Survey Says: It's the Economy, stupid

Have we heard or seen that line enough this election season already?

Many of us are already putting final plans for 2008 in motion, and are looking ahead to 2009. With a Presidential election less than 30 days away, I'm certainly not in any position to predict the future of our economy, our automotive industry, or the election turnout itself. But the truth is, I just can't help myself. Besides, there are indicators and discussions of which we should all take note as we prepare our businesses for 2009.

From the DOT: American Driving Reaches Eighth Month of Steady Decline
Data released by the U.S. Department of Transportation shows that, since last November, Americans have driven 53.2 billion miles less than they did over the same period a year earlier – topping the 1970s’ total decline of 49.3 billion miles. ...Americans drove 4.7 percent less, or 12.2 billion miles fewer, in June 2008 than June 2007. The decline is most evident in rural travel, which has fallen by 4 percent – compared to the 1.2 percent decline in urban miles traveled – since the trend began last November. The decline in miles driven is similar to the two oil crisis of the '70s. (Data Source: August 13, 2008,
Calculated Risk: Finance & Economics.)
When Americans drive fewer miles on their vehicles, consumables (tires, parts, etc.) and preventative maintenance (oil changes, filter changes, etc.) tend to be required less. As certain services are being performed less, mechanics are faced with two certainties:
they will have to find other jobs to pick up the slack within their employment - for instance, a shop will try to perform more oil changes or PM checks, when people begin to reduce their scheduled maintenance because they're not hitting the mileage points
or they reduce time on current job (because the business is not coming to their door) and find other jobs to pick up the slack.
Historically, during a period of recession, the mobile tool jobbers business will pick up, as more technicians perform "shadetree mechanics", working on weekends outside their shop to supplement their income.

However, mobile jobbers business is reported as relatively soft in the U.S. through the second quarter (Snap-on US sales down 4.1%, Danaher down 4% in their tool segment, Stanley's revenues within North American automotive repair tools continue to be adversely impacted by the U.S. economy. Segment profit as a percent of sales declined versus the prior year driven by inflation, unfavorable product mix and strategic investments in emerging markets and Stanley Fulfillment System initiatives, according to annual reports) and into September (anecdotally). The same can be said for many other tool and equipment companies this year. Many faced a soft 1st quarter, saw a slight rally in the 2nd quarter, expected flat to a slight increase in the 3rd quarter, but instead had more dismal sales. Equipment sales are really lagging, primarily due to the credit crunch. Right now, I am not hearing much positive commentary from the field about the 4th quarter or into 2009.

There are talks of cutbacks and layoffs, and some customers have already begun to lay people off or reduce hours. Warehouse distributors are not taking advantage of quarterly rebates, because their warehouses are already full and they can't afford to risk cash-flow for inventory that may or may not move in 30-90 days. Mobile distributors are having a tough time getting new dealers set-up because they can't get financing for their new businesses. That being said, everyone is starting to get more creative in how they approach the market and as they look for new markets.

When technicians aren't working as much, they're not replacing older tools, nor are they interested in investing in new tools when they have to make a choice between groceries, gas, or tools. Especially, now that the first several waves of price increases on tools and equipment have hit the streets. There are some tools and equipment being sold today for 10% to 30% more than they would have cost a technician a year ago, simply because of the rising costs of raw materials that manufacturers have seen over the past 18 months. They've finally been able to pass some of their costs along to the distributor and ultimately the consumer.

So - no quick answers, no clear direction. However, here are my predictions for the final months of 2008 and early 2009:

1 - We will have a Presidential election and a man will win.
2 - The "Wall Street/Main Street Bailout" will pass.
3 - Credit will remain tight as the government sets tighter standards - thus continuing to make it difficult for some businesses to grow. In theory, this will weed out the weaker businesses, and ultimately the stronger, better-run companies will thrive.
4 - Most indicators for the automotive industry will continue to decline (miles driven, tires replaced, new cars manufactured/sold) for the next 6 months at a minimum.
5 - In an effort to keep people fully employed, our government will continue to run a deficit, because the private sector will not invest enough to increase production and reverse the recession. Additionally, we will see an increase in subsidies (this may help the automotive sector if the subsidies are available to the domestic Big 3).
6 - The price of oil, and subsequently gasoline, will continue to play a big part in the public's sense of well-being and trust in the government.
7 - no matter what any politician says between now and the election - taxes will go up.

Random Recession Thoughts on Our Biz

These are just a few observations I made after discussing business conditions with several industry experts last month. These are the result of their in-depth discussions with more than 500 shop owners:

Are we in a Profitability Crisis? By "we" I mean, are independent repair shops in short-term and possibly long-term trouble? Well, let's look at the facts. Every year, it appears there are more and more shops just struggling to stay afloat. Most shops are in business 25 - 27 years. These shops might like to get bigger and more profitable and generate more business, but they struggle to stay alive. They are working harder and making less. Think about it - broken cars are disappearing. Vehicle reliability continues to grow, as everything lasts longer and works better.

Here are the challenges we see for the Independent Shop Owner:

Profitable maintenance work is going to the most aggressive marketers. Many shop owners are working on cars more and more, in an effort to control costs and profits. What is happening instead is they are not focusing on growing their business. Too many shops have little or no equity and operate on a hand-to-mouth basis. Speaking with a major supplier of diagnosis and repair information for the shop, they said the NUMBER ONE reason they lose customers is: That customer goes out of business.

Review the list below. Do any of these challenges apply to you?

• Low or uncontrolled margins, due to a lack of focus on profitable business, or perhaps focusing on the wrong part of your business
• Getting out of the habit of selling scheduled or preventive maintenance - we call this "upselling". Are you doing it enough?
• Ineffective, mis-directed or non-existent marketing
• Poor customer follow-up
• Low customer visit frequency
• Inneffective access to customer/vehicle and their repair hisotry
• Multi-shop customers - these are the customers who go to a repair shop for repairs, but to their dealership for maintenance or a tire shop for tires. (this is your opportunity to get them to your shop with a Maintenance Schedule of your own, based on the manufacturer's guidelines)
• Bargain shopper customer
• Poor customer retention
• A future challenge - getting and keeping qualified professional technicians, service writers and counter people

Don't let this happen to you. Manage your business.

With the price of gas continuing to rise, vehicle owners are looking for ways to get better fuel economy and make their vehicles last longer. This is the right time for you to look for opportunities to increase your scheduled maintenance business. Work to make the "repair event" (a breakdown or loss) less of a factor in your shop. Maintenance work can be profitable. It should not be left to the car dealerships.

Understand that sometimes your opportunity for growth is coming from a highly competitive segment. Increasingly we are seeing dealers and the large chains marketing and promoting their services to YOUR customer. Quick lubes and tire chains, previously single-market type of outlets, are now looking to expand their business into mechanical service.

New technologies are being built on top of the old technologies that you are familiar with, leading to pyramid systems. Transmission and drivetrain, chassis (active damper system), restraint (dual state/dual threshold front airbags), comfort (air filtration), brakes and crash avoidance are just some of the areas in transition. Keep up with the changes.

In short, in order to be profitable and continue to grow you must find the tools that will help you improve your business and your performance. Then purchase them and put them to work. Join a professional network to learn best practices from your competitors and peers. Stay current with changing technologies. Make sure you and your staff have access to the latest vehicle information. You will be glad you did.

Britney or Recession?

Two words I've heard too often in the past few weeks.

In macroeconomics, a recession is a decline in a country's gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year. In the United States, GDP is officially tracked by the Commerce Department's Bureau of Economic Analysis. An alternative, less accepted definition of recession is a downward trend in the rate of actual GDP growth as promoted by the business-cycle dating committee of the National Bureau of Economic Research.[1] That private organization defines a recession more ambiguously as "a significant decline in economic activity spread across the economy, lasting more than a few months." A recession may involve simultaneous declines in measures of overall economic activity such as employment, investment, and corporate profits. Recessions may be associated with falling prices (deflation), or, alternatively, sharply rising prices (inflation) in a process known as stagflation. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called economic collapse. Newspaper columnist Sidney J. Harris distinguished terms this way: "a recession is when your neighbor loses his job; a depression is when you lose your job."
Market-oriented economies are characterized by economic cycles, but actual recessions (declines in economic activity) do not always result. There is much debate as to whether government intervention smoothes the cycle (see Keynesianism), exaggerates it (see Real business cycle theory), or even creates it (see monetarism).

I think it's time we also debated the effect the media plays in our economy - if enough people hear, read, or blog about it, does it make it true?

Believe it or not, most economists say we've seen a recession in the U.S. every 6 - 8 years. Some businesses (like housing) or regions (like Michigan and NE Ohio) are already in a recession, based on the definition above.

So, what types of business will survive a recession, and what types hold up pretty well during a recession? Two things we know for sure - death and taxes. Therefore, the funeral home guys and the tax accountants are pretty safe during a recession. Safe to say that doctors and insurance people do ok as well.

Carmakers and car dealers often have a tough time during a recession, because when times get tough, people tend to put off buying a new car, it's just too scary to make that longer-term decision. But how about your business? Are you recession-proof or recession-resistant?

Here are some strategies to think about as we consider the effects of a recession nationwide:

1 - It is more important now than ever to keep a close eye on your competitors' pricing. As money becomes tight and consumer spending contracts, some businesses will cut prices as demand dries up. You need to be aware of what is going on in your marketplace, and react (or act) appropriately.

2 - Watch your debt load and cash flow. Even though the Fed reduced "an" interest rate this week, it may not necessarily make it any easier for a business owner to borrow more money to get through a downturn. Review costs and eliminate waste. (Good advice anytime, but during a recession this can mean the difference between staying in business or closing the doors.)

3 - Talk to your customers. Find out if they plan to reduce their regular maintenance, or if they are putting off major purchase and respond accordingly. If your regular customers plan to cut back on repairs, you need to widen the net you cast and develop new customers and new markets to make up for the lost income, or you will need to make changes to cope with the loss.

Surviving a recession as a business requires strategies that you probably use all year round. It's just more important now to keep them top of mind and in effect.

The "R" Word

Dare we say it? Recession. There are whispers of it on the evening news. It's coming, they say - sort of like Thanksgiving and Christmas. Unlike the holidays, we don't know when Recession, the univited guest, will arrive.

I vaguely remember the last recession - 1981-82, I was still in college and not yet fully-employed. I remember going home during the winter holiday to a house kept a "comfortable" 65 degrees in December and January, an attempt by mother to keep heating costs to a minimum. I also thought it was her unveiled attempt to make me return to college sooner, but that's another blog....

Back to this year's recession...
What do we know about business? Number one - there are business cycles. Just because it's 2007 and a woman may be running for President of the U.S., does not mean the business cycle has been recalled, rejected or repealed.
The housing collapse continues. According to a recent article in Newsweek, New-home starts are now 47% below their peak of January 2006, and still declining. As the inventory of unsold homes continues to grow, their prices come down. Nationally, prices in August were down 4.4% from the previous year, except in Atlanta, Charlott, NC, Dalls, Portland, OR, and Seattle). Go figure.
Oil prices continue to rise. Media-types and industry analysts are predicting $100/barrel before the end of the year.
Credit continues to tighten. The incredible losses being felt on subprime mortgages (typically weak borrowers) are starting to squeeze the lending standards for better borrowers - leading to tighter lending practices.
The good news? Export growth is strong - projected to be up 16% by year's end, and the federal gov't continues to spend - up 7%
So why all the hand-wringing? Is a recession good or bad?
A recession usually means higher unemployment, weaker profits, and more stress at headquarters. According to Newsweek magazine, there have been 10 recessions since World War II, one about every six years, and they've generally lasted 10 months.
There are benefits to a recession - though anyone who loses their job as a result would argue. For instance, a recession will slow inflation. This means prices can't go through the roof, of course neither can wages. Also a recession can help reduce bad corporate investments and risky financial speculation. When credit gets tight, the banks look at investments a little bit differently, don't they? Short-term - a recession can be tough. But long-term, it can make our economy healthier. Quite possibly, it could lead to a reduction in oil prices and further reduce the price of a new home (which could spur new home sales and allow more people to be able to afford a new home).
There are two big questions. What will the Fed do next? What will the big corporations be reporting for profits in the next week or two?