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A young 30-ish couple recently recounted what they called their “horror” story of a business and a livelihood that was about to collapse. After studying in a yeshiva for 5 years, David and his wife Molly opened a small retail store with money from in-laws and an older brother. The business appeared to be doing well during the first two years, enough so that they decided to expand the business to an on-line operation.
David admitted that he got “carried away” with the on-line, so much so that he apparently neglected the retail establishment. He used whatever profits he made in the store to prop up the on-line business. Within two years, he found himself with a mounting debt, insufficient take home funds, and a business that was on the verge of collapse. You guessed it; he blamed much of his troubles on a business slowdown due to the recession but a closer look showed that the economic downturn was only a minor factor.
Doing some forensics on the business, I found that it had potential and that it would be a shame to close it down. That’s when I recommended that the business retain a consultant to help restructure the business, or as I sometime believe is to restructure the “thinking” on the business.
The consultant divided the tasks at hand to include debt restructuring, infrastructure, and future business model. Although there were some bitter pills to swallow, David recognized that the alternative was to shut down the business altogether, something he shuddered to think about. He admitted that one of his hires was doing tasks he did in the beginning, but when he got busy with the e-commerce, he retained the help. The consultant forced him to lay off the “expensive” worker, to resume doing those tasks himself and to suspend further investment into the on-line business.
Molly, who had been led to believe that the business was doing extremely well, simply withdrew to care for her home and the children. She was very instrumental in the early success of the business. She seemed to have an excellent rapport with customers and did the buying very well. The obvious recommendation was for her to return to rebuild the retail establishment.
The debt restructuring went much better than expected as most of the creditors were only too happy to have the business continue in a recession. Some insisted on COD but most even granted the business better credit terms than before. A few were adamant that David share his plans for the future, to simply make them more comfortable that there is a future in the business.
One of the biggest challenges was getting David to reposition his thinking of the business. It seems that in the past he lost focus on his core business and “jumped” to other ventures. This caused him to perhaps overlook opportunities that he had with his original business.
Restructuring has become a necessity for many businesses dealing with the reality of doing business in a down economy. There is no cookie cutter model that applies to all businesses, but I have found that there are some common denominators, most of which David and Molly had to deal with. For example, many people allow debt to pile up simply because they are somehow convinced that better days lie ahead. When the sun does not shine, as expected, the roof can cave in.
I strongly believe that many businesses end up in trouble simply because they do not reach out for professional help. One business consultant remarked that not reaching out for professional help is like “talking to yourself.” It is really important to include someone who is not emotionally attached to the business and who can offer objective advice.
Reconstructing, say business experts, can sometimes simply mean retooling. They recommend that every business take stock of their status and re-evaluate the way they do business. What worked a decade ago may no longer be applicable in today’s rapidly changing business environment. There should be no fear of making a business “leaner and meaner,” the experts say.
David and Molly seem to be on their way to recovery even as uncertainty remains whether the economy as a whole is in recovery. They now understand the value of being focused on the profit center before venturing on to other enterprises. As it turns out, David has not given up on the on-line business and was at this writing negotiating with another entity to merge the sites. One of the benefits would be that the other entity has strong on-line management. Restructuring may not be for everyone, but then again, maybe it just is!
By Menachem Lubinsky
Miriam, an office manager with seven years of experience, was laid off nearly six months ago when her company made some drastic cutbacks in the face of the continuing recession. The company consolidated her position with another key job to save one salary. At first she thought that her experience would help her land a job quickly but that has not happened. Miriam, like so many other unemployed workers has been hearing that the recession may be winding down, but for some reason she is still out of her job. She has stayed in touch with her former employer “just in case” he is hiring again, but that has not happened as yet, and she may just not be able to wait too much longer. The few interviews she did receive were more suitable for entry-level with a severe cut in salary.
Each month, when some of the key economic indicators are released, it seems that the number of jobs continue to decline, but a closer look at the jobs picture in June might offer a glimmer of hope. The nation is said to have lost 125,000 jobs in June, but the unemployment rate actually dropped to 9.5%, according to the U.S. Bureau of Labor Statistics. But many of those jobs were temporary employees working on Census 2010. The private-sector payroll employment actually increased by 83,000.
If the most recent data holds up, Miriam should soon be back either at her former employer’s business or somewhere else. Perhaps seasonal, employment rose by 28,000 in amusements and recreation. Approximately 21,000 jobs were added in temporary help services. There were also additions in professional and business services, management and technical consulting (+11,000), business support services (+7,000), transportation and warehousing (+15,000), health care employment (+9,000), and manufacturing employment (+9,000).
For people like Miriam, a temporary solution might be a temporary job. Many forms who are still not sure about rehiring full-time employees are instead hiring people for projects or on a temporary basis. There is evidence to suggest that many of these temporary jobs are indeed turning into full-time jobs as many businesses continue to experience an improved business climate.
The added jobs in various sectors is noteworthy for a variety of reasons. For one, it gives a job seeker an idea just where the jobs might be. Clearly, there are various industries that are in a recovery mode while others are not. While health care is one of the growing categories, for example, the hospitality industry is not. There may always be an opportunity for temporary jobs such as the Census workers, the clean-up crews for the BP oil spill in the Gulf of Mexico and perhaps with the midterm elections around the corner, there will be many temporary jobs helping governors, senators and congressmen get elected.
In speaking with several job counselors, it seems that becoming disillusioned about finding a job is one of the worst problems they face with job seekers. One told me of a young man who had been looking for a year and out of sheer frustration said: “I will give this one more week and then I will have to consider an alternate course.” He found a good job within the week. The counselors say that timing is everything in a job search. Just because someone has failed to get an interview for weeks on end does not mean that it cannot happen and often revisiting an earlier potential employer can work out as well.
Many people like Miriam have found success in looking for employment with competitors who may just cherish the idea of hiring an experienced employee who knows the industry and the business. It seems that the recovery may not be on a level playing field in that while some businesses in an industry are indeed recovering, others may still be mired in the recession. This appears to be the case in retail as several chains have recovered nicely while others are still in the throes of the recession.
“Looking for a job,” said one of the counselors, “requires a bit of common sense and a bit of research.” The commons sense, he pointed out, was to approach potential employers who might have shown an interest in the past or in fact going back to past employers. The research is to know exactly what is happening in the industry you’ve been involved with before.
For job seekers this period might be a bit confusing because of the mixed signals that one gets reading the press these days. Perhaps the good news is that the signals are mixed as opposed to the “One Way” downward direction of just a year ago. It might make it a bit more difficult to negotiate, but there is activity and there is hope. The fact that the private sector has added 83,000 jobs in just one month is encouraging. If the July numbers, due out in August, continue that trend, it will be a clear signal that the economy has turned the corner and more jobs may be on the horizon.
Out of the Box is a collection of strategic marketing articles that Menachem Lubinsky has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.
The name, “Out of the Box” is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.
By Menachem Lubinsky
There was actually some good news on the economic front recently as a new report indicated that the average credit card debt of American consumers has come down somewhat. I am sure that you have heard ads that promise to significantly reduce your credit card debt. They are obviously playing on a well known fact: Americans are trying to creep out from under a crushing credit card debt even as the credit card has emerged as the key method of payment for consumer goods and services. While there are many dimensions to the credit card issue, there is no escaping the fact that credit cards are directly related to the recession and to an eventual recovery.
While no one should feel bad for the credit card companies with their exorbitant interest rates and astronomical profits, this has not been an easy time for them. They have had to face an increasing number of personal bankruptcies and are beseeched with requests to renegotiate debt. Recognizing the difficult economic climate, they were also forced to adjust credit limits downward out of fear that growing insolvency by people affected by the recession may end up in default. A customer who owed a credit card over $25,000 received notice from the company that their $30,000 credit limit had been reduced to $10,000. But within a month after the card was cleared up, the company wrote to invite them to increase their limit to $40,000. Said the customer: “When I needed them most, they reduced my limit and when I needed them least, they increased my limit.”
Americans clearly recognize the dangers of accumulating debt on credit cards but may be helpless in the face of a growing dependency. Technology (namely on-line) has made the credit card the major method of payment. Incentive like accumulating points for free travel and other amenities has created a generation of what one financial expert calls “the points generation.” Financial advisors advise that the best way of dealing with credit cards is to treat them like bills, meaning that they are paid in full as soon as the bill arrives. What forces many consumers into an untenable financial position is when they use the credit cards as a lending bank. Many financial experts say that the current credit crunch has forced more Americans to use the maximum credit available to them on credit cards.
A bankruptcy lawyer relates that he recently filed for a Chapter 11bankruptcy on behalf of a business with debt of $347,000, more than $145,000 owed on credit cards, most of it on personal credit cards. He says that in the last two years alone, the company accumulated more than $90,000 on the cards, particularly when the bank it has been doing business with for 25 years cut their line of credit by 70%. Business had dropped by more than 50%, causing the business to go into tailspin, which was directly related to the recession.
I recently read that the average credit card debt per household with credit card debt is $15,519. With an average APR of 14.67 percent (Federal Reserve, May 2010), you can imagine what affect interest payments are having on these households and why it has become so difficult for many families to climb out of debt. It was interesting to note that more Americans are using credit cards for such necessities as education and food, a sign of the economy but also in many ways a warning sign. The inability to borrow money through banks is why many families carry multiple credit cards with the average family carrying 3.5, as of yearend 2008, according to the Federal Reserve. The U.S. credit card 60-day delinquency rate is 4.18 percent and the default rate a staggering 11.17 percent (Source: Fitch Ratings, May 2010). It is because of this default rate and the increase in personal bankruptcies that credit card companies are now more inclined to negotiate. One financial advisor told me that he negotiated $43,000 in credit card debt to $11,500 in several installments.
A Brooklyn storeowner said that the recession had a direct affect on his sales with credit cards. “Many people who used to shop with cash or checks are instead buying with credit cards, causing me to lose a few percent on margins that I can ill afford to reduce.” In this economy, he pointed out, raising prices was not an option. He complained that some people challenge the sale later, causing an undue delay in payment by the credit card company. He recalled that his father, from whom he inherited the store, had not accepter credit cards. “Imagine if I did that today,” he said, “I would most likely loose many customers.” He said that the first question he frequently hears from new customers is whether he accepts credit cards.
Financial counselors say that one of the biggest risks in the overuse of credit cards is to lose perspective on what you can afford. They say that some people who fall victim to impulse buying have no idea on how they will be able to repay a purchase with a credit card other than to figure that “something will materialize.” It is this blind faith in the unforeseen that often sinks consumers into bigger debt. Obviously, a recovery will no doubt help many consumers either pay off their credit cards or at least renegotiate debt. That is why the report of reduced balances on many American credit cards was such a welcome sign, but as the statistics indicate, only a drop in the bucket.
*Picture Credit Andres Rueda
The travel and hospitality industry continues to be a major victim of the recession. In fact, many economists consider it an industry that may very well be a key litmus test for the prospects of recovery. While many continue to watch the banks for signs of economic revival, some carefully eye the business traveler as a key indicator.
Here is a perfect illustration of just how critical the business traveler is to the economy: Raymond, a vice president of sales for commercial energy saving electrical bulbs, used to travel at least once a month to visit some of his distributors in various parts of the country. In addition, he would also fly to at least 3-4 large trade shows a year. He estimates that he spends an average of four days on the road on each of his trips.
In the good days, Raymond would travel in first class whenever he was able to upgrade his reservation. He usually stayed in what he calls 4-star hotels, ate out in good restaurants, and spent considerable amounts of money to entertain distributors. In 2009, the company began to feel the effects of the recession and as part of some cost-cutting measures slashed Raymond’s budget to include only 4-5 trips to distributors and at most two trade shows.
Raymond’s new budget meant that hotels would loose out on some 40 hotel nights at an average of $250 per night. The airlines lost some 10 trips and then there were the restaurants, taxis, and many other services that he would normally utilize that also lost out.
When the economy went south several years ago, Raymond’s story repeated itself in thousands of businesses. The cutbacks in travel had a snowball effect on many related businesses. The trade show industry, for example, took it on the chin. The number of exhibitors declined as did the number of visitors. Not only did the travel and hospitality industry suffer from the decline in trade show participation, but so did graphic artists, producers of exhibits, bus companies and so forth. Oh, let’s not forget the local governments who benefited from sales tax.
What is perhaps even more troubling is that Raymond may never return to his pre-recession routine. In the past few months, the company is doing much better but management has gotten used to the idea of the more austere way of life, which means that there is a good chance that even if the recession ended tomorrow, Raymond would still not resume his pre-recession ways.
The airline industry is beginning to recognize the challenge of doing business without the coveted business traveler, or at least not as many business travelers. It is pitching its upscale services to people with high net worth in the hope that they will fill the seats of the missing executives. Hotels too are offering all kinds of incentives to attract the premium traveler.
There are new reasons why Raymond might never return to his old ways. He has learned to effectively use such tools as videoconferencing and skype with good results. He can now communicate with some of his distributors in a one or two hour meeting and does not have to spend four days on the road for the same meeting.
Unless someone comes up with a good reason why Raymond is physically needed at these meeting, he will certainly be asked to conduct business from home. There are many good minds at work trying to revive what some have called the “eyeball-to-eyeball” way of doing business. This is a school of thought that says that technology can never replace human contact. One businessman wrote: “There is no replacement for looking someone in the eye and observing body language. I just can’t see doing large business deals based on a video image.” But many businesses are not buying into it and are cutting out travel altogether in favor of the technological methods of communications. One large law firm with many offices abroad has completely banned travel.
The hotel industry seems to have shifted its focus from relying on the business traveler to more regional and local business. They are putting up new hotels in cities that are regional hubs which might involve bus or car travel. In fact, a recent fad is intercity bus service that offers passengers such amenities as Wi-Fi in an effort to lure regional business travelers.
In the ‘90’s many start-up trade shows were able to compete with existing trade events just by relying on hefty travel budgets, In the past few years that has dramatically changed with the number of start-up trade shows declining. Existing trade show strongholds like Las Vegas have also taken a hit as has almost every major city.
Despite the ominous facts that the business traveler is a fraction of what it was, many in the travel and hospitality industry still believe that a comeback is in the offing when the rest of the economy rebounds. But most executives are making the necessary adjustments to deal with what appears to be a new era in business travel. Even if the industry does come back some believe it will be far more restricted. Raymond, for example, may visit one city and then rent a car to travel to another city for a day or two, a destination he would normally fly to separately. So when you see a business traveler rushing through an airport, make way. The economy may depend on him.
By Menachem Lubinsky
In the past few days, there seemed to be a significant surge in the number of high-profile mergers and acquisitions, raising the question of how much of an effect the recession had on these developments. To be sure, M & A’s occur during more stable economic periods as well, but a closer look suggests that the current economic climate is having a direct effect on the mergers and acquisitions now in the news.
The on-again off-again proposed merger between Continental and United, two of America’s largest airline carriers, may be a good example of a recession related deal. Surging fuel prices, a decline in business travel and mounting debt forced Continental to look for a way to stabilize the company. On the other hand, the acquisition of Palm by Hewlett-Packard probably would have occurred in a more stable economic climate as well. Palm had simply lost its competitive edge to a new generation of smart phones, namely Blackberry.
While most of us focus on the “big-name” mergers and acquisitions, economists say that they have increased dramatically amongst mid-sized and even smaller firms during the past few months. Typically a merger affords both companies the opportunity to create a new entity that is more efficient, cost-effective and ultimately profitable. The same is true for an acquisition when a floundering company is acquired by a healthier entity.
There is most definitely a connection between some of the mergers taking place nowadays and the recession. In 2008, after the housing crash and the collapse of many of the nation’s largest financial institutions, there was no discussion of mergers for such icons as Lehman. It was simply curtains for those companies. For the banks that failed, the FDIC made sure that they were taken over by other banks.
The story is quite different for businesses that managed to stay afloat during the recession, albeit in a weakened state. Many accumulated debt in the belief that the turnaround was just around the corner. They were betting that the recession would be short-lived and that they would soon revert back to profitability. But that did not happen and worse, some economists were predicting permanent changes in consumer habits that all but sealed the fate of many troubled businesses.
I recently tried to convince two food importers that it would be in their best interest to merge. One business was fairly successful with a staff of a half dozen people but was not growing. The other was a husband and wife team working out of their basement that found it hard to keep up with their business. While the husband traveled to secure new products, the wife managed the home front. The couple felt that it was time to move out of the basement and consider renting space and hiring a clerical person.
Upon closer examination, it seemed that both companies were not only importing some of the same lines; they pitched the same accounts. But here’s where egos got in the way. The couple could not fathom an arrangement where they would give up their independence. The other company was convinced that the couple would simply “steal” their accounts and then go on their own again.
It is some of these human aspects of companies that often prevent mergers that make sense from happening. This is true in even the large mergers when two well-paid CEO’s with huge egos bud heads in negotiations for a merger. Even the question of who ultimately becomes the CEO of the merged company can become the impediment to a deal. Sometimes it becomes a focal point in the negotiations, especially when a Board of Directors feels that the acquired company has the better CEO. In the Continental-United deal, the new entity will go under the United name but the Continental CEO will preside over the newly merged company.
Tapping into some of the best personnel in each of the merging companies is one of the major advantages of a merger. Many merged companies not only capitalized on the large pool of talent that often comes along with a merger, they actually found the right team to take them on the road to profitability and beyond.
The recession forced many companies to look at their long-term prospects of success. While many believe that they could weather the storm on their own, others began looking for strategic partners to help them devise long-term solutions. This may seem like a process that needs to take place periodically in the life of a business, but it is far more urgent in a recession since the prospects of raising capital are not that clear. What is clear is that signs of recovery not withstanding, there is a growing trend towards mergers and acquisitions and that many are directly related to the recession.
By Menachem Lubinsky
New York…The recession continues to have a significant impact on kosher food sales despite a perception that kosher food is “recession-proof,” Kosher Today has learned. In dozens of interviews with industry officials, it became clear that the buying habits of kosher consumers was markedly different this past Passover than it was just two or three years ago. “People are being squeezed on all sides” said a Boro Park retailer, “and they are more price conscious than ever.” He said that he observed that more customers were buying from lists rather than just impulse buying or walking up and down the aisles and picking up items. In nearby Flatbush where Pomegranate has set a new standard in shopping for kosher foods, there were many customers who now shop in multiple stores. A kosher blogger wrote: “I have learned to buy items at Pomegranate that cost about the same everywhere (i.e. many dairy products) and to save by buying at places like COSTCO, Paperific and the Kolel store.” The retailers say they are constantly reminded by customers of a breadwinner that has lost their job. Stores that recorded double-digit growth in 2008, said they only did 2% – 3% better on sales during Passover 2010 than they did in 2009. The same seemed to be true in kosher wines where many customers shunned the more expensive wines they routinely bought in 2008. The number of people relying on help from such charities as Met Council on Jewish Poverty, Tomchei Shabbos and Keren Aniyim as well as similar organizations in cities outside of New York also increased significantly.
Despite this disturbing development for the kosher food industry, sources say, the industry as a whole seems to have weathered the “pockets of downturns” well. They pointed to making up some of the slack with volume. “Natural growth has always helped the industry even in a down economy,” said one kosher food manufacturer. New items also continue to drive sales as younger kosher customers continue to show a strong desire to try new and interesting foods. While there is talk of a recovery, in the kosher food industry the recession still continues to take its toll.
By Menachem Lubinsky
A column I wrote in this space several weeks ago generated an unprecedented response. The subject was the competition between younger and older people for the same scarce jobs. Much of the feedback that I received revolved around personal experiences of people who felt that they were unfairly victimized because of their age. Several were young people who wondered how you can get a job that calls for experience without getting the experience. There seemed to be a common thread that related to the hardships many families face as a result of the recession, ranging from layoffs to business failures.
Many of the people seemed to find the answer in a “second” income. Americans have long become accustomed to the concept of two incomes in a family but increasingly more spouses have pitched in with some kind of income producing venture that helps the family bottom line. Without getting into the social implications for society, I heard of a number of stories that may be worth sharing.
David, a 31-year old father of three, lost his job as a production manager for a trade publication. After six months of job-hunting, he was still not any closer to a job. A job counselor advised him to take some courses in sales with the idea that there were many sales jobs available. It turned out that the compensation for most of the offers was based on commission with little or no fixed salaries.
Eve, David’s stay-at-home wife had started to dabble in a home-based graphics business focusing on a specific industry. She called the money her business made “spending money” and had little time to either plan or actually expand the business. It was at this point that David came up with what he called “an insane idea” to try to build up his wife’s business. He had after all invested the time in the sales training. That was eight months ago. David indeed developed the business, is no longer looking for a job, and the couple is now seriously considering a move to a nearby office building and hiring a clerical person.
Joe, a manager in a small machinery parts business, was having increased difficulty in paying bills. At 30, his two children were in pre-school and the cost of tuition alone was “choking” him. His wife worked part-time at the office of a local dentist but he was increasingly worried about his job. His boss had already notified the staff that sales were off by about 20%. That’s when an idea hit him. Perhaps he could work out some arrangement with his boss to sell the parts on-line. Thankfully, his boss dismissed the idea and agreed to share in the profits provided that Joe made the investment. He did, and left his job devoting his energy to his new successful business.
For many people, a “second income” means taking on another job. A local yeshiva recently hired a Jr. Accountant for Sundays to do journal entries and prepare reports for the accountants. A restaurant hired a mashgiach (kosher supervisor) to replace their full-time mashgiach during weekends.
The challenges of producing enough income for a household are ever-present but so much greater in a recession. It requires a bit of creativity and “out-of-the-box” thinking like David and Joe, whose answers were right in front of their noses. I recently read about a company that sells amenity kits to hotels and corporations on the West Coast. The gist of the story in an in-flight magazine was that the company had gone “green” and was selling the hotels products that were environmentally sound. There was one line in the article that caught my eye. It spoke about the nephew of the boss who had been laid off from a computer consulting job and decided to expand the business to the Central states with great success.
Al, a self-employed real estate broker had fallen on hard times. At 57, he was having difficulty finding a full-time job and his wife who had worked most of her life suffered from crippling arthritis. Here briefly is his story, in his own words: “I was at the point where I was ready to accept the fact that I would have to rely on benefits just to get by when I took stock of my experience. I realized that I knew many building managers and owners and that they would occasionally ask me for a good repairman. I hired two handymen that were looking for work and started to call and visit all my contacts. In the last four months, I have been averaging $30,000 a month in repairs, enough to pay my bills. I still, here and there, make some money on brokerage.”
A second income, whether for self or a spouse, is obviously not for everyone. Many people’s life circumstances prevent them from even considering a second income, but for those who can entertain the idea, it is a good way to beat the recession. There are many people whose careers were launched in a down economic climate because they had an idea that worked out.
By Menachem Lubinsky
I have to admit that I was considering stopping to write this column, not because the recession is over, but because there were so many signs that a recovery might be on the way. The unemployment figures seemed to go down somewhat despite the loss of thousands of jobs. Retailers were more optimistic than they have been in the last two years. Small businesses were beginning to rebound and some were finally benefiting from competitors that had downsized or closed altogether…
Continue Reading “Eye on the Recession: Where Oh Where Are the Banks?” on Lubicom’s Marketing Blog
By Menachem Lubinsky
Hal and Rob were partners in a New England fishing supply store for over 30 years. Like many businesses in the region in the ‘90’s and the early 2000’s, the business experienced extraordinary growth. In addition to expanding their showroom and warehouse, the two ventured into catalogue and on-line sales realizing unprecedented profits. Hal’s oldest son Bruce joined the business in 2005 while Rob’s 22-year old son Jeremy came on board in 2008.
The arrival of the younger generation should have been a welcome development for the business, but it was not. The recession had significantly cut into the recreational fishing business, a mainstay of their livelihood and for the first time in years, sales and profits were slipping. In addition to a slump in tourism and fishing, the business faced serious competition from many on-line supply businesses. Hal and Rob knew that the hour of reckoning was close. To be sure, there were choices but closing the business did not appear to be one of them.
Bruce and Jeremy had actually forged a good working relationship and while their dads were trying to figure out their next step, the sons of the owners were concocting their own plan. They feared the worst in that their fathers would want to protect their life-savings and either sell the business at below value or shut the doors altogether. For the two of them, coming up with some kind of plan to save the business was survival.
Hal and Rob meanwhile had come to the conclusion that their only hope of survival was to significantly downsize the business while Bruce and Jeremy were actually planning to raise capital to further expand the business with an outlet in a large nearby mall. But the elder owners prevailed, at least for the moment. They had hired a consultant to help them make significant cuts. But where to cut was the big question and the cause for some friction between the age-old partners.
Their dilemma is not peculiar to their business. As the recession continues, many businesses that survived are still downsizing by making cuts in such areas as marketing, human resources, and capital investment. Often the question is not whether to make the cuts but which cuts. Even now, as signs of a recovery seem to be emerging, many companies that had downsized earlier are choosing to be prudent and to stay that way, at least until there is evidence of a real recovery.
Bruce and Hal’s consultant forced them to prepare two lists of potential cuts. One that they labeled A which were those that did not impact the business as much while those on the B list more directly affected the business. On the A list was a reduction in the warehouse space, elimination of one sales counter and one sales clerk, ending the sponsorship of the local Independence Day parade, and cutting out the production of the catalogue (while leaving it on-line). On the B list (in addition to everything that was on A) were such items as selling the warehouse in favor of renting smaller space, cutting back the hours of a fishing instructor who had helped train amateur fishing buffs, and slashing the advertising budget in half. Hal noted: “If we made all these cuts, our business would look like it was 1985).
While to an outsider the cuts that Bruce and Hal were considering do not appear to be that deep, the two felt otherwise, as Hal pointed out. Part of the problem in many businesses when it comes to making cuts is that ownership is emotionally tied to many aspects of the business even if they no longer make sense in a down economy.
I, of course, try my best to keep the marketing budget intact, not so much because I believe that it is the engine that drives most business, but because it takes so much more to return to a former position of strength. But many businessmen find it hard to connect the dots between the expense of marketing and profits. I often spend a good part of a consulting session doing just that.
When it becomes obvious that a business could only survive by downsizing, it can often be accomplished by retaining an outside consultant who has no emotional connection to the business and certainly would not let ego get in the way. The consultant can help a business overcome painful decisions while still keeping the basic infrastructure intact. In many instances, a business can benefit by combining jobs and rehiring talent that will not only compensate for the losses of the exited employees but serve as a significant upgrade.
When Hal’s health failed and Bruce decided to spend more time at his summer home, the “boys” took over and ultimately implemented their plan of opening a satellite store in the local mall with one exception: They closed the main store and warehouse and leased smaller warehouse space. The business is now extremely profitable once again. A cut here and a cut there and pretty soon you have a healthy business, particularly in a recession.
The word “recovery” is being used with increased frequency; yet the experts are still afraid to say the word. While the economy is showing some signs of a recovery, it is also still apparently mired in a deep recession, hardly the time to declare that the economy is in recovery.
You might say that we are living in a period with extremely mixed signals. There was the news that people are beginning to refinance their homes, a good sign for the sluggish housing market. But it turns out that the refinance surge was due to an anticipated hike in the interest rate. In addition, the number of foreclosures continues to increase. In New York, stimulus funds are being used to encourage people to buy foreclosed homes as the inventory of such homes shows no signs of abating.
There was a report that the service sector had begun to hire once again. True to some extent, but on the flip side is a double-digit unemployment figure and that does not include the millions of people who are no longer looking for jobs. It is not a secret that the unemployment figures do not include the disenfranchised who have given up looking for a job.
Of course, the stock market has been doing better of late. Should that not mean that the recovery is here? Again, the mixed signals. Some of the strong institutions like Citibank are struggling and no one is sure just how long this “rally” will last. For some the climb back is so steep that there is little solace in the market’s resurgence.
So it may be a bit premature to use the word recovery for the economy as a whole, but it might be in order for certain sectors or even businesses. For example, the retail sector seemed to have a better than expected holiday season. Travel is making somewhat of a comeback. But again, these gains are modest and economists wonder how enduring they may be.
Several businesses that I am familiar with say that they feel that they are in a recovery mode. OK, it is possible for the economy to be in a recession and for individual businesses to be in a recovery. A service business I know has consolidated its operations and is doing much better. They certainly feel that they are in a recovery. In an earlier article, I pointed out how it is possible to take a business from an economic downturn to profitability. The formula is to control expenses and to operate on a much leaner basis.
I know a business that has cut two major brands from its inventory. The company realized that these two brands were not only not carrying their weight; they were draining the company’s successful brands. It was not an easy decision because there was no telling that the two struggling would not return to profitability at some point in the future. The company first sought to sell off the brands but found few takers. It had to take the bitter pill of disposing of the brands, but as it turned out it was not so bitter after all as the company returned to profitability enabling it to launch a new brand that stood a better chance than the two brands it dropped.
A company in recovery acts the way the economy would act if it was finally at that point. The company is much more secure in investing in its future just as people would do were the economy to be in a recovery. This is distinctly different from a recession where people hold onto their money, fearful that the hard times dictated to keep as much cash on hand and certainly not to plunge into ventures that have less than a promising future
So how does one know if a business is indeed a recovery? Economists like to think that it is all in the “graph.” They are loathe to call a temporary bump a recovery but are apt to accept that if a company, for example has had steady growth in 3 periods (quarters) that it might indeed be in a recovery mode. They also tend to evaluate other trends such as new business, the state of the competition, and some valid signals from consumers that that the recovery is not a passing fad.
The economists warn that a premature reaction to a presumed recovery is dangerous. A client I had not heard from in more than four years suddenly called to explore a rather ambitious marketing program. He seemed to feel comfortable that the worst was over and that it was time to embark on a marketing program we had discussed four years earlier. Our negotiations took several weeks and then the communications between us went dead. When I finally did catch up with him, his business seemed to be in a tailspin due to an investment that had soured. He admitted that he had seen the signals but chose to ignore them, believing that he could weather the storm. The marketing program was put on hold.
I, of course, wish that we were in a recovery and certainly hope that whatever business you are in it is in a recovery mode, but in a real way, which means that the direction of the graph is headed in only one direction: up!