Search

Thursday, December 19th, 2013

Srirachagate Gives a Window Into California’s Business Climate Problem


Sriracha Sauce. Image via Huffington Post

I love Huy Fong Foods’ Sriracha sauce as much as the next guy, which is to say a lot. The red hot sauce with the rooster on the bottle has a cult following across the nation. So unsurprisingly it made national news when the city of Irwindale, CA sued to shut down production at the company’s processing plant there. The processing of the hot peppers, done during only a limited time of year because Huy Fong only uses fresh peppers, was alleged to be causing a noxious odor in the town.

This looks like a pretty garden variety dispute between neighbors and an industrial business. Clearly industrial odors can be a problem. I don’t know how long they’ve been in Irwindale, but Sriracha has been around a long time so I’m a bit skeptical something changed just this year. Regardless, I don’t think odor complaints are necessarily evidence of a bad business climate as there could be a legitimate problem.

Then came the state order to stop shipping the product for 30 days. The state of California decided that to reduce the risk of food borne illnesses, the sauce had to sit for 30 days before it can be shipped. Keep in mind, this is for a product that has never had a complaint against it for making someone sick.

How many businesses can afford to halt shipments for a month and survive? Sriracha has a cult following and so they’ll likely overcome it. But many businesses wouldn’t have this luxury. When their customers can’t get product, they lose the business. Indeed, I wouldn’t be surprised if restaurants do turn to alternative suppliers. At a minimum, Huy Fong is going to lose a lot of sales.

Who in their right mind would want to do business in a state like this? And this is far from the worst case. It just so happens that because this is such a popular consumer product, it’s visible. If even these types of companies get shut down, how much more so a firm where this wouldn’t create an avalanche of bad publicity?

Urbanists put way too little thought into business climate, which can sound like such a shady way of saying cut services and taxes. But taxes are often the least part of it. It’s the regulatory apparatus that makes doing business in many places too painful to contemplate. This even affects city-suburb investment patterns. I’ve observed that in many places, the urban core is a flat out terrible place to do business, unless you’re very politically wired up.

This doesn’t usually bother urbanists all that much until a trendy business they like gets affected. For example, an urban farming supply shop in Providence called Cluck got sued when they tried to open. The beautiful and the bearded were outraged and the shop was ultimately approved. But there’s no similar visibility or outrage when a Latino immigrant runs into the red-tape buzzsaw when he tries to open a muffler shop.

If we want to promote investments in our cities and states, we need to be focused on basics like an objective, predictable regulatory framework that operates in the timely fashion and in which arbitrary denials, rule changes, and such are minimized. This is way more important to attracting capital investment than sexier items like streetcar lines.

25 Comments
Topics: Economic Development, Public Policy
Cities: Los Angeles

25 Responses to “Srirachagate Gives a Window Into California’s Business Climate Problem”

  1. Racaille says:

    “This doesn’t usually bother urbanists all that much until a trendy business they like gets affected. For example, an urban farming supply shop called Cluck got sued when they tried to open. The beautiful and the bearded were outraged and the shop was ultimately approved. But there’s no similar visibility or outrage when a Latino immigrant runs into the red-tape buzzsaw when he tries to open a muffler shop.”

    When the slaughterhouse sets up shop next to your home….write back.

  2. Derek Rutherford says:

    This piece has it exactly right: few business are obsessed with small changes to taxes; their survival can depend on predictable and corruption-free regulations and enforcement.

    A mayor who raised taxes and seriously cut down the regulatory rule-book by 50% would be a hero to business. Plus, the mayor would have lots of more $$ to play with: not only more tax money, but there would be a lot of bureaucrats who could be released. Think of the revenue that could be applied to transit, parks, the arts, etc..

    Of course, we all know what the public sector unions would think of this proposal. Considering how potent they are in local elections, don’t expect to see many examples of this.

  3. Racaille says:

    @derek

    “A mayor who raised taxes and seriously cut down the regulatory rule-book by 50% would be a hero to business.”

    You mean like Rahm Emanuel? But, of course, he doesn’t fit the current conservative narrative.

  4. Chris Barnett says:

    Racaille, you’ve unintentionally hit on something. The “micro” trend has run afoul of zoning regs that consider a slaughterhouse (or a brewery, or a coffee roastery, or a high-end craft manufacturer) as an “industrial” operation because of presumed scale and overwhelming externalities.

    But in many cities, if a butcher wants to make smoked/cured meat and sausage, or a microbrewer wants to open in a strip mall, or a coffee-roaster or wood-craft furniture manufacturer wants to start in a small commercial space, they can’t necessarily do so.

    The beautiful and bearded may be the people leading this charge so that they can create their own jobs and small local businesses.

  5. Brandon says:

    People made the business climate comment about the original lawsuit, which was ridiculous because nuisance is the oldest form of land use regulation and exists everywhere.

    You are definitely right about this second order, which came out of nowhere and with no explanation that we are aware of thus far. What is the point of holding the sauces for 30 days? They certainly dont require milk producers to hold milk for 30 days before shipping it to stores.

  6. AIM says:

    “Of course, we all know what the public sector unions would think of this proposal. Considering how potent they are in local elections, don’t expect to see many examples of this.”

    Why? The vast majority of people in local government are police and firefighters. Most of the rest aren’t out there enforcing code and regulations, contrary to what some may believe.

  7. Ventura Capitalist says:

    Huy Fong Foods has seen a 20% increase in revenue nearly every year since its founding in 1980. Its sauces were made in Rosemead for 30 years before it relocated to Irwindale three years ago. Irwindale lured the company with a loan with “irresistible” terms: Interest-only for 10 years, with a balloon payment at the end. Huy Fong took the deal and built a $40-million factory that at full capacity could generate about $300 million a year in sales. The loan deal produced $250,000 a year to the city.

    When odor complaints started coming in, Tran felt the city acted severely toward the company, without a real investigation into the matter. The company began borrowing from East West Bank with less favorable terms to pay off the Irwindale loan.

    If the company pays off the loan, the city loses the quarter $million a year in payments. This may have focused the city’s attention on revenge, with which state regulatory goons are happy to assist.
    http://www.forbes.com/sites/rosatrieu/2013/12/12/sriracha-ordered-to-halt-production-for-30-days/

  8. Jon Seisa says:

    This is exactly why there is a business and manufacturing EXODUS out of California, the over-regulatory capital of the Known Universe. It would be far easier to put a camel through the eye of a needle than to operate a business in California.

    One family-owned parts manufacturer in Whittier finally and reluctantly shut their doors after 50 years of successful business because the federal, state, county, and city over-regulations, fees, penalties, taxes, restrictions and fines made doing business unprofitable. When they began their business in 1960, there was one mere regulatory page posted on the common wall. When they closed their business every square inch of that common wall was plastered over from floor to ceiling and from end to end with regulations from every agency known to Humankind.

  9. Racaille says:

    @Ventura

    “This may have focused the city’s attention on revenge, with which state regulatory goons are happy to assist.”

    Happy to assist? Oh yes…that’s their job… to close down businesses.

    Furthermore, I am pretty sure that Mr. Tran felt entitled and thought he could run his business with impunity. Which is typical for a already successful company seeking tax incentives.

    Like I said to Aaron, when the pulp mill moves into town and is up wind from your house….write back.

    @jon

    “This is exactly why there is a business and manufacturing EXODUS out of California, the over-regulatory capital of the Known Universe. It would be far easier to put a camel through the eye of a needle than to operate a business in California.”

    “Forecast: Calif. to outpace nation in job growth”

    Google it.

  10. Linnaeus says:

    “Most of the rest aren’t out there enforcing code and regulations, contrary to what some may believe.”

    I deal with regulatory agencies on a semi-regular basis as part of my job, and based on my experience, I’d say that there are important regulatory agencies that are actually understaffed. And so we get some important regulations that go unenforced and some businesses just slip through the cracks.

    Regulatory folks that I’ve worked with are also pretty understanding of the effects that regulations have and don’t act capriciously. They’ve been accommodating if they can see that a business is acting in good faith to meet regulatory requirements.

  11. DowntownIndy/Evan says:

    As I would say to anyone in those high tax, anti business states arenn.
    Come on over to Indiana :) enjoy the low taxes, business friendly environment you deserve. You are welcomed here with open arms.
    That should be Indiana’s motto.

  12. AIM says:

    Funny how there’s not been an exodus of businesses from California to Indiana, South Dakota or Mississippi despite their low regulation, low tax business environments. Just goes to show that there’s more to business location decisions than just offering low taxes and lax regulations.

  13. Patrick Prescott says:

    I’m trying to figure out which residents are complaining. Irwindale is a very small industrial city with about 1400 population and 9 square miles that consists largely of quarries, the Santa Fe Dam and the San Gabriel River and spreading grounds. Huy Fong has the misfortune of being om the border with the city of Baldwin Park. Is that where the complaints are coming from? http://goo.gl/maps/Z9WWT

  14. George Mattei says:

    This is a tough topic in my mind. Specific case aside, it’s often very difficult to find the right regulatory balance. AND that balance shifts over time as things change.
    The issue arises from the fact that it’s almost always in an organization’s best interest to have more control over a situation. In the case of a business, this translates to less regulation. For governments and communities, this translates to more regulation.
    So you tend to have this polarizing mindset. Either you have pro-regulatory folks that want to control everything, or you have the business community that comes into power and wants to de-regulate everything. If they split power, they fight fiercely amongst each other (which BTW is how a democracy is designed to work).
    Problem is, oftentimes there’s no one looking at what the real need is in a given situation. Regulations and businesses are both around for a reason-they both can provide societal benefits. Regulations should trump the needs of business when 1) it doesn’t violate a basic constitutional right and 2) the benefit of the regulation to society generally is greater than the detriment to that company/industry (i.e. the loss to society imposed by the regulation). Business needs should trump regulations when 1) the regulation would violate a basic constitutional right and 2) the benefit of the regulation produces more loss to society (through imposition on that company/industry) than it creates.
    This gets even harder when you compound regulations. Maybe one outrageous regulation doesn’t create an outsized loss of benefits, but combine it with another couple of regs and all of a sudden it’s stifling. I have personally experienced this in the affordable housing realm-trying to combine several programs with different regulatory frameworks together can be almost impossible. It’s like the volume of a cube – as the sides increase linearly (i.e. 2” to 3”) the increase in volume is polynomial (cubic, i.e. 2x2x2=8; 3x3x3=27).
    This all makes the “right” level of regulation very difficult to determine. The 30-day thing sounds ridiculous on the surface, but how many of us have the expertise to know whether or not there really is a public health issue that needs to be addressed? I don’t. If there’s a decent chance that a 30-day waiting period would prevent many cases of food poisoning, then maybe it’s justified. My guess is that it’s not, but I just don’t know, and I bet that few do.
    Listening to the parties involved doesn’t always help, because they are both arguing their own self-interests, not in the interest of society as a whole. The courts are an “arbiter” of sorts, but that is an expensive and lengthy process.
    So going too far in either direction creates either a race to the bottom or a race to grinding regulations. Neither is good for society. No easy answers.

  15. Jon Seisa says:

    @ Racaille- “Forecast: Calif. to outpace nation in job growth

    Google it.”

    Thank you, but this has some whitewashing to it because CA has been experiencing uneven regional recovery. Did you know that California is the POVERTY CAPITAL of the U.S.? Google it. It’s composed of antipodal isolated economic and standard of living enclaves, where all the growth and prosperity is really ONLY in the high-end, high-tech coastal metros of NoCal’s Bay Area (not SoCal, very sluggish), and the rest of the state is impoverished with low salary and unskilled labor who scarcely can speak American English, if at all. I doubt this demographic sector possesses much in the way of diplomas. CA used to be the 6th largest economy on the entire planet. But the death-wish economic policies of the Left took care of that, by giving away the farm. Now it has sunk to 12th place. Even the UCLA Anderson Forecast sites these glaring juxtaposed anomalies don’t paint a rosy picture for CA or benefits for all, only the few. And the other bad news is that the CA Middle Class is literally vanishing before everyone’s eyes. Those are the main consumers in the economy; and this Middle Class Flight and Middle Class Impoverishment Phenomenon are undermining CA’s core tenants that once made the state so successful. CA is really like Detroit approaching the formidable threshold before its fall, but this will be on mega-steroids.

  16. Alon Levy says:

    Did you know that California is the POVERTY CAPITAL of the U.S.? Google it.

    Did you not see Aaron and me discussing this before? California is not the poverty capital of the US. It has the highest poverty rate only if you adjust all incomes by the rent index (link). The rent index is not the same as overall costs of living, and exhibits much larger differences between low- and high-cost areas than overall costs of living (link, see chart 2 on PDF-page 3 and table 4 on the last page). It’s also not terribly relevant to poor people, who rarely live in neighborhoods with very high rents, and who often have subsidized or rent-stabilized housing. California has about the same per capita income as Texas, adjusted for overall living costs, and about the same inequality (search “gini index of income inequality” on the Factfinder; I selected the 2012 5-year estimate). It should have about the same poverty rate as Texas, and if your favorite poverty indicator suggests otherwise, then it fails a sanity check.

    California is not like Detroit. California’s metropolitan portion is on a par with Metro Detroit, which contains perfectly reasonable areas like most of Oakland County. Metro Detroit isn’t doing particularly well, but it’s the much poorer city and not the metro area that has an appointed viceroy emergency manager cutting electric service to people just to prove a political point.

  17. Jon Seisa says:

    The 2011 U.S. Census Bureau reported CA’s SPM rate of 23.5% second to Washington D.C.’s 23.2% under the newly devised and improved Federal SPM rating system. The steep climb in CA’s poverty rate under SPM cites 9 million of 38 million population in CA’s poverty rolls and is apparently driven largely by the state’s high cost of living. CA’s SPM rate of 23.5 percent represents not only the highest in the nation, but the largest of any state’s jump from the official rate (16.3%) to the SPM rate. The current system of rating poverty was cited as inadequate since its 1960s inception due to new emergent factors. The new, and still experimental, system includes broader data of income and outgo that have emerged, such as payroll taxes that reduce disposable income and government benefits that increase income. The new system also takes into account cost-of-living variations from state to state. The highest SPM rate in any other state is Florida’s 19.5%. Not Texas. SOURCE, CENSUS BUREAU: http://www.census.gov/prod/2012pubs/p60-244.pdf

    “There are several important differences between the official and supplemental poverty measures,” said Kathleen Short, a U.S. Census Bureau economist and the report’s author. “For instance, the supplemental measure uses new poverty thresholds that represent a dollar amount spent on a basic set of goods adjusted to reflect geographic differences in housing costs. The official poverty thresholds are the same no matter where you live.”

    There are two other major differences as well. The official measure includes only pre-tax money income. Income for the supplemental measure adds the value of in-kind benefits such as the Supplemental Nutrition Assistance Program, school lunches, housing assistance and refundable tax credits like the earned income tax credit. Additionally, supplemental poverty measure resources deduct from income necessary expenses for critical goods and services such as taxes, child care and other work-related expenses, and contributions toward the cost of medical care and health insurance premiums or medical out-of-pocket costs. SOURCE, Census Bureau Releases 2011 New Supplemental Poverty Measure Research Findings: http://www.census.gov/newsroom/releases/archives/poverty/cb12-215.html

    California is also “America’s Welfare Queen”. The state accounts for 1/3 of America’s welfare recipients, though it only contains 1/8 of the U.S. population. This is quite alarming, a train wreck waiting to happen.

  18. I believe Alon is saying that renters pay less than high housing prices would indicate. However, in the city of Los Angeles, 43% of renters spend more than 30% of their income on rent. 22% spend more than 50% of their income. (North of 75% of households in the bottom 50% of the income distribution pay more than 30% of their income in rent). I don’t have stats for other areas at my fingertips, but even rents are very high in much of California, to say nothing of the media multiple in home prices.

  19. Alon Levy says:

    Jon, please reread my comment. I’m familiar with the statistic that you’re citing, and I have an explanation for why the methodology you’re relying on is incorrect: the cost of living adjustment is not actually a cost of living adjustment, but rather a rent index adjustment. There are more expenses than just rent; if you follow the links in my previous comment, you’ll see that rent indices vary much more than the overall price indices, and that California’s average income is about the same as Texas’s after adjusting for the overall price index.

    And this is separate from my skepticism of official price indices’ rent index, which uses geometric mean rent (better than arithmetic mean) but may still not be relevant for 20th percentile households. In any area where renters are disproportionately poor and housing isn’t extraordinarily cheap, renters are going to spend a large fraction of their income on rent, not or not just because of high rents, but mostly because of low income.

  20. Jon Seisa says:

    Aaron – I concur. A tiny bungalow house (1100 sq ft) just sold around the corner from me here in Belmont Heights-Long Beach, CA, 2 blocks away—— for the grand total of $625,000.00. I viewed it before it sold. An insignificant matchbox. The living room door opened right into the Thimblelina living room, no entry hall with chandelier, foyer or side guest closet at all. Small fireplace on one wall, living room window, and the house was located 5 feet from the sidewalk. Only 2 bedrooms and virtually no exceptional amenities. Very, very ordinary.

    On a walk 3 weeks ago I saw a sign for an apartment for rent in an ordinary neighborhood… 1 bedroom and one bath—–$1,500 per month.

    That gives you an idea here for the cost of living.

    Alon – Oh, I see what you are saying, very good. But what do you think of this? I also saw a report last year on the comparison of CA and TX’s standard of living. Now, I’m just attempting to recollect on my mere memory here the main jest, having no sources or details at my disposal on the article I read; but basically the article relayed that though CA has a much higher standard of living than TX, an average household income of a CA household per capita of $50K would adjusted lower to $35K for a TX household per capita, and thus because of TX’s lower standard of living Texans actually have a higher annual % of disposable income compared to spend than Californians. It was like CA = $6,000 on $50K and TX = $10,000 on $35K. Texans keep more of the money they earn, and Californians keep less of the money they earn. So the article went on and cited Texans can reinvest back into their communities, neighborhoods, cities and generate more consumer and economic prosperity as a result, while Californians are basically hamstrung and declining in keeping the engines of its former wealth creation going. I thought it was very interesting.

    There was even a comments section to the article and one gentleman wrote that he was originally a California, but got out because doing business in CA was becoming intolerable with all the over-regulations that caused more red tape, headaches and debilitated doing business and earnings, so he moved to TX in 1998. He then relayed that he is now a millionaire, and that if he and his business would have remained in CA that his level of accomplishment today would have never been fulfilled.

  21. Gabriel says:

    Racaille,

    My concern with your NIMBY approach to local business regulation is that while it may address some surface level aesthetic issues, it does not appear to resolve anything else. For one thing, if Providence, RI would rather not welcome the slaughterhouse or paper mill (or off-shore wind farm), some other city will. Maybe that city will be Canton, NC or maybe it will be Guiyang, China. On the one hand, this means that NIMBY does not begin to solve real problems (e.g. pollution), it simply pushes them to another locale. On the other hand, while I watch my neighbors sling crack and my immigrant friends struggle to find work, I have to wonder if I would not rather have the slaughterhouse.

    I am glad that Cluck was able to muscle through the petty lawsuits because it is nice having a urban farming supply store instead of a deserted gas station adorning the neighborhood. That said, it is doubtful that Cluck will ever employ as many people as a muffler shop could. The extent to which a boutique farm supply store benefits those in the neighborhood who cannot speak English or do not have college degrees is an open question.

  22. Joseph E says:

    Jon Seisa, while you can pay $1500 to rent a 1 bedroom in Long Beach in a nice neighborhood near the beach, you can also rent a 2 bedroom apartment for “only” $1000 just a mile north, in central Long Beach. For example;: http://losangeles.craigslist.org/lgb/apa/4266637888.html
    And you can rent a 2bd for $848 a month in the poorer neighborhoods of North Long Beach: http://losangeles.craigslist.org/lgb/apa/4265643700.html
    These links will be gone soon, but they are typical. Sure, you can get a 2bd apartment in a cheap neighborhood in Houston TX for $500 a month, but you won’t be within a few miles of some of the most popular beaches in the world.

    If you want to find really cheap housing in California, there’s always inland cities like Sacramento, where you can pay $700 a month for a 2bd, only a little more expensive than Texas: http://sacramento.craigslist.org/apa/4259155583.html

  23. Jon Seisa says:

    @ Joseph E – Believe me, you don’t want to be anywhere near Central or No LB, unless you want to be a fatality statistic.

  24. Jon Seisa says:

    @ Joseph E – Furthermore, you missed my initial point; the housing prices and rent in the neighborhood I cited is mere Middle Class not Beverly Hills, and thus incongruent to the actual value of the real estate there and amenities; and not located in the palatial upper crust along the LB coast which is 7 city blocks away, and of course down in Belmont Shore, East Belmont Heights, Naples Island and Spinnaker Bay are where the 2 to 10 million dollar homes are located and more aligned to there real estate value and amenities.

  25. Jon Seisa says:

    Here’s the latest on the “Sriracha Escapade”… business-friendly TEXAS to the rescue.

    Read the comments on this local L.A. News site and you will get a better picture of CA politicians’ complete FAILURE in the private business sector that they have over-regulated to death, and the unanimous agreement by the locals of business flight and exodus out of the state as a result of Liberal/Democrat policies.

    Enjoy.

    http://abclocal.go.com/kabc/story?section=news/business&id=9385722

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

Telestrian Data Terminal

about

A production of the Urbanophile, Telestrian is the fastest, easiest, and best way to access public data about cities and regions, with totally unique features like the ability to create thematic maps with no technical knowledge and easy to use place to place migration data. It's a great way to support the Urbanophile, but more importantly it can save you tons of time and deliver huge value and capabilities to you and your organization.

Try It For 30 Days Free!

About the Urbanophile

about

Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

Full Bio

Contact

Please email before connecting with me on LinkedIn if we don't already know each other.

 

Copyright © 2006-2014 Urbanophile, LLC, All Rights Reserved - Copyright Information