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by Scott Barancik and Kellye Hunter
 Recession: A period during which the economy not only stops growing but actually shrinks for at least two consecutive quarters. Thankfully, few hot shops in business today have had to cope with a recession. Most opened their doors after 1991, when the most recent downturn ended. As a result, shop owners are more familiar with free-spending clientele than with customers who are suddenly jobless or underemployed for whom luxuries like a $6 bottle of salsa are a faint memory. But guess what? In 2009, the R word is back! But hot shops are not off the hook forever. Though no one can say when for certain, most mainstream economists believe there will be another recession sometime in the next few years. Many are already predicting that the rate of U.S. economic growth will slow from an estimated 3.7 percent in 1997 to between 2.0 percent and 2.5 percent in 1998. The message is clear: shop owners will eventually be abandoned by the economy that has buoyed them the past seven years. However, those who educate themselves in advance and follow a disciplined plan will be better prepared to ride out the storm. Just what can a hot shop owner do to prepare? Fiery Foods Magazine asked George Whalin, a San Marcos, California-based retail consultant, for advice. His suggestions range from value-building and customer thank-you notes, to the computerization of sales and inventory management, to lease renegotiation. WHAT IS A RECESSION?
Recessions play a recurring role in a drama that economists like to call "the business cycle," a circular process by which the economy moves from growth to contraction and back. When the economy is growing, consumers spend easily, and businesses--with the help of low borrowing rates--expand their operations to meet the increasing demand. As businesses grow, they hire more workers, who in turn have more money to spend, which enriches businesses, and so on. At some unpredictable point, however, the party begins to wind down. The pool of available workers falls so low that businesses must pay higher wages to attract them, a cost which is often passed on to consumers in the form of higher prices. Consumers balk at the newly inflated prices, and lenders respond to the price hikes by raising borrowing rates, thereby discouraging further business expansion. As demand for goods and services sinks, businesses begin laying off or cutting the wages of employees, who respond to their new hardship by looking for bargains, eschewing luxuries, and on the whole spending less money. Many businesses in turn see their revenues fall. Between businesses not expanding and consumers not spending, the economy begins to contract. The duration of recessions varies from cycle to cycle, which makes them hard to predict. To confuse matters further, unpredictable external events can hasten their onset. Recent examples include the oil crises of 1973 and 1979, and the Gulf War--all of which helped inspire a downturn. While forecasting is the bread and butter of many economists, suffice it to say there is no consensus on how best to predict recessions. It is also important to remember that when the national economy goes into recession, not all areas of the country will be affected equally. If the next recession hits the computer industry harder than the agriculture sector, for example, Silicon Valley hot shops will probably suffer more than their rural counterparts. But whether the business of a town is cows, chips, or cow chips, recessions are inevitable and they put hot shops at risk. What Impact Will the Next Recession Have on Hot Shops?
Recessions are kind to few and cruel to many. While a discount store may thrive on consumer frugality, hot shops and other purveyors of luxury items are likely to lose business. George Whalin, publisher of George Whalin's Retail Management Letter, predicts that during the next downturn the typical hot shop will see sales revenue drop by as much as 25 percent. Even "hardcore" customers, he says, "are going to buy less often...[and] less [product]." It's not difficult to see why. When consumers are flush with cash, they might not hesitate to purchase a bottle of premium barbecue sauce. In hard times, they may look for less expensive alternatives. Six Ways to Beat the Next Recession
To help hot shop owners prepare for the next recession, Fiery Foods Magazine has assembled a list of suggested steps. As these will show, the key to survival is a combination of cost-cutting, efficiency enhancement, and customer retention. Readers should understand that these recommendations are not intended to be exhaustive or to fit everyone's needs. Shop owners are urged to stay abreast of retail news, to seek counsel from consultants, accountants, mentors and trusted peers, and to follow their own common sense. Suggestion #1: Reject the myth of everlasting economic growth.
According to George Whalin, "retailers may be the single-most optimistic bunch of people you'll ever meet." So what happens when naturally optimistic people open hot shops amidst an economy that delivers seven consecutive years of growth? In some cases, they come to expect that the economy--and their revenues--will grow forever. A Rocky Mountain hot shop owner recently expressed this belief: "I am not preparing for a recession. I don't see it. Am I blind?" According to Steven Pearlstein of the Washington Post, he may be. Pearlstein's analysis of government data shows that the current economic expansion has already lasted two years longer than the post-World War II average. Another retailer, this one in the Pacific Northwest, said he does not pay attention to economic news and believes customers will continue to buy his products at the same rate through the next recession..."Once you enjoy the hot and spicy, it becomes an addiction, a very good addiction...whether it's a recession, a depression, or aggression, I doubt very seriously if they'll give it up." Results from a recent survey of 10 hot food consumers suggest this retailer was correct on the subject of 'addiction,' but wrong to assume that customer purchasing habits would not change. While seven of the 10 consumers surveyed said they considered hot foods a "necessity" or a "way of life," five suggested that if their financial situation worsened they would buy fewer packaged items and whip up more in their own kitchen. Suggestion #2: Build a cash reserve.
We have all heard the expression "save some for a rainy day." But what happens when a rainy day turns into a rainy year, or two? Hot shop owners will face precisely this quandary when the next recession hits and store revenues fall by five, ten, twenty percent or more. The best way to prepare is to set aside cash during more prosperous times. "There's a real benefit to having a long-term business plan that deals with the kind of cash requirements you'll need in case of a business downturn," says consultant Whalin. For some shop owners, building a cash reserve may come at the expense of swifter business expansion. But the alternatives--taking out a loan, dipping into personal net worth, or shutting the shop's doors--are far less palatable. Suggestion #3: Manage inventory more efficiently.
Hot shop owners should always be striving for greater efficiency, and at no time more so than when the economy has soured and store receipts are falling. One relatively inexpensive way to enhance efficiency is to computerize sales and inventory operations. A computer armed with point-of-sale (POS) software not only is faster than pen and paper, it provides the entrepreneur with a whole new set of management tools. With it, for example, a manager can swiftly determine which are the best-selling products, how quickly inventory is turning over, how much of each item to is needed for future demands, and how to divide shelf space most efficiently. POS software also helps the manager avoid locking up cash in slow-moving goods, an extremely important goal during a recession. "There are a number of companies who build very nice, fairly inexpensive in-store computer systems," says consultant Whalin. For shop owners who want to spend less, he adds, pre-packaged POS software is available for under $1,000. Suggestion #4: Renegotiate your lease.
One way businesses manage to survive a recession is by cutting operating costs. For hot shops, this can be tough. Most are Mom-and-Pop operations with little or no labor fat to cut. Rent, too, is a significant cost factor, and because a lease is a contractual agreement, it would seem unchangeable. In fact, a lease can be changed in almost any way, so long as both parties concur. For shop owners trying to cope with lower revenues, the incentive for seeking a lower rent is obvious: to reduce expenses. If lessors refuse to renegotiate, they run the risk that tenants will default, which could mean months of lost rent. If a landlord is absolutely unwilling to agree to a rent reduction, the shop owner might propose an abridgement of the rental term. This gives an early opportunity either to renegotiate the current lease on more favorable terms, or to find a better lease elsewhere. Given that real estate prices usually fall during recessions, finding a cheaper rent would not be difficult. Suggestion #5: Don't cut prices--reward loyal customers. When the economy grows sluggish and revenues begin to taper off, a retailer's first inclination may be to cut prices. For hot shops and other luxury retailers, such a move can do more harm than good. Even if sales do rise enough to offset the slimmer profit margins, a gourmet shop that drops its prices risks cheapening its image. Boston Chicken found this out several years ago. The chain was riding high on a reputation for moderately-priced quality food when it began offering bargain meals. Rather than expanding its market, the move nearly erased the distinction between Boston Chicken and fast food, which alienated some customers and caused revenues to plummet. Instead of cutting prices for all customers, says George Whalin, shop owners ought to focus on rewarding the most loyal, "the ones that will support you through the tough times." For example, during a recession a hot shop owner can mail targeted discount coupons, introduce a frequent-buyer program, send handwritten thank-you notes, or host a customer appreciation party. Suggestion #6: Build value.
Persuading customers to buy premium products at premium prices is a hot shop's fundamental challenge, a task that becomes even more difficult during hard economic times. The solution, according to consultant Whalin, is to build value. What exactly does that mean? "[Value] means selling the selection of products, the quality of products, educating the customer, offering recipes and all sorts of other things." For example, he explains, "if you are selling only a $4 bottle of hot sauce, you have a problem. If you are selling the concept of buying products that will add flavor to your meals, make your life more exciting, make your life more fun, give you the feeling of being in New Orleans or the Caribbean...then it changes the whole dynamic." Whalin cites The Gap as a role model for retailers. During the early 1990s, the clothing store chain thrived not just because of its moderate prices but because customers enjoyed the total Gap experience: its customer service, store layout, product quality, and hip feel. Retailers face so many daily challenges that planning for the future may seem like a luxury. But running a hot shop without a recession plan is like buying an Oklahoma trailer home without twister insurance. "This is a business that has enormous highs and enormous lows," observes Whalin. "If you're a small business and your financial resources are moderately limited...you have to prepare a plan, period." Even as we lament the demise of the current economic expansion, it is important to remember that recessions, like expansions, have a limited life span. Bad things, too, must come to an end. Scott Barancik is a freelance journalist based in Washington, D.C. and a Contributing Writer at the Washington City Paper.
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