubles in Asian markets and the once-in-a-millennium Y2K plunge. Medium-term, the outlook for tourism is actually good.

“At some point in the next two or three years, there’s likely to be a big jump in say, Japanese visitors. There’s going to be something that causes the economy to grow very rapidly in a short period of time and that might be what it takes. We may need to have a really good year, I mean really good. Not 2 percent growth. Rather 3 or 4 percent growth in real terms to sort of get people completely over the ’90s,” says Bonham.

With record May 2000 visitor arrivals and with state economists already predicting 3 percent growth in the Gross State Product for 2000, the stage has been set for all Hawaii businesses this year. Says Brewbaker, “There’s no sector here that can fall back on the excuse that the economy’s not being good to them. If you’ve got a problem now as a business, than you really need to be attentive to it, because it’s your problem and yours alone.”

 

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Kelli Abe Trifonovitch