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- Recession-Proof Your Retail Business
by Scott Barancik and Kellye Hunter
Six Ways to Beat the Next Recession
by Scott Barancik
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 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. He writes regularly for Fiery Foods Magazine.
Hot Wheels Turn a Quick Profit in Wisconsinby Kellye Hunter
Just last year, John and Shelly Dobson of Appleton, Wisconsin, were looking for a way to transform their love of hot foods into a business--but they didn't want to bite off more than they could chew.
So they began to gather information and ask questions. When Tahiti Joe (Turner), manufacturer of one of their favorite sauces, suggested going to the 1997 National Fiery Foods Show, the Dobsons packed their bags for Albuquerque. "We learned so much there," says John. "We were able to avoid a lot of the mistakes that new companies make."
After that, it was time to put their plan into action, but the proposed expenses of a retail venture were pretty intimidating, says John. Settling into a storefront would involve extensive set-up costs and big advertising expenses to draw customers to their particular location. Additionally, it would probably mean signing a long-term lease, and the store would be in competition with all of the other new stores in the area. So John decided to take an entirely different route, which is how The Pepper Connection, a mobile hot shop carrying sauces, salsas, spices, T-shirts, ristras, and other items, was launched.
The bright red trailer topped with flashing fire engine lights can now be seen in residential driveways, as well as at fairs and craft shows throughout Wisconsin. The Dobsons facilitate Pepper Parties, which are similar to Tupperware parties. Someone agrees to host a party (based on various themes, including tailgate, Mexican, Cajun, and football), then invites guests and cooks food. The Pepper Connection provides exciting condiments, fun demonstrations, recipes, serving suggestions...and order forms. The host earns "Pepper Points" toward discounts on product, and gains a new-found love of hot and spicy foods. "Every person who has hosted a party has ended up working for us," says John, who employs these people as a "floating part-time staff" to help out at trade shows and fairs.
In addition, the Dobsons provide product, particularly wing sauces and hot sauces for Bloody Marys, to local bars; sell by mail-order; and run a Hot Sauce of the Month Club. Sherry, who works full-time for a large retail firm, handles most of the advertising and business aspects, while John tends to the selling and the day-to-day maintenance. After less than one year in business, The Pepper Connection is breaking a little more than even--and is set to do better in its second year because there will be no start-up costs. "My total investment--for stock, trailer, and everything--was $15,000," says John. "With rent, fixtures, utilities, and higher insurance, it probably would have been triple that amount had we gone to a permanent location." And advertising costs are lower too. In the course of its travels, The Pepper Connection trailer is seen by large numbers of people, many of whom are anxious to call the phone number painted on the side.
In the future the Dobsons want to start a hot and spicy distributorship for the upper Midwest, as well as continue to expand their retail interests. John says that eventually--maybe in six years or so--he would like to open a storefront, but not until he has four more trailers and a crew that travels around to the many shows and fairs that are held every week in Wisconsin and the surrounding areas. This means the shop will have a home base, but will still benefit from the huge amount of exposure and recognition that mobility offers, says John. "When people see us coming down the road, they know who we are."
The Pepper Connection
W7326 Winnegamie Dr.
Appleton, WI 54915
PH/FAX: (920) 757-9887
Quarterly Performance of the U.S. Economy, 1990-1997, as Measured by the Percentage Change in Real Gross Domestic Product from the Previous Quarter
As this table shows, the most recent U.S. recession occurred between the 3rd quarter of 1990 and the 1st quarter of 1991. The economy did not fully recover until the 1st quarter of 1992.
1990 I 3.9% II 1.2 III -1.9 IV -4.0 1991 I -2.1 II 1.8 III 1.0 IV 1.0 1992 I 4.7 II 2.5 III 3.0 IV 4.3 1993 I 0.1 II 2.0 III 2.1 IV 5.3 1994 I 3.0 II 4.7 III 1.8 IV 3.6 1995 I 0.9 II 0.3 III 3.0 IV 2.2 1996 I 1.8 II 6.0 III 1.0 IV 4.3 1997 I 4.9 II 3.3 III 3.1Source: U.S. Department of Commerce, Bureau of Economic Analysis, "Survey of Current Business" (January 1998). Data beyond the 3rd quarter of 1997 were not yet available at the time of publication.
Predictions of How the Economy Will Perform in 1998
Few economists believe that the U.S. economy, as measured by changes in the Real Gross Domestic Product, will shrink in 1998. But most believe it will grow more slowly than it did in 1997, when economic activity increased by an estimated 3.7 percent. When The Wall Street Journal (1/2/98) surveyed 55 economists about 1998 GDP growth, their predictions averaged out to +2.3 percent.
Here is what other experts are predicting about economic growth in 1998:
John Huizenga, Deputy Dean, University of Chicago Graduate School of Business: +2.5 percent Source: Business Wire, 12/4/97
Bruce Steinberg, Chief Economist, Merrill Lynch & Company: +2.5 percent
Source: Washington Post, 12/28/97
National Association for Business Economics: +2.4 percent
Source: Birmingham Post-Herald, 11/28/97
Jack Beebe, San Francisco Federal Reserve Bank: +2.0 percent
Source: Washington Post, 12/6/97
Office of Management and Budget, Executive Office of the President: +2.0 percent
Source: "Budget of the United States Government, Mid-Session Review, Fiscal Year 1998"
Business Starts and Failures Among Small Food-Related Retailers (1), 1990-1997
The small food-related retail field has enjoyed steady growth through the 1990s, with 1996 showing the biggest jump in startups. But while an increasing number of entrepreneurs are opening these businesses, the casualty rate remains high. Preliminary 1997 data suggest that for every 10 new shops opened, 4 others shut their doors.
Business Business Starts Failures 1997(2)(3) 428 175 1996(2) 460 122 1995 327 87 1994 324 82 1993 290 83 1992 305 69 1991 266 75 1990 259 63(1) The data above represent starts and failures of businesses listed under Standard Industrial Code (SIC) 5499, 'Miscellaneous Food Stores'. 'Gourmet Shops Retail' is one of six subcategories encompassed by SIC 5499, but separate data by subcategory are not available.
(2) Preliminary data.
(3) Figures for 1997 exclude starts and failures during the month of December.
Source: The Dun & Bradstreet Corporation, Murray Hill, NJ.
