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Forecast 2009
A Stormy Economy Could Dampen The Business Climate In The Coming Year
By Phillip M. Perry
Home foreclosures. Frozen credit. Crippled banks. Sinking stocks. The scary
headlines are everywhere.
No doubt your micro-business is entering the
most challenging economic environment in decades. But what’s that mean to your
operations? What steps can you take to survive and thrive?
Here’s what
the experts have to say.
Position Your Micro-Business For A
Recession
First, the big picture: As we enter 2009 the implosion of
the financial system has strained a business environment already suffering from
a crippled housing market.
“We are now looking at an economy that is
going into a recession,” says Sophia Koropeckyj, managing director of industry
economics at Moody’s Economy.com, a research firm based in West Chester, Pa. “We
anticipate very weak growth through 2009 before the economy gets back on track
in 2010.”
The numbers tell the tale. The most important figure is gross
domestic product (GDP), the yearly total of all goods and services produced in
the U.S. GDP growth for 2009 is expected to be -.05 percent, according to Economy.com. That’s
a considerable softening from the 1.4-percent increase anticipated for 2008 when
final numbers are tallied.
To put these numbers in context, the GDP for
an economy in average growth mode is 2.5 percent. No wonder business people are
bracing for the worst.
“For many companies the financial meltdown feels
like the business equivalent of 9/11,” says Walter Simson, principal of Ventor
LLC, a New York-based management consultancy. “People are expecting big shocks
and bad news.”
The bottom line will be under siege at most businesses.
Corporate profits are expected to decline 5.7 percent in 2009, reports Economy.com. That
comes on the heels of a 6.9-percent drop expected when the numbers for 2008 are
finalized. No rebound in profits is expected until 2010.
To position
your micro-business for a successful ride through these troubled waters, start
by understanding the three big trends that you’ll need to grapple with over the
next 12 months. They are:
- A decline in consumer spending
- A freezing of business credit
- A rise in the cost of goods sold
Prepare For Consumers To Pull
Back
Shed a tear for the consumer borrowing and spending that has
driven the economy in recent times.
“Five years ago consumer spending
represented 65 percent of our economy,” says consultant Simson. “Today that
figure is 70 percent. The reason for the increase has been the availability of
excess credit. Now we are seeing that availability being reduced. As a result we
will see a pullback of consumer spending on discretionary purchases.”
Rising unemployment will only add to consumer angst.
“We are
looking at continuing job losses into the summer of 2009,” says Scott Hoyt,
senior director of consumer economics at
Economy.com. “Job
gains in the second half of 2009, given a growing labor force, will be
insufficient to keep the unemployment rate from rising.”
The
unemployment rate is expected to grow to 7.7 percent by the end of 2009 from the
current level of 6.7 percent.
Job losses, of course, are clearly a
negative when it comes to household income. Total wages in the country are
expected to rise by 2.5 percent in 2009, according to
Economy.com. That
moderation from the 3.6 percent increase of 2008 should put further downward
pressure on sales — especially at retailers.
“Consumers who don’t have
jobs or who are concerned about losing them will be cautious shoppers,” says
Hoyt.
At the same time, the rise in unemployment is not expected to be
great enough to cause a decline in labor costs for employers.
When
incomes are under pressure consumers tend to find alternative sources for pocket
cash. Unfortunately, these sources are also drying up.
“Obviously there
are no capital gains around anymore,” notes Hoyt. “And there is no more
appreciation in home equity, which people have borrowed against in the past.”
Indeed, borrowing any kind of money is more difficult now, even for
consumers who have always paid their bills on time. Even credit card companies
are tightening up.
“Given current trends in the economy, it’s hard to
see where consumers will get money to spend,” says Hoyt.
All of these
factors are coming together to dampen enthusiasm.
“Consumer confidence
is clearly very weak right now,” says Hoyt. “We had been hoping for some
improvement because of lower energy prices, but with the recent events in the
financial markets we are no longer convinced that confidence will improve until
well into 2009.”
Shoppers are expected to cut back in particular on high
ticket goods.
“There is going to be a slowdown in luxury items as well
as in expensive things that people will opt to repair rather than to replace,”
says Marilyn J. Holt, a Seattle-based management consultant. Holt points to her
local hardware store which recently removed a line of expensive toilets from an
end cap display. The substitute? Toilet repair kits that cost just $19.95.
Micro-business owners should plan their inventories for frugal,
cost-conscious customers. Position your offerings as necessary, not
discretionary. Provide lower-cost alternatives to high-priced products and
services. Promote value in your services.
Plan For A Continuing
Credit Crunch
Your own micro-business will probably be confronted
with a credit squeeze similar to your customers’.
“There is currently a
shutting off of access to credit for businesses,” says
Economy.com’s
Koropeckyj. “That will affect not only capital investment, but also the ability
to borrow short term to meet payroll and cover inventory costs.”
As a
business owner, you’ll most likely take a second look at expansion plans.
Capital investment is expected to decline by some 2.7 percent in 2009. That’s a
dramatic pullback from the 3.1 percent expected increase of 2008.
The
credit freeze may even affect your ongoing operations if you become a target of
your bank’s belt tightening.
“I would expect more banks will be calling
clients and saying ‘we want to make some changes to our relationship,’” says
consultant Simson. “That will cause some pain.”
What should you
anticipate?
“A banker might say ‘I want a higher interest rate,’”
suggests Simson. “Or ‘I want more structured terms.’ Or more monitoring of your
financials or a different legal agreement or higher fees. Some bankers might
even say, ‘Maybe you will be happier with another bank.’ Well if three out of
five banks start saying that, you have a credit crunch and you can’t borrow
money at any cost. Such conversations are probably happening in many places even
as we speak.”
Are you in the practice of using one or more credit cards
to fund your inventory and other needs? Be prepared: Your providers may either
lower your credit limit or start beefing up their bills.
“Many of the
financial companies suffering huge losses are big backers of credit cards,” says
management consultant Holt. “So they will be looking closely at making more
profits by upping the costs of their cards to both merchants and users.”
What can business owners do?
“Keep an eye on your cost of
accepting cards. Start to look around for better deals,” advises Holt.
Expect Energy Prices To Increase Your Cost Of Goods And Services
Businesses of all sizes will be hit by an increase in the cost of goods
sold driven by higher energy prices. Pricier fuel translates into higher costs
for production and for transportation to end users, putting pressure on
manufacturers, service businesses and retailers alike.
And on the buy
side, consumers are shelling out cash for energy that they would otherwise spend
on goods and services.
“Home heating costs will be significantly higher
this winter than they were last year,” says Hoyt.
While the cost of oil
has been trending down in recent months, the decline is not steep enough to make
up for the sharp increases of 2008.
“Even if prices go down further they
are not expected to get to where they were earlier in the decade,” says
Koropeckyj.
Look for ways to economize on your energy costs. And don’t
expect that you can pass energy expenses on to customers without compromising
your sales numbers.
Watch For New Ideas And Markets
There
are steps you can take to stay afloat in a rough economy.
Keep looking
for ideas in technology and system improvements to get more done with fewer
labor hours. This has been a winning tactic in recent times.
Productivity increased by 3 percent in 2008, according to
Economy.com. That’s
an improvement over the 1.4 percent of 2007. And there’s more good news ahead:
Productivity growth is expected to increase by 2.5 percent in 2009.
Want
another profit strategy? Look to foreign markets. Exports are expected to
increase by 6.9 percent in 2009, according to
Economy.com. While
that represents a moderation over the 8.78-percent increase clocked in 2008,
there’s still room here for new players.
“There is great opportunity in
export-related capital goods,” says Simson. “If you make a widget that Europeans
can buy, I would get distribution in Europe as quickly as possible. This is a
wonderful time for exports. It will be the only game in town for the next three
years.”
The good news for exporters is that the dollar, despite some
recent strengthening, is expected to remain weak against the euro in 2009. By
the end of this year it will take $1.39 to buy what a single euro can purchase,
according to
Economy.com. That represents only a minor strengthening over
the $1.52 clocked in 2008.
Finally, as you enter the new year, avoid
panic and remember that you can’t cut your way to profitability. Reducing costs
will only take you so far.
You also have to create new initiatives that
boost sales by offering customers real value. And you need to find
cost-effective ways to market your value to customers who are pinched for
spending money.
But plan those moves carefully, keeping one eye on the
risky economic environment.
“Be sure of your projects before you invest
in them,” says Simson. “Take a second look at everything.”