A Growing Success: Leola Produce Auction

In Lancaster County, Pennsylvania, some of the freshest fruits and vegetables are up for auction. Since 1985, the Leola Produce Auction has supported other small businesses—specifically, Amish farmers selling produce. The auction runs efficiently with almost no technology. Instead, employees use clipboards to record the results of each auction.

The auction operates two to four times a week and makes around $7 million annually through auction fees and sales of food and drinks. It offers a centralized, high-traffic location for selling produce. Amish farmers who use Leola’s services are essentially small-business owners; many used to sell their goods through roadside stands. Some also used to sell goods through cooperative agreements where they pooled resources to guarantee that each farmer would make some money each crop cycle. However, the Amish people were not happy with the fees associated with cooperatives, so the auction was created.

The auction has a variety of regular business buyers. Grocery stores are the biggest buyer. Grocers from as far as Washington, D.C., come to the auction. The grocery stores can place a large markup on the produce they win at the auction because the quantities they buy are so large. Some restaurants like to bid at the auction to provide their customers with popular farm-to-table meals.

The auction benefited from the COVID-19 pandemic, which disrupted the U.S. food supply chain. Consumer spending on groceries increased, along with the demand for fresh produce. Growers saw an increase in both sales price and volume, leading to the auction’s most successful year ever.

The Leola Produce Auction is an efficient middleman for produce buyers and sellers. It gives farmers a place to sell their goods, while buyers can purchase high-quality produce in large quantities. The auction itself benefits from auction fees and through concession sales. Thanks to the auction, everybody wins.

Critical Thinking Questions

What type of business does Leola Produce Auction operate in?

Describe how Leola Produce Auction acts as a middleman for buyers and sellers.

What type of consumer does Leola Produce Auction appear to predominately target?

Specify the advantages of small-business ownership.

Small-business ownership offers some personal advantages, including independence, freedom of choice, and the option of working at home. Business advantages include flexibility, the ability to focus on a few key customers, and the chance to develop a reputation for quality and service.

Analyze the disadvantages of small-business ownership and the reasons many small businesses fail.

Small businesses have many disadvantages for their owners such as expense, physical and psychological stress, and a high failure rate. Small businesses fail for many reasons: undercapitalization, management inexperience or incompetence, neglect, disproportionate burdens imposed by government regulation, and vulnerability to competition from larger companies.

Describe how to start a small business and what resources are needed.

First, you must have an idea for developing a small business. Next, you need to devise a business plan to guide planning and development of the business. Then, you must decide what form of business ownership to use: sole proprietorship, partnership, or corporation. Small-business owners are expected to provide some of the funds required to start their businesses, but funds also can be obtained from friends and family, financial institutions, other businesses in the form of trade credit, investors (venture capitalists), state and local organizations, and the Small Business Administration. In addition to loans, the Small Business Administration and other organizations offer counseling, consulting, and training services. Finally, you must decide whether to start a new business from scratch, buy an existing one, or buy a franchise operation.

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

Changing demographic trends that represent areas of opportunity for small businesses include more elderly people as baby boomers age, millennials (or Generation Y), and an increasing number of immigrants to the United States. Technological advances and an increase in service exports have created new opportunities for small companies to expand their operations abroad, while trade agreements and alliances have created an environment in which small business has fewer regulatory and legal barriers. Economic turbulence presents both opportunities and threats to the survival of small businesses.

Explain why many large businesses are trying to “think small.”

More large companies are copying small businesses in an effort to make their firms more flexible, resourceful, and innovative and, generally, to improve their bottom line. This effort often involves downsizing (reducing management layers, laying off employees, and reducing work tasks) and intrapreneurship, when an employee takes responsibility for (champions) developing innovations of any kind within the larger organization.

Assess two entrepreneurs’ plans for starting a small business.

Based on the facts given in the “Solve the Dilemma” feature near the end of this chapter and the material presented in this chapter, you should be able to assess the feasibility and potential success of Gray and McVay’s idea for starting a small business.

Why are small businesses so important to the U.S. economy?

Which fields tend to attract entrepreneurs the most? Why?

4. What are the principal reasons for the high failure rate among small businesses?

10. Why do large corporations want to become more like small businesses?

The global economy was upended in 2020 as a result of the COVID-19 pandemic. It disrupted the operations of America’s more than 30 million small businesses, from nail salons and restaurants to gyms and tattoo shops. Additionally, it shifted consumer behavior and created new business opportunities. Many businesses struggled to adapt while others thrived from new patterns in consumer behavior.

During the outbreak, the Centers for Disease Control and Prevention (CDC) encouraged individuals to limit face-to-face contact by avoiding crowded places and mass gatherings and maintaining a six-foot distance from others outside of the home. Beyond social distancing measures, many state and local governments issued temporary stay-at-home orders that closed nonessential businesses and ones where close contact with others was likely (e.g., gyms, movie theaters, and salons) and urged people to leave their homes only for essential needs. Businesses deemed essential, such as grocery stores, banks, gas stations, and pharmacies, were able to continue operations.

Even as the temporary lockdowns ended, business did not return to normal. Some called the pandemic the “retail apocalypse.” Consumer spending across nearly every category declined, except for alcohol and groceries. As sales for brick-and-mortar stores slowed to a halt, many small businesses shuttered for good. Small businesses that were able to shift their businesses online had a greater chance of survival. Though e-commerce increased, many small businesses either did not have an online presence established or were not suited for online sales (e.g., hair salons). Roughly one-quarter of small businesses closed during the pandemic.

Running a small business during the pandemic came with a variety of challenges. While large retailers such as Whole Foods have dedicated crisis management teams and run on larger profit margins, small businesses had to work twice as hard to survive. Many companies had to pivot their product strategies. For example, laundromat Clean Rite Center based in New York City switched its business model from self-service to full-service with “no contact” cleaning, using a mobile app payment system. The ability to adapt quickly was an asset.

The COVID-19 pandemic fueled demand for food delivery, but many restaurants, such as fine dining establishments, did not have delivery systems in place. Restaurant operators had seemingly no other choice but to sign up for delivery apps such as Grubhub and Uber Eats or risk decreased consumer visibility. Due to the high fees, restaurant owners often complain about these apps, which charge restaurants as much as 30 percent per order. Additionally, with high delivery demand, many restaurant owners created ghost kitchens (i.e., delivery-only restaurant facilities). The ghost kitchen market segment could become a $1 trillion industry by 2030, according to Euromonitor.

Due to solid liquidity levels, banks loaned out more than $500 billion to small businesses while only having to borrow about $50 billion from the Federal Reserve’s Paycheck Protection Program (PPP) Liquidity Facility. Seventy percent of small businesses applied for these PPP loans, which had extremely low interest rates. The loans were designed to cover payroll costs and other expenses.

While many small business owners struggled, the high rate of unemployment during the COVID-19 recession led to a page 166boom in entrepreneurship. Based on data from the U.S. Census Bureau, new business formations during the pandemic hit a record high. In the long term, many of these small-business owners will turn into employers, which will improve the unemployment rate. Recessions give rise to new types of businesses as innovative entrepreneurs capitalize on new opportunities.65

Critical Thinking Questions

How did the pandemic disrupt business operations?

In what ways did consumer behavior change during the pandemic? How has consumer behavior changed long term?

Why do you think new business formations during the pandemic hit a record high?