Case Study: Raymond Rathle Survived a Hurricane but Lost His Employees, Customers, and Insurance
Raymond Rathle said goodbye to his insurance agent, hung up the phone, and sighed heavily.
He thought about everything that had happened in the nine months since the hurricane hit. His New Orleans-based business, Carnival Brands, a manufacturer of Creole and Cajun foods, had been hit hard by Katrina. The 140-mile-an-hour winds had torn off portions of the roof of the company's warehouse, causing some $300,000 in damages. Even after carting out dozens of trash cans full of debris, Rathle had been unable to get the business going again. For one thing, he was still waiting on the required approvals from the Food and Drug Administration to begin producing food. And even if he had the official go-ahead, there was no one on hand to make the food--all of his 10 employees had left town. In 2005, Carnival Brands had had sales of nearly $1 million. The figure through May 2006: zero.
Throughout it all, Rathle somehow had remained confident that he'd be able to get Carnival Brands up and running again--until that conversation with his insurance agent in May. The carrier, which had been dragging its feet on making good on Rathle's business-interruption coverage, now had even worse news: It was dropping his policy completely. The odds of landing affordable coverage through another carrier were slim. The news left Rathle shaken. "Without coverage, it would be insane to reopen," he says.
But was he really ready to throw in the towel? A New Orleans native, Rathle had been producing Cajun and Creole foods since opening Carnival in 1990. Starting with seafood gumbo, he had expanded his product line to include more than 30 different items, produced on a contract basis for local restaurants, food distributors like Sysco, and casinos like the Treasure Chest. Business had been growing steadily and Rathle also owned his building, which was worth about $750,000--until Hurricane Katrina hit.
In the buildup to the storm, Rathle moved his wife and two children from their home in Jefferson Parish to the Hilton hotel downtown. The family rode out Katrina on Monday morning along with 500 other people in the ballroom of the hotel, which quickly lost power and swayed ominously in the hurricane's winds. By the afternoon, after the winds and deluge had subsided, Rathle decided he couldn't wait around any longer. "I told my wife I had to find out if we still had a home and business," he says.
Rathle jumped into his four-wheel-drive pickup truck, which was parked in the hotel's basement garage, and headed out onto the city's debris-strewn streets. The drive home, normally 10 minutes long, took Rathle two hours. The news was good, though. The family's Victorian home had emerged unscathed. Seeing his warehouse, on the other hand, was like a punch in the stomach. Katrina's winds had completely wrenched off the building's two 25-foot-wide metal shipping doors. "It looked like someone had tied a chain to them and yanked them off," he says. Massive holes in the roof had allowed rainwater to soak everything in sight. Of course, once he learned how many other businesses had fared, Rathle was grateful. "At least the building was still standing," he says.
Rathle then drove back to the Hilton to gather his family. As soon as they arrived home, however, Rathle's sense of relief was dashed. The streets in his neighborhood were now under two feet of water. That's when the news came: The city's levies had been breached. Rathle rushed his wife and children an hour to the Baton Rouge airport, where he arranged for a family friend to fly them in a private plane to his sister's home near Washington, D.C.
He then headed back home, stopping at a Baton Rouge sporting goods store to buy a pair of rubber waders and a boat. When he arrived, he armed himself with a pair of pistols and stood guard for three days as the water lapped at his front porch. "On two occasions," he says, "I chased away looters trying to break into my neighbors' homes."
As the days passed and the floodwaters began to recede, Rathle turned his attention to his business. He filled dozens of garbage cans with mud, ruined inventory, and sodden brochures. He estimates he lost $50,000 in raw and prepared food products, $50,000 in packaging and advertising materials, and he sustained about $200,000 in structural damage to his building. Still, the damage was not catastrophic.
Rathle registered with the SBA's disaster-relief program and filed a claim with his insurance carrier. Under his business-interruption policy, coverage was triggered by windstorm and fire damage, not by flooding--fortunate, since most of the damage to his property had been caused by wind. The carrier quickly came through with a check to pay for his building repairs. Meanwhile, he received 30-day reprieves from both his mortgage lender and his equipment vendor.
It was a promising beginning. In the weeks and months after the storm, Rathle divided his time between supervising the renovations to his warehouse and volunteering his time to help rebuild his city. He received FEMA clearance to enter the quarantined city and helped ferry emergency workers around New Orleans in his truck and boat. He also did some volunteer work for Mayor Ray Nagin's since-defeated opponent, Lt. Governor Mitch Landrieu, in the city's recent mayoral race. With Carnival's revenue at a standstill, he took on some real estate consulting jobs--acting as a general contractor on a condo development in New Orleans and a warehouse in Houston.
In May, however, on the eve of the new hurricane season, Rathle's optimism waned as the obstacles to Carnival's reopening continued to mount. He was able to find contractors to begin the repairs to his building, but connecting with his employees was a bigger struggle. "My whole staff moved away--all of them," he says, and there were few workers to be found anywhere in the city. Those who were available either lacked the appropriate skills or were too expensive. Before the storm, employees at Carnival earned about $15 an hour. In the storm's aftermath, wages in the food industry jumped, in some cases to some $37 an hour. "People can make more money Sheetrocking than they can making crab cakes," Rathle says. Absorbing those kinds of costs would mean raising prices, perhaps even doubling them. Given that most of his customers also had yet to rebuild, the prospect seemed impossible. The customers who had reopened, like the head chef at the city's convention center, had tried to place orders but balked at Rathle's suggestion that he might have to raise prices.
Then came his insurance problems. (Citing ongoing negotiations, Rathle asked that the company not be named.) "They said I was uninsurable because they couldn't control the possibility of looting," he says. Rathle has been able to find just one carrier willing to issue a policy--but with a premium 120 percent higher than before. The deductible would jump to $50,000 from $2,300, and he would not be covered for fire, theft, or spoilage. "Insurance and labor are my two largest costs," he says. "If those are more than doubling and I can't pass them along in higher prices, what are my options?" he asks.
More of his old customers finally have begun to call, but without insurance, employees, or FDA approval, Rathle can't take new orders. If the FDA comes through and he can at least get some kind of coverage, Rathle figures he can temporarily sacrifice profits and keep his customers' prices steady, at least until his labor situation returns to normal. "I know that the products I made before at a good margin had a lot of appeal and that my brand is worth something," he says.
If finding employees or insurance proves impossible, Rathle is considering renting his renovated facility to another food processor. With so much damage in and around the city, Rathle figures his facility could be attractive to a company without a home or even one from out of state looking to break into the New Orleans restaurant scene. In fact, one restaurateur has already approached Rathle about leasing his facility to serve as the hub of a new catering business. Rathle also is considering moving to someplace like Baton Rouge where he might find better labor and insurance options. That way he could continue to serve his customers without having to raise prices as dramatically as if he stayed downtown.
The last resort is to sell everything: the building, the brand, and perhaps even the home that his wife and kids just moved back into. "If I sell the business, my family and I would have to consider leaving New Orleans," he says. While he is loath to give up on the business that he has been building for more than a decade, he realizes that he is facing a difficult situation with risks that might not be worth the potential rewards. "I'm not going to put more capital into the business without a reasonable positive projection for the future," he says.
Rathle says he'll make a decision by the end of the year. "My company is at an impasse," he says. "I have no debt, but no income. The future is so damn uncertain."
The experts weigh in
Change the focus
Rathle needs to consider what size business the market will support. If he can only do $500,000 a year, will that excite him? Can he cut back on his product line to focus on the items with larger margins? His most valuable asset is his relationship with his customers. Perhaps he can get some of them to prepay on their contracts and he can use that cash to get the business open. These kinds of contracts go a long way in assuring both investors and banks.
Marks & Co.
Raleigh, North Carolina
Think about moving
Rathle should contact the Louisiana insurance commissioner's office for help in his dispute with his carrier. He can also apply for up to $500,000 in flood coverage under the National Flood Insurance Program. Clearly, he can expect to pay higher premiums for the next two or three years, but my sense is that he is still insurable. And Rathle is smart to think about moving his business out of New Orleans, which could dramatically affect the cost and availability of insurance.
Director of risk management and insurance research
Georgia State University
No reason to reopen
The good news is that Rathle doesn't have any debt. He may be able to overcome the higher wages, but if his cost of operating is prohibitive, there's no reason to reopen the business. He'd just be throwing good money after bad. He also needs to understand the impact that the business could have on his family. Is this a battle he's willing to fight? He really needs to face the facts and say I can't bring back what was and figure out how to move forward.
Bottom Line Consultants
What do you think? Can Raymond Rathle's business be saved? What would you advise? Let us know at email@example.com.
DARREN DAHL is a contributing editor at Inc. Magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, NC.
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