Two years ago my son and I wandered into a Virtual Reality studio in Ottawa, kicking off a very expensive habit. VR studios are popping up all over the south and are fast becoming the young generation’s arcades.
Of course, as an entrepreneur, I can’t simply enjoy the experience – my brain starts ticking along: would this business work in Yellowknife?
If it seems like the business model would work here, I create a financial model to determine the profitability and investment requirements. Those numbers are based on revenue and cost assumptions, which are only as good as my understanding of the local economy.
I believe the best model for understanding the northern economy is through the lens of a small rentier state. Rentier states are an economic term for jurisdictions that receive a high proportion of their income from an outside source, regardless of the productivity of its population. For the NWT, that source of external income is the large federal government transfers, which distort the structure of the economy in two ways that directly affect businesses. The first is that wages are pushed upward by well-paying government jobs. As a business owner, you are always competing with the large public sector employers. The second distortion is that the economy will skew toward non-tradable industries at the expense of tradable industries.
Tradable industries include goods and services that could easily be imported and exported – things like manufacturing, financial services, agriculture, forestry, high tech, film and TV production. I worry when I see plans for northern businesses that sell things we can easily buy for less from elsewhere. It never goes well for us, and we never seem to learn.
Non-tradable industries need, realistically, to be carried out on location by local labour. These include government (and services to government), health care, tourism, retail, education and construction. That’s the kind of business that does well in Yellowknife, and as long as we are a rentier economy, those are the industries that will thrive here. While the cost of a new car in Yellowknife is exactly equal to the cost of a car in Edmonton plus shipping (tradable), the cost of haircut depends on the local labour market (non-tradable).
These categories are not completely static. There is a large window of opportunity for businesses who manage to wrestle an industry from the non-tradable to the tradable category. The internet has disrupted many previously non-tradable industries, like home entertainment, replacing movie rentals with Netflix. This is leading to the re-imagination of retail worldwide, not just the North.
What successful local retailers have found is that offering the customer a great experience can ensure that you will never be replaced by a website. Your customers want to be able to see and touch the physical product, to interact with knowledgeable staff and to receive related services. Overlanders is a great example of this in Yellowknife.
Like a dealer at a high stakes poker game, landlords like me get an interesting birdseye insight into business models that work – without necessarily playing in the game. Our company has a couple of dozen tenants operating a wide range of industries, including construction, tourism, education and health care. The one commonality among the most successful businesses is that they operate, to some extent, in non-tradable industries.
Let Me Knot is a great example of a successful business operating in an industry that, at first glance, appears tradable. Sarah, the owner of Let Me Knot, has two business lines: retail flowers and event/wedding planning.
While it might be feasible to order flowers from down south, a southern retailer couldn’t ensure the flowers would be delivered to Yellowknife in good condition. Similarly, a couple could probably find a wedding planner on an online marketplace like Fiverr, but Sarah from Let Me Knot will ensure the happy couple’s wedding takes place lakeside at Long Lake – and not at Fiddlers Lagoon. What looks like a consulting business is really more aligned with the tourism industry.
So can your business idea survive against southern competition? Is it possible for Amazon to get into your business line? If not, you’re halfway there.
If anyone would like to start a VR studio, it’s just the kind of non-tradable business that does well in Yellowknife. Come talk to me!
Sam Gamble is a managing director of CloudWorks Adventure Capital, a Yellowknife-based real estate investment company. His column aims to explore the second and third order economic effects of decisions facing the North.