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!