I'm a fan of looking outside my industry for fresh ways of solving problems, and I was delighted last month at SpaExec NYC to have a chance to do just that.
Leo Renaghan, Emeritus Professor from the Cornell University School of Hotel Administration, delivered the keynote address, "Creating Customer Value in a Down Economy." Providing insights into the social and emotional factors that affect economic decision-making, he encouraged the spa marketers in attendance to reframe our marketing messages to increase perceived value.
His thoughts on pricing impacted me the most. He explained that when consumers are given a choice of soft drink sizes that includes Small, Medium and Large, Medium beverages are sold the most. When Extra Large is added to the choices, Large beverages are the best sellers. Why?
Consumers perceive the Large to be the best value, but only when juxtaposed with Extra Large.
So perceived value is very much about context, and pricing has an enormous impact on perceived value. Yet the spa industry's understanding of the price-value equation is only just evolving. What sort of pricing context do we offer our customers? As little as possible, it seems. This probably springs from a shared misapprehension that we are "above" pricing tactics, such as dropping a service price to $99 from $100. In any other industry, such practices are accepted. But the spa industry has a stubborn affection for increments of $5.
It's not just about reducing price. Another example Renaghan provided was the improvement in sales that followed a product when its price was adjusted from $105 to $119.
How could one apply this example to services sold in the spa? At our spa, we decided to roll out a new promotion, called "Small Indulgences," designed to appeal to consumer's thawing desire to treat themselves well after months of sensible behavior. American consumers don't seem to do well with privation, and thought the "I deserve it" ethos is now officially unfashionable, it is also utterly indelible.
Small Indulgences was inspired by a very similar promotion being offered by one of the spas in our Spa Leadership Round Table, a group of Bay Area spas that get together every other month to share best practices. Avant Garde, led by the irrepressibly creative marketer Blanca Caballero, has been running their "Spa Tapas" promotion with great success for over a year.
We decided we wanted to focus attention on our menu of 45 minute spa treatments, which are normally priced at $75, as well as a luxury pedicure that is 75 minutes, for $75. So our menu consisted of a facial treatment, a massage, and a pedicure, to keep things simple.
One "indulgence" can be had for just $69 (a mere $6 off its normal price, a discount that most consumers would sniff at were it described as "9% off.") Two can be purchased for $129, and three can be had for $199. And in every case, the discount is less than 10%.
Voila! Small, medium and large. (extra large will be tested next!) The consumer suddenly has choice. They're in the driver's seat. The first purchase, the single Indulgence, is virtually a no-brainer, because that price point is so low. It opens what I call the "shopping door" in a consumer's head. (I'm sure there is a real scientific term for this phenomenon: you agonize for a half hour about whether to buy the dress...yet once you decide to buy it, you add a pair of shoes and a cute shawl. What just happened???)
So, while they're convinced that they deserve one little Indulgence...golly, that "Medium" starts looking good. Two spa treatments for $129? You can't beat that.
We launched the promotion through our favorite medium, the e mail blast, limiting it to weekdays. We had a strong response, stronger than we got for our "Buy a full session treatment and receive an additional 30 minutes of treatment with our compliments," which of course is a much better value.
This is yet another cautionary tale for folks who think throwing discounts at their customers is the best way to improve sales. We call discounting the "D" bomb, but I think "D" is the grade that marketers deserve if deep discounting is all they can come up with. (Come to the front of the class and write on the chalkboard "I won't mindlessly discount my great spa services" 100 times!)
"Small Indulgences" doesn't tear down our brand, or create expectations that more and more free stuff will be shoveled out as time goes on. It actually enables a new guest to try our spa, or an infrequent visitor to return more often; it taps into the midmarket price point without diminishing our brand promise. Wouldn't you rather have a bona fide spa experience than visit a storefront budget massage place? (Hint, luxury spa operators: there is a way to beat 'em at their own game, and it doesn't have to cost you giant chunks of margin.)
Renaghan recommended the book "Predictably Irrational," as a great introduction into the often baffling art and science of predicting consumer behavior. I can't wait to read it!
Showing posts with label recession. Show all posts
Showing posts with label recession. Show all posts
Tuesday, May 26, 2009
Monday, March 2, 2009
Coming Soon to a Spa Near You: Unions!
I'm a small business owner who voted for President Obama, with one big reservation: his support for the controversial "Employee Free Choice Act," which fundamentally changes the process by which employees can be organized by a labor union.
According to the National Federation of Independent Business, under the new card-check system mandated by the Employee Free Choice Act, "a union gathers authorization cards signed by workers that express their desire to unionize. The unions would be able to collect these cards from your employees and independent contractors for as long as it takes to get 50 percent plus one," says author Lena Anthony, who penned an article on the topic for the current issue of NFIB's My Business magazine. (www.mybusinessmag.com)
Under current law, the "card check" system is a voluntary option for companies. However, the preferred method for most employers is a secret ballot, which is supervised by the National Labor Relations Board.
"The NFIB believes a secret ballot election administered and supervised by the NLRB is the only way to protect the integrity of a worker's right to vote because it is a more accurate indicator than authorizing cards of whether employees actually wish to be recognized by a union. Each employee's choice is made in the privacy of a voting booth, with neither employer or union knowing how the individual voted," explains Anthony.
Enabling employees to vote privately on whether to unionize seems to be the best way to prevent manipulation and intimidation by either the employer or union organizers. The bill, named the "Employee Free Choice Act" (remember the "Clear Skies Act"? Sounds like the same folks named this one) there is an implication that employees currently don't have a free choice. Hello? Secret ballot? Reminds me of how we elect...a President!
Call me an idealist, but my belief is that if all businesses were run well and run ethically, we wouldn't have a demand for labor unions. Alas, we know that there are plenty of badly run businesses out there, and employees that are badly treated, and in a bad economy, things will likely get worse.
I think it's a testimonial to the core values of the spa industry that there are few unionized operations. However, unions would take a dim view of my perspective because like all other institutions, they now exist, in part, to perpetuate themselves as institutions. They need and want more money, like institutions do.
Yet union coffers have been dwindling since the 1980's. Perhaps the decline in labor union dues is a sign that the "price value" equation offered by unions has lost some of its appeal--after all, union representation is a service that employees pay for.
However, the conclusion that's been drawn in Washington by politicians that rely on union support is that this decline is due to the fact that it's too hard to organize. Hmmmm. I realize the President owes a debt of gratitude to organized labor for his victory, but I would like to finally see a President who pays more than lip service to the idea that this nation is sustained, built and ultimately healed by small business. And I've yet to meet a small business owner that thinks things run better after their company was unionized.
As hard as it is to make a go of it now, if the Employee Free Choice Act becomes reality, your path to profitability will be that much steeper. Don't think you're safe because you're small; it's actually easier to unionize small businesses. Under the card-check system, you won't even know you've been organized until you receive the notification that your spa is, voila, a union shop, says NFIB Executive Vice President Dan Danner. "Then the clock starts ticking for you to agree on a contract. If you can't agree on a contract within 120 working days, the Employee Free Choice Act mandates compulsory, binding arbitration on the employer and the employees as part of the collective bargaining process."
If they're forced into a collective bargaining situation, I know plenty of spa owners who will throw in the towel. We all know that there are easier ways to make a living than by employing people, even without having to navigate the delicate protocols of operating a union shop. Many an esthetician-turned-spa owner will likely just turn esthetician again, and slip off into the peace and quiet of a more profitable private practice. (And heaven forfend, we'll have yet another batch of spa consultants flooding the market!)
Personal service businesses are old school, old economy, and often labors of love. When labor doesn't love us back...beleagered small business owners will find other ways to express our entrepreneurial urges. And I guarantee you they will involve fewer, if any, employees.
Unfortunately, we small business owners are a squirmy bunch. We're independent, we don't play well with others and we're politically all over the map. (Instead of lobbying, we'd rather do something productive--like generate two-thirds of the jobs in this nation.)
If our new government is serious about job creation, the first order of business is to ensure that it's easier, not harder, for companies to succeed, and to keep employing the workers we currently have. I desperately hope that one of President Obama's first "shovel ready projects" isn't digging a grave for small business.
Please contact your US Senator, forward or excerpt this blog wantonly, and learn more about the Employee Free Choice Act.
According to the National Federation of Independent Business, under the new card-check system mandated by the Employee Free Choice Act, "a union gathers authorization cards signed by workers that express their desire to unionize. The unions would be able to collect these cards from your employees and independent contractors for as long as it takes to get 50 percent plus one," says author Lena Anthony, who penned an article on the topic for the current issue of NFIB's My Business magazine. (www.mybusinessmag.com)
Under current law, the "card check" system is a voluntary option for companies. However, the preferred method for most employers is a secret ballot, which is supervised by the National Labor Relations Board.
"The NFIB believes a secret ballot election administered and supervised by the NLRB is the only way to protect the integrity of a worker's right to vote because it is a more accurate indicator than authorizing cards of whether employees actually wish to be recognized by a union. Each employee's choice is made in the privacy of a voting booth, with neither employer or union knowing how the individual voted," explains Anthony.
Enabling employees to vote privately on whether to unionize seems to be the best way to prevent manipulation and intimidation by either the employer or union organizers. The bill, named the "Employee Free Choice Act" (remember the "Clear Skies Act"? Sounds like the same folks named this one) there is an implication that employees currently don't have a free choice. Hello? Secret ballot? Reminds me of how we elect...a President!
Call me an idealist, but my belief is that if all businesses were run well and run ethically, we wouldn't have a demand for labor unions. Alas, we know that there are plenty of badly run businesses out there, and employees that are badly treated, and in a bad economy, things will likely get worse.
I think it's a testimonial to the core values of the spa industry that there are few unionized operations. However, unions would take a dim view of my perspective because like all other institutions, they now exist, in part, to perpetuate themselves as institutions. They need and want more money, like institutions do.
Yet union coffers have been dwindling since the 1980's. Perhaps the decline in labor union dues is a sign that the "price value" equation offered by unions has lost some of its appeal--after all, union representation is a service that employees pay for.
However, the conclusion that's been drawn in Washington by politicians that rely on union support is that this decline is due to the fact that it's too hard to organize. Hmmmm. I realize the President owes a debt of gratitude to organized labor for his victory, but I would like to finally see a President who pays more than lip service to the idea that this nation is sustained, built and ultimately healed by small business. And I've yet to meet a small business owner that thinks things run better after their company was unionized.
As hard as it is to make a go of it now, if the Employee Free Choice Act becomes reality, your path to profitability will be that much steeper. Don't think you're safe because you're small; it's actually easier to unionize small businesses. Under the card-check system, you won't even know you've been organized until you receive the notification that your spa is, voila, a union shop, says NFIB Executive Vice President Dan Danner. "Then the clock starts ticking for you to agree on a contract. If you can't agree on a contract within 120 working days, the Employee Free Choice Act mandates compulsory, binding arbitration on the employer and the employees as part of the collective bargaining process."
If they're forced into a collective bargaining situation, I know plenty of spa owners who will throw in the towel. We all know that there are easier ways to make a living than by employing people, even without having to navigate the delicate protocols of operating a union shop. Many an esthetician-turned-spa owner will likely just turn esthetician again, and slip off into the peace and quiet of a more profitable private practice. (And heaven forfend, we'll have yet another batch of spa consultants flooding the market!)
Personal service businesses are old school, old economy, and often labors of love. When labor doesn't love us back...beleagered small business owners will find other ways to express our entrepreneurial urges. And I guarantee you they will involve fewer, if any, employees.
Unfortunately, we small business owners are a squirmy bunch. We're independent, we don't play well with others and we're politically all over the map. (Instead of lobbying, we'd rather do something productive--like generate two-thirds of the jobs in this nation.)
If our new government is serious about job creation, the first order of business is to ensure that it's easier, not harder, for companies to succeed, and to keep employing the workers we currently have. I desperately hope that one of President Obama's first "shovel ready projects" isn't digging a grave for small business.
Please contact your US Senator, forward or excerpt this blog wantonly, and learn more about the Employee Free Choice Act.
Tuesday, January 27, 2009
The Recession and Your Spa Business: What's Ahead?
How did you start your day today? If you’re like me, you attempted to divine what sort of mood the country was in when you got up, checking the news as you got your game face on. The big story (as it’s been for awhile) was layoffs. I’m sure we were both wondering what all the economic doom and gloom meant for our discretionary-income driven spa businesses.
I have to say, tonight I feel I am a bit closer to getting my arms around this confusing mess. I had the good fortune to hear Christoper Thornberg, an economist, speak at my Entrepreneur’s Organization chapter event in Palo Alto. (If you own a business with at least $1 million in annual sales, you should join your local chapter of this brilliant business organization—now!)
Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He’s a principal at Beacon Economics, an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues. As part of the California Council of Economic Advisors, Dr. Thornberg advises State Controller John Chiang on the state’s crucial economic issues.
During his lively and often very funny talk (I think he might be able to bill himself as the Lewis Black of Economics) I took copious notes, hoping to absorb and share as much of it with you as possible. One thing the spa industry doesn’t do much is look outward. Indeed, we’ve spent years congratulating ourselves on our fabulousness. So it’s a real blow to our pride to realize we’re subject to the same laws of business gravity as everyone else. And that, perhaps, we are far less prepared than many other businesses to weather this storm.
Here are some of the key ideas I was able to take away from Thornberg’s talk.
- Recessions follow huge imbalances. (See: dot bomb) For this one, we had three big ones: housing, finance, and excessive consumer spending. Before they blow up, these massive imbalances/bubbles are usually accompanied by what he calls ‘the four most dangerous words in economics’: “This time it’s different!” (If you still believe that, I have a rental property in Arizona I’d like to sell you.)
- We need to stop watching what Wall Street does, and looking to the stock market as a barometer of things to come. I’ve already resolved: no more reading the Wall Street Journal in the morning. Published at ground zero of the economic collapse, it’s immersed in its own toxic habitat of doom and gloom. He called equity markets “the thirteen year old daughter of the economy”—in other words, major drama queens. He quoted a Wall Street financial advisor, who proclaimed late last year that “there are two positions out there—cash, and fetal.” Do we really want to believe this? If we’re to succeed in this climate, we have to make our own weather (see my previous blog on this subject!)
- It’s never as good as you think, and it’s never as bad as you think. Consumer and business sentiment has rocketed from denial (the party is never going to end; the housing market is going to have a soft landing) to abject hysteria (the US economy has forever lost its mojo, and we’ll be a bit player on the world stage going forward, a new Dark Age is beginning, etc.) A couple of years back, Thornberg was one of a few lonely Bears, a party pooper derided for his predictions of financial mayhem and a disastrous real estate crash. Interestingly, he’s now a Bull--while most everyone else is rending their garments and sprinkling ashes on their heads.
- This is not your mother’s Depression. Thornberg scoffs at the notion that we are heading into a depression. However, he’s unstinting in his description of the fine mess we’re in: the worst recession since World War II. As he says, “It’s a normal very bad recession.” His estimate: two more years of hard slogging.
- Unemployment is a lagging indicator. The layoffs that are happening now are not predictors of the future, but symptoms of excesses the past. Companies are finally shedding jobs in response to the falloff in demand for their goods and services. Another great reason not to listen to CNN, MSNBC, etc., while getting ready for work!
- The majority of the drop in consumer spending has happened in the automotive sector and in the decline in the price of gas. (Maybe a reporter will throw that in at the end of the story, but it won’t be the lead.) Services are selling better than products. My controller Roxanne showed me a newspaper story with a graph the other day showing how badly sales had dropped during the 2008 holiday season from 2007. The dropoff was downright dizzying—til you looked more closely at the chart and saw the graph was calibrated in hundredths of percentage points. With all the finger pointing going on right now about “who’s to blame,” it’s amazing to me that the media does not recognize their role in throwing gas on the flames. Granted, we do know that the luxury sector, which lagged behind others in going off the cliff, finally caught up with a startling 35% decline during the holiday season. (Hey, what do we expect for calling the super-affluent demographic “recession proof”?)
- Our national obsession with stopping foreclosures overlooks a very important fact: people shouldn’t keep homes they can’t afford. Foreclosures are just a symptom of the overconsumption that drove this meltdown. Thornberg says simply, “Foreclosures are not necessarily bad for the economy.” To put it in terms business can relate to, once people stop throwing 70% of their income at their mortgage, they can afford to buy other stuff. Of the credit damage that is occurring to many consumers, another businessperson I know remarked, “A couple of years from now, it’ll just be like having a tattoo: a mistake a lot of us made in our past.”
- Bank consolidation ( failure) is going to be a fact of life. 8000 banks will become 4000, says Thornberg. If you have more than $250,000 in a small bank, get it out of there, is his advice. The words “bank failure” strike terror into our hearts, since this phrase is inextricably linked in our minds to the Great Depression. But bank consolidation is inevitable. It will take another two years for all the bankrupt banks to admit that they’re broke. California, says, Thornberg, is filled with these walking-dead “zombie banks.”
- Our concern with ‘what the banks did with our TARP money’ and politicians’ desire for strict accounting demonstrates our and their lack of understanding of how banks work. “It’s like pouring a quart of water into a bucket that’s half full and asking, ‘where did our water go?” Bank lending is down in large part to a decline in demand. Businesses are not expanding right now; they’re shrinking. You don’t borrow money to shrink. That is, unless, you’re broke. And banks aren’t lending to companies that are broke (any more.)
- When banks tighten up lending, the Fed can print more money and put it into the supply. When banks loosen lending practices, the Fed pulls money back out of circulation. (We hope!) Thornberg says banks are still lending money, but not making risky loans. He gave the example of a builder he recently sat next to on a plane. The builder was lamenting the lack of financing for his projects, yet he refused to pay a higher interest rate, inject more than 7% of his own money into a project, or sign a personal guarantee. This may be how it was working a couple of years ago, but not any more. Businesses have to shoulder more risk.
- “We’re on the back end of a twelve year bender and we’re waking up with the mother of all hangovers.” The good news to me here is that, in the words of the twelve-step world, we’ve admitted we have a problem. If we successfully complete our economic rehab program, Thornberg sees positive growth in the second half of 2010. That program should include middle class tax cuts, he says, and helping people save more by spending less. It wasn’t that long ago that the savings rate in the US was 10%. In the past few years, we stopped saving, and developed a real talent for living beyond our means.
- Consumer and business weakness will continue for awhile, though some businesses should see growth by the fourth quarter of this year. Remember, we’ve been in this recession for awhile. It’s not just starting. And one of the few ‘laws of gravity’ in economics is that recovery is inevitable—the market digests its mistakes and slowly gets healthier. But for many of us operating businesses, it’s a grueling test to see who will survive.
- This is the time to look for opportunity. For example, falling home prices mean that those of us with California companies can compete for workers with the rest of the country. There’s been a huge exodus of talent from our state because of the high cost of housing. There’s also opportunity awaiting us in the shakeout, which will correct market saturation. Let’s face it; the country has a few too many spas and spa vendors. I hate to say it, but every time I’ve hit the trade show floor lately I wonder to myself, “Can all these companies possibly be necessary?” Our abundance-loving culture makes it hard to admit such un-Kumbaya thoughts, but we’ll be a healthier industry when we have healthier players. In the meantime, hunker down and renegotiate everything. Have a lease? You may be surprised at your landlord’s willingness to lower it if you commit to a new, longer term. Push back when vendors raise prices.
- Cash is king; if you’ve got it, your company will have the opportunity to buy competitors’ assets for fire sale prices. (See: Warren Buffet. In fact, see his new biography, Snowball. You’ll see as you read it that now is the time to build your empire. If you’d rather not tackle this massive book, which chronicles such fascinating details as the type of packaged snacks he enjoys, just head to the children’s section in the bookstore and re-read the Tortoise and the Hare.) There’s even a chance your competitor will suddenly close his doors and a desperate real estate broker will call you with an opportunity to acquire a fully equipped, operational, just-add-water spa—for the cost of rebranding the place. Leasing companies need to keep the lights on and the parking lots full in their shopping centers. A spa owner I know just walked into precisely this opportunity.
I have to say, I found Thornberg’s talk tonight to be refreshing and even encouraging. I think most of us have been paddling around in the murky pool of this recession, wondering how deep it really is. Just experiencing the sensation of your toes touching the bottom is comforting--even if you’re still in over your head!
I have to say, tonight I feel I am a bit closer to getting my arms around this confusing mess. I had the good fortune to hear Christoper Thornberg, an economist, speak at my Entrepreneur’s Organization chapter event in Palo Alto. (If you own a business with at least $1 million in annual sales, you should join your local chapter of this brilliant business organization—now!)
Thornberg is an expert in the study of regional economies, real estate dynamics, labor markets and business forecasting. He’s a principal at Beacon Economics, an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues. As part of the California Council of Economic Advisors, Dr. Thornberg advises State Controller John Chiang on the state’s crucial economic issues.
During his lively and often very funny talk (I think he might be able to bill himself as the Lewis Black of Economics) I took copious notes, hoping to absorb and share as much of it with you as possible. One thing the spa industry doesn’t do much is look outward. Indeed, we’ve spent years congratulating ourselves on our fabulousness. So it’s a real blow to our pride to realize we’re subject to the same laws of business gravity as everyone else. And that, perhaps, we are far less prepared than many other businesses to weather this storm.
Here are some of the key ideas I was able to take away from Thornberg’s talk.
- Recessions follow huge imbalances. (See: dot bomb) For this one, we had three big ones: housing, finance, and excessive consumer spending. Before they blow up, these massive imbalances/bubbles are usually accompanied by what he calls ‘the four most dangerous words in economics’: “This time it’s different!” (If you still believe that, I have a rental property in Arizona I’d like to sell you.)
- We need to stop watching what Wall Street does, and looking to the stock market as a barometer of things to come. I’ve already resolved: no more reading the Wall Street Journal in the morning. Published at ground zero of the economic collapse, it’s immersed in its own toxic habitat of doom and gloom. He called equity markets “the thirteen year old daughter of the economy”—in other words, major drama queens. He quoted a Wall Street financial advisor, who proclaimed late last year that “there are two positions out there—cash, and fetal.” Do we really want to believe this? If we’re to succeed in this climate, we have to make our own weather (see my previous blog on this subject!)
- It’s never as good as you think, and it’s never as bad as you think. Consumer and business sentiment has rocketed from denial (the party is never going to end; the housing market is going to have a soft landing) to abject hysteria (the US economy has forever lost its mojo, and we’ll be a bit player on the world stage going forward, a new Dark Age is beginning, etc.) A couple of years back, Thornberg was one of a few lonely Bears, a party pooper derided for his predictions of financial mayhem and a disastrous real estate crash. Interestingly, he’s now a Bull--while most everyone else is rending their garments and sprinkling ashes on their heads.
- This is not your mother’s Depression. Thornberg scoffs at the notion that we are heading into a depression. However, he’s unstinting in his description of the fine mess we’re in: the worst recession since World War II. As he says, “It’s a normal very bad recession.” His estimate: two more years of hard slogging.
- Unemployment is a lagging indicator. The layoffs that are happening now are not predictors of the future, but symptoms of excesses the past. Companies are finally shedding jobs in response to the falloff in demand for their goods and services. Another great reason not to listen to CNN, MSNBC, etc., while getting ready for work!
- The majority of the drop in consumer spending has happened in the automotive sector and in the decline in the price of gas. (Maybe a reporter will throw that in at the end of the story, but it won’t be the lead.) Services are selling better than products. My controller Roxanne showed me a newspaper story with a graph the other day showing how badly sales had dropped during the 2008 holiday season from 2007. The dropoff was downright dizzying—til you looked more closely at the chart and saw the graph was calibrated in hundredths of percentage points. With all the finger pointing going on right now about “who’s to blame,” it’s amazing to me that the media does not recognize their role in throwing gas on the flames. Granted, we do know that the luxury sector, which lagged behind others in going off the cliff, finally caught up with a startling 35% decline during the holiday season. (Hey, what do we expect for calling the super-affluent demographic “recession proof”?)
- Our national obsession with stopping foreclosures overlooks a very important fact: people shouldn’t keep homes they can’t afford. Foreclosures are just a symptom of the overconsumption that drove this meltdown. Thornberg says simply, “Foreclosures are not necessarily bad for the economy.” To put it in terms business can relate to, once people stop throwing 70% of their income at their mortgage, they can afford to buy other stuff. Of the credit damage that is occurring to many consumers, another businessperson I know remarked, “A couple of years from now, it’ll just be like having a tattoo: a mistake a lot of us made in our past.”
- Bank consolidation ( failure) is going to be a fact of life. 8000 banks will become 4000, says Thornberg. If you have more than $250,000 in a small bank, get it out of there, is his advice. The words “bank failure” strike terror into our hearts, since this phrase is inextricably linked in our minds to the Great Depression. But bank consolidation is inevitable. It will take another two years for all the bankrupt banks to admit that they’re broke. California, says, Thornberg, is filled with these walking-dead “zombie banks.”
- Our concern with ‘what the banks did with our TARP money’ and politicians’ desire for strict accounting demonstrates our and their lack of understanding of how banks work. “It’s like pouring a quart of water into a bucket that’s half full and asking, ‘where did our water go?” Bank lending is down in large part to a decline in demand. Businesses are not expanding right now; they’re shrinking. You don’t borrow money to shrink. That is, unless, you’re broke. And banks aren’t lending to companies that are broke (any more.)
- When banks tighten up lending, the Fed can print more money and put it into the supply. When banks loosen lending practices, the Fed pulls money back out of circulation. (We hope!) Thornberg says banks are still lending money, but not making risky loans. He gave the example of a builder he recently sat next to on a plane. The builder was lamenting the lack of financing for his projects, yet he refused to pay a higher interest rate, inject more than 7% of his own money into a project, or sign a personal guarantee. This may be how it was working a couple of years ago, but not any more. Businesses have to shoulder more risk.
- “We’re on the back end of a twelve year bender and we’re waking up with the mother of all hangovers.” The good news to me here is that, in the words of the twelve-step world, we’ve admitted we have a problem. If we successfully complete our economic rehab program, Thornberg sees positive growth in the second half of 2010. That program should include middle class tax cuts, he says, and helping people save more by spending less. It wasn’t that long ago that the savings rate in the US was 10%. In the past few years, we stopped saving, and developed a real talent for living beyond our means.
- Consumer and business weakness will continue for awhile, though some businesses should see growth by the fourth quarter of this year. Remember, we’ve been in this recession for awhile. It’s not just starting. And one of the few ‘laws of gravity’ in economics is that recovery is inevitable—the market digests its mistakes and slowly gets healthier. But for many of us operating businesses, it’s a grueling test to see who will survive.
- This is the time to look for opportunity. For example, falling home prices mean that those of us with California companies can compete for workers with the rest of the country. There’s been a huge exodus of talent from our state because of the high cost of housing. There’s also opportunity awaiting us in the shakeout, which will correct market saturation. Let’s face it; the country has a few too many spas and spa vendors. I hate to say it, but every time I’ve hit the trade show floor lately I wonder to myself, “Can all these companies possibly be necessary?” Our abundance-loving culture makes it hard to admit such un-Kumbaya thoughts, but we’ll be a healthier industry when we have healthier players. In the meantime, hunker down and renegotiate everything. Have a lease? You may be surprised at your landlord’s willingness to lower it if you commit to a new, longer term. Push back when vendors raise prices.
- Cash is king; if you’ve got it, your company will have the opportunity to buy competitors’ assets for fire sale prices. (See: Warren Buffet. In fact, see his new biography, Snowball. You’ll see as you read it that now is the time to build your empire. If you’d rather not tackle this massive book, which chronicles such fascinating details as the type of packaged snacks he enjoys, just head to the children’s section in the bookstore and re-read the Tortoise and the Hare.) There’s even a chance your competitor will suddenly close his doors and a desperate real estate broker will call you with an opportunity to acquire a fully equipped, operational, just-add-water spa—for the cost of rebranding the place. Leasing companies need to keep the lights on and the parking lots full in their shopping centers. A spa owner I know just walked into precisely this opportunity.
I have to say, I found Thornberg’s talk tonight to be refreshing and even encouraging. I think most of us have been paddling around in the murky pool of this recession, wondering how deep it really is. Just experiencing the sensation of your toes touching the bottom is comforting--even if you’re still in over your head!
Subscribe to:
Posts (Atom)
