Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

Warning signs that a business is in trouble

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From the latest GrowerTalks: Long before the bank says NO and the final profit and loss statement bleeds red ink, there are warning signs that a business may be in trouble. Whether you’re optimistic about your future or feeling a wee-bit stressed these days, it’s crucial to monitor for early indicators of coming problems. Think of it as preventative maintenance—something you’d give your vehicle in order to fix the little problems before the engine blows….continued.

Several folks, including myself, were interviewed for the article. Click here for the full scoop.

What consumers are still doing

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Despite the recession, there are still some activities consumers are willing to spend their money on. Sageworks, Inc., a firm that tracks private-company financial performance, has compiled a list of seven. Number 2 signals opportunity for the landscape service sector.

  • 1) Repairing their cars instead of buying new autos. Auto repair shops grew their sales by an average of 2.4% over the last 12 months. In contrast, car dealerships saw their sales decline by 9.7% in the same period.
  • 2) Remodeling and repairing their homes instead of moving. Building equipment contractors (such as electricians, plumbing and heating contractors) saw their sales increase by 4.6% in the last 12 months.
  • 3) Shopping at grocery stores more than eating out. Grocery stores experienced average sales growth of 6.7% over the last 12 months. Sit-down restaurants saw growth of 3.9% in the same period.
  • 4) Attending technical and trade school. Trade and technical schools saw their top-line sales grow by 7.8% in the last 23 months, compared to growth of 5.9% in 2007.
  • 5) Going to the dentist. The average dentists’ office experienced sales growth of 6.9% in the last 12 months, up from 4.9% in 2007.
  • 6) Getting personal care services such as haircuts and manicures. Hair salons, barber shops, nail salons, and skin care providers experienced an average of 4.5% sales growth in the last 12 months.
  • 7) Visiting an accountant. Accounting firms saw average top-line revenues grow by 10.2% over the last 12 months, putting the accounting industry in the top 20 industries in the country by sales growth.

The impact of increased savings

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Two forces that until recently turbo-charged US consumer spending—growing household debt and a falling savings rate—have gone into reverse. In late 2008, as households started reducing their indebtedness and saving more, consumption tumbled.

New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.

Consumer spending rebounds

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The economy contracted at a 6.1% annual rate in the first quarter, which was a little more than the 4.6% decrease in real GDP expected by economists. The best news in the B.E.A. report report was the rebound in Personal Consumption Expenditures during the first quarter. Consumer spending grew at 2.2% during the first quarter (see graph above) following two quarters of negative growth (-4.3% in 2008:Q4 and -3.9% in 2008:Q3), and was just slightly below the 2.27% average growth since 2001.

REUTERS — There were some bright spots in the report. Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 2.2%, after collapsing in the second half of last year. Consumer spending was boosted by a 9.4% jump in purchases of durable goods, the first advance after four quarters of decline.

WSJ — GDP acts as a scoreboard for the economy by measuring all goods and services produced. Its biggest component is consumer spending, which accounts for about 70% of GDP. First-quarter spending increased 2.2%, after dropping 4.3% in the fourth quarter.

Hopefully, a good portion of this increase in consumer spending was in the lawn and garden category. As you probably saw in the Making Cents sales poll, 46% indicated that March sales were higher than same-month sales in 2008, 4% indicated they were the same level, and 50% indicated fewer March sales than last year. This is consistent with my conversations across the country as well.

Be sure to complete the April poll on the right side of the page.

Strong showing of capital goods orders

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According to data released today from the Department of Commerce, orders for non-defense capital-equipment goods excluding aircraft rose 1.5% in March after a 4.3% gain in February. Such core capital-goods orders are considered the best gauge of capital spending by businesses, and are also considered a leading economic indicator. The two-month increase of 5.8% in new orders for capital goods was the strongest two-month gain in more than four years, since the 6.5% two-month increase for December 2004 and January 2005.

Three tips for cost cutting

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Almost all companies have or will need to cut costs to survive in the current environment. Unfortunately, not all cost cutting is done smartly. Consider these three pieces of advice before making cuts:

  1. Put strategy first. Cuts across the board rarely, if ever, lead to effective results. Laying out strategy first helps you decide where to cut, and also helps employees accept the cuts as a step toward a goal.
  2. Focus on good customers. Rather than cutting valued services to valuable customers, “fire” high-maintenance customers who cause you unnecessary complexity. Focus on serving your more cost-effective customers who are happy with your products and services as they are.
  3. Keep your business simple. In a healthy economy, it’s easy to overlook processes and activities that are redundant or overly involved. Simplifying them can save you money with the added bonus of increasing both customer and employee satisfaction.

Recession ending this year?

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According to the New York Fed, “Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity.”

On Tuesday, the New York Fed released its latest “Probability of U.S. Recession Predicted by Treasury Spread,” with data through March 2009, and the Fed’s recession probability forecast through March 2010 (see chart above, click to enlarge). The NY Fed’s model uses the spread between 10-year and 3-month Treasury rates (currently at 2.61%) to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed’s data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed’s model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (0.82% in December 2009). By March of 2010, the recession probability will be only 0.53%, close to the lowest level since mid-2005.

Further, the Treasury spread has been above 2% for the last 12 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above).

Signs of vibrancy

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Now, after months of seemingly nonstop bad news, there are hopeful signs on the horizon. Below the surface of gloom, there are signs of a new vibrancy. They include:

  • A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.
  • A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.
  • A back-to-back jump in retail sales ex autos, in both January and February.
  • A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.
  • A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.
  • An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.
  • A Housing Affordability Index that has hit an all-time high.
  • A two-month improvement in wholesale used-car prices, measured by the Manheim Index.
  • A rise in Monster’s Employment Index in February, suggesting a turn in the job market may be around the corner.
  • A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.
  • A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.
  • A two-month rally in the Index of Leading Indicators.
  • A growing body of evidence that the “liquidity crunch” is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

Data Source: IBD Editorial

Marketing during a recession

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How should your marketing change because of the recession? Harvard professor John Quelch has eight tips for Marketing Your Way Through a Recession:

1. Research the customer. Instead of cutting the marketing budget, you need to know more than ever how consumers are redefining value and responding to the recession. Price elasticity curves are changing. Consumers take more time searching for durable goods and negotiate harder at the point of sale. They are more willing to postpone purchases, trade down, or buy less. Must-have features of yesterday are today’s can-live-withouts. Trusted brands are especially valued and they can still launch new products successfully, but interest in new brands and new categories fades. Conspicuous consumption becomes less prevalent.

2. Focus on family values. When economic hard times loom, we tend to retreat to our village. Look for cozy hearth-and-home family scenes in advertising to replace images of extreme sports, adventure, and rugged individualism. Zany humor and appeals on the basis of fear are out. Greeting card sales, telephone use, and discretionary spending on home furnishings and home entertainment will hold up well, as uncertainty prompts us to stay at home but also stay connected with family and friends.

3. Maintain marketing spending. This is not the time to cut marketing. It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times. Uncertain consumers need the reassurance of known brands, and more consumers at home watching television can deliver higher than expected audiences at lower cost-per-thousand impressions. Brands with deep pockets may be able to negotiate favorable advertising rates and lock them in for several years. If you have to cut marketing spending, try to maintain the frequency by shifting from more expensive forms to less expensive forms, such as the use of direct marketing, which gives more immediate sales impact.

4. Adjust product portfolios. Marketers must reforecast demand for each item in their product lines as consumers trade down to models that stress good value, such as cars with fewer options. Tough times favor multi-purpose goods over specialized products, and weaker items in product lines should be pruned. In grocery-products categories, good-quality own-brands gain at the expense of national brands. Industrial customers prefer to see products and services unbundled and priced separately. Gimmicks are out; reliability, durability, safety, and performance are in. New products, especially those that address the new consumer reality and thereby put pressure on competitors, should still be introduced, but advertising should stress superior price performance, not corporate image.

5. Support distributors. In uncertain times, no one wants to tie up working capital in excess inventories. Early-buy allowances, extended financing, and generous return policies motivate distributors to stock your full product line. This is particularly true with unproven new products. Be careful about expanding distribution to lower-priced channels; doing so can jeopardize existing relationships and your brand image. However, now may be the time to drop your weaker distributors and upgrade your sales force by recruiting those sacked by other companies.

6. Adjust pricing tactics. Customers will be shopping around for the best deals. You do not necessarily have to cut list prices, but you may need to offer more temporary price promotions, reduce thresholds for quantity discounts, extend credit to long-standing customers, and price smaller pack sizes more aggressively.

7. Stress market share. In all but a few technology categories where growth prospects are strong, companies are in a battle for market share and, in some cases, survival. Knowing your cost structure can ensure that any cuts or consolidation initiatives will save the most money with minimum customer impact. Companies such as Wal-Mart and Southwest Airlines, with strong positions and the most productive cost structures in their industries, can expect to gain market share. Other companies with healthy balance sheets can do so by acquiring weak competitors.

8. Emphasize core values. Although most companies are making employees redundant, chief executives can cement the loyalty of those who remain by assuring employees that the company has survived difficult times before, maintaining quality rather than cutting corners, and servicing existing customers rather than trying to be all things to all people. CEOs must spend more time with customers and employees. Economic recession can elevate the importance of the finance director’s balance sheet over the marketing manager’s income statement. Managing working capital can easily dominate managing customer relationships. CEOs must counter this. Successful companies do not abandon their marketing strategies in a recession; they adapt them.

Let me add to his wise remarks my own thoughts:

The biggest changes in market share occur at economic turning points.

I don’t have data to back up this claim, but I believe it. Consider two scenarios:

A firm decided to downsize the sales staff during the recession. The remaining sales people became order-takers, answering calls from repeat customers. They had little time for outbound calls, and when they did call on new prospects or former customers, they had little success. So they stopped trying.

At the same time, a competitor had some (probably young) sales people, too new or too stupid to realize that nobody buys in a recession. They made the sales calls. They followed up a month later. They stayed in touch with their prospects and former customers.

When the economy turned around, who do you think got the business?