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

Unhappy times are unhappy in their own way

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“Happy economic times are all alike; unhappy times are unhappy in their own way.”

A recent article by Ram Charan in Fortune Magazine (2/18/08) reiterated many of the points made in my earlier posts about NOT cutting back too drastically during economic downturns; especially in terms of marketing programs. Here are the highlights:

What makes the current economic downturn distinctively unhappy is the unprecedented confluence of three things. First, there was a Fed-induced housing bubble – too much cheap money for too long. Then there was the rampant use of exotic financial instruments, such as collateralized debt obligations, to disperse risk among people who didn’t understand it. Finally, the rating agencies failed to catch the poor quality of a great deal of highly rated debt. With lots of momentum – and faulty brakes – the financial system hit the skids.

Whether this turns into an official recession (two straight negative quarters) is immaterial: What matters is how their business is affected, segment by segment. But certain principles apply broadly:

Keep building. When the top line looks shaky and the bottom line worse, the temptation is to go after discretionary spending. Fine – but do not consider product development, innovation, and brand building optional. Sacrificing your future for a slightly more comfortable present is not worth it. If you keep building, you can come back strong.

Another area to build on is personnel. It may seem counter-intuitive to pay bonuses when profits are falling, but sometimes it’s the right thing to do, particularly if a specific unit is creaming the competition. Rewarding excellence – through new challenges, public recognition, and, yes, money – in bad times as well as good builds loyalty.

Communicate intensively. Get information from where the customer action is, and get it to the operating people – fast. Companies should do so routinely, of course. But they don’t. It’s counterintuitive but true that when the economy slows down, the pace of decision-making has to speed up, because you can’t put off the tough choices anymore. The companies that are readiest to act on solid information are primed to shoot ahead of the business cycle.

Communication needs to happen among teams in the company. In the hot summer of 1787, the Founding Fathers locked themselves into a room and wrote the entire Constitution in a matter of weeks. That’s not a bad model for a company under pressure. Fill a room with people from operations, service, marketing, and sales, and require them to hash out their expectations for the next eight quarters or so – what if demand goes down? if prices of key inputs go up? – and then to devise coordinated plans to meet them.

And keep it up, repeating the exercise every month. When the facts change, to paraphrase Keynes, so must your strategy. Research has shown that when people have thought through their reactions to high-stress scenarios – such as a disaster or being a victim
of a crime – they are much more likely to survive it. Ditto for business.

Evaluate your customers. In good times, companies manage the P&L; in bad times, cash and receivables matter more. Therefore, you need to identify your higher-risk, cash-poor customers. You could decide to simply not supply them anymore – that’s harsh but sometimes necessary.

Alternatively, and this helps build good relations, work out a way to keep going – for example, by helping finance purchases or supplying smaller quantities. The point is, a downturn is a very good time to do a quality check on your customers.

Just say no to across-the-board cuts. By all means cut costs if it makes sense to do so, but make sure there is purpose in how you do it. It may be useful to clean out the metaphorical attic – for example, by pruning your product line. The key: If you have to cut costs, don’t try to be fair about it. As I have said before, the world does not inflict pain evenly, and you have to deal with that reality.

Being on the downside of the business cycle is not much fun. That said, a slump can also be an opportunity if you use the sense of urgency to improve strategy, management, and discipline. In that sense, happy and unhappy times are alike: The companies that take charge and outcompete will win.

Pay me now or pay me later

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An insightful commentary from Robert Samuelson yesterday provided an excellent perspective to the recent discussions regarding recession and stagflation. For example:

Naturally, no politician acknowledges the self-evident implication: that recessions, though unwanted and hurtful to many, are not just inevitable; sometimes they’re also necessary to prevent the larger and longer-lasting harm that would result from resurgent inflation. Interestingly, many academic and business economists who have more freedom to speak their minds suffer the same deficiency. They treat every potential recession as a policy failure when it is often simply part of the business cycle. They thus contribute to a political climate that, focused on avoiding or minimizing any recession, may perversely aggravate inflation and lead to much harsher recessions later.

For the rest of this insightful dialogue, click here.

Another interesting treatise on how current monetary policy is not addressing the real issue is provided by Allan Meltzer, the eminent economist and monetary historian, who thinks the Fed is repeating the mistakes of the 1970s. Click here.

Who's right?

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Almost two out of every three Americans won’t spend tax rebates included in the proposed government stimulus package, a survey by American Century Investments found. A little more than a quarter of respondents said they would spend the rebate money now, while 36 percent said they would use it to pay off outstanding loans or credit card balances, according to Kansas City-based American Century Investments. Another 25 percent said they would save or invest it.

On the other hand…

According to a new National Retail Federation survey, consumers plan to spend 40.6% of tax rebate checks, which will provide an immediate $42.9 billion boost to the economy. The survey also found that the $105.7 billion distributed in tax rebates will be used to pay down debt ($30 billion), saved ($19.8 billion), invested ($4.4 billion) and used to pay down medical bills ($4.6 billion). Women will spend a larger percentage of their rebate check than men (43.6% vs. 37.3%). And young adults age 18-24 will spend more of their checks (46.2%) than any other age group.

Who is right? Time will tell, but I do know this. There will be some big trees planted in my yard when the check does arrive!

Which crystal ball to believe?

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Needless to say, I have been receiving a lot of questions at various meetings on the economic forecast for this year and the prognosis for the Green Industry. I always receive curious looks when I start off saying “It depends on who you’re listening to!” Perhaps the following may help to explain. The Federal Reserve Bank of Philadelphia just released its latest survey of professional forecasters and panelists were divided on when the effects of a government fiscal stimulus package would be apparent and how large the effects would be. Thirteen economists reported an effect beginning in the second quarter and 19 think the effect will begin in the third quarter. Two estimated that the effect won’t begin until the fourth quarter, and the remainder didn’t provide answers. The majority, however, expect the stimulus package to have a welcome but moderate effect on the economy. Almost a quarter said tax rebates would have a significant effect on consumer spending, while just 7% expected investment tax credits to have a major impact on business spending. Some 22% said tax rebates would have an insignificant or no effect, while 38% said investment tax credits would have an insignificant or no effect. Overall, economists in the Philadelphia Fed survey raised expectations for GDP contraction this year, but on average still expect the economy to grow, albeit at a sluggish pace. See what I mean!

One step closer to recession???

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Recession worries surged, slamming financial markets, amid signs that service businesses may be stumbling. A key barometer of the strength of the service sector dropped to its lowest level since October 2001 and suggested those businesses are now contracting. ISM’s Non-Manufacturing Business Activity Index registered 41.9% in January, indicating a significant contraction in business activity in January from the seasonally adjusted 54.4% registered in December. This is the first contraction in the non-manufacturing sector since March 2003, when the index registered 46.3%, and the lowest Business Activity Index since registering 40% in October 2001 (one month after 9/11). The next piece of major economic data comes in a week with the retail sales report for January. Reports from retailers already offer cause for concern. Capital Economics today offers another sign of caution, and it goes back to the surprise drop in the ISM’s nonmanufacturing index that shook markets yesterday. The firm tracks the ISM’s service-sector index against real consumer spending and finds they are correlated, meaning that next weeks retail sales report should prove interesting! Even so, most pundits still only put the chance of the U.S. entering recession at 42%. All for now…time to polish the crystal ball.

Recession Resistance: Real or Wishful Thinking?

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During a presentation today (click here to view) at the 2008 Tennessee Nursery and Landscape Association Winter Education conference, I emphasized what I feel is the key business strategy that growers, landscape service firms, and retailers must embrace in order to survive the maturity stage of the green industry life cycle – differentiation – that is, specializing by product, services offered, customer type, or geographic area. Of course, in setting the stage for this differentiation discussion, current industry trends had to be reviewed to prove the initial supposition that the green industry is indeed maturing. Trends in grower-level nursery and greenhouse sales, DIY lawn and garden activities, and the recent growth in lawn & landscape services were presented, with several anecdotal observations including the industry’s historical recession resistance, correlation to housing starts, and factors affecting the cost-price squeeze being felt by all industry participants. No sooner had I packed away my laptop away and turned my blackberry back on did I receive an email from my esteemed colleague, Dr. Marvin Miller of Ball Horticulture, sharing a recent pontificating regarding the very concept of recession resistance that I had just discussed. Marvin writes:

“You might hear comments suggesting our industry has always been recession proof, but that is a piece of “ancient history.” Historically, when the industry was dominated by cut flowers and many of these were used for funerals and other traditional occasions, the industry may have been somewhat resilient even in times of economic stress. Over the last 30 years, our society’s use of funeral flowers has dramatically declined, but more importantly, the majority of purchases of our industry’s products are now focused in less tradition-bound occasions. Indeed, during the late-1980s recession, our industry was affected, as hotel after hotel removed foliage plants from their atria and lobbies in cost-cutting initiatives; it was the weekly maintenance of these plants that was more of concern than the cost of the plants per se. Similarly, supermarket sales of floricultural products slowed during that recession, as consumers found a way to cut back on their grocery bills by reducing self-consumption.

Today, the bedding/garden category so dominates domestic production and accounts for a major share of consumption. If a recession does come, we may be writing a different story altogether on its effect on industry sales. Some would argue that we will be affected as consumers find another way to save money. Others might argue that consumers will save on vacations and other travel costs and instead spend that time at home, perhaps, spending even more effort on their own garden. I know if I owned a garden center right now, I would certainly be preparing POP materials that expressed the sentiment that one should “plant a little vacation paradise in your own backyard.” Certainly, one could argue that a good share of our industry’s sales go to folks that will feel proportionately less pain during a recession; in this scenario, independent garden centers may fare much better than chain stores focusing on consumers with more modest incomes. Whatever the outcome, the next few months will be interesting.”

I couldn’t agree more Marvin. In a follow-up phone conversation later in the day, we agreed that this phenomenon of recession resistance can be validated quite readily anecdotally, but proving it with actual data is a little trickier. Personally, I like to point to the most recent recessionary period (2001) for comparative purposes due to its similarity to the current economic conditions in which we find ourselves (see earlier posts). In the 2001-02 period, grower-level sales continued to expand, as well as DIY lawn & garden activities and landscape services demanded. It wasn’t until after the recession was over that DIY lawn & garden retail sales started declining. This was perhaps more a result of Boomers maturing and demanding more DSIFM (do-some-of-it-for-me) services than any post-recessionary effects. A perfect proof of our theorem? Maybe. I think I’ll reserve that conclusion until at least the 1st quarter of 2009!