Tuesday, December 16, 2008

Cleveland Ohio Economy and Small Business Status

Here are some recent observations about the state of the economy, from the viewpoint of a small business owner (I have a few diverse small businesses) that has also been discussing business and sales trends with other small and medium business owners throughout the greater Cleveland, Ohio and Northeast Ohio region. The observations surely do not leave much room for optimism about the economy at present.

Example #1: Home Theater Business
A relative of mine owns a small business providing Cleveland area Home Theater, Audio, and Video installation, sales, and design services - and even though he has been in business for over 10 years, he has never seen business as slow as it is now. His is a business that serves a demographic that would clearly be described as "upper middle class" and/or "upper class".

The clientele that keep my relative's company busy have included coaches from professional sports teams, players from those same teams, doctors, executives, and other rather well compensated individuals. Much of his company business comes by word of mouth and personal referrals. He has never had to advertise in order to obtain more work than his company can handle. But, suddenly, WHAM, this current economic mess has even these rather "upper end" clients hesitating at committing dollars to upgrading or otherwise investing in their home theater, multimedia, and audio-visual needs.

And, if these people are not engaging my relative's business for things like product purchases, wiring and other installation services, design and implementation services, and the like, the "trickle down" effect is immediate: my relative can not afford to keep as many employees active and employed. Sure, his company still sells some home theater and HDTV / digital-television equipment (especially as people hurry to be ready for the February 2009 digital TV cut-over and transition away from analog TV), but when the volume drops to the lowest level he has ever seen, it really puts the pressure on the viability of his company.

Sure, he will make it through the slowdown, but it is not even clear if the business will turn much, if any, profit while trying to maintain employees to handle those jobs that do come through yet. This is what a typical small business in Northeast Ohio is feeling right now - and the rest of the country too I expect.

The market-wide panic, and lack of buying, ripples through causing others to cut back employment and buying, which ripples through... etc. etc. It all becomes a self-fulfilling downturn: people expect a downturn, they alter their expenditure and investment habits, and gee... a slowdown occurs as they expected.

Example #2: Cookbooks
My wife and I authored a Gluten-Free / Wheat-Free Recipes (Desserts) Cook Book that we sell almost exclusively via our online website. Over the past couple years of selling, I noticed this VERY strong inverse correlation between gas prices and my book sales: meaning, when gas prices went up, my sales would slow, and vice-versa.

But, after this last round of super high gas prices, and the precipitous fall to the lowest prices in years, that same pattern of book sales increases that normally accompany the fall in gas prices did not emerge. This was the first time ever that book sales did not increase when gas prices fell!

Fact is, this demonstrates a LOT about how much market panic there is, and how close to the edge everyone has been, and/or is, living - with regards to their finances. Credit cards are maxed out. People have little to zero cash. Credit limits are being cut, making "extra" credit or "excess / available" credit shrink quickly. The results on my book sales are immediate.

Further proof: even discounting our book heavily has made little difference in sales! In the past, if I ran a temporary discount or promotional sale, book sales increased dramatically and in direct response to that short-lived promotion. Now, even deep discounts have made little change to book sales volumes. People do not have, or are not willing to spend, any money - PERIOD. Even though my book can save them money by teaching them how to bake gluten-free items at home (which saves a fortune over pre-made GF diet foods), they STILL hesitate to spend even $20.00 on a book.

The ONLY exception to sales volume has been that our "scratch and dent books" (those with MINOR scratches or bends from banding of boxes on pallets during shipment, etc) have been selling as quickly as we find any in our inventory. Why? Simple: I sell them for under $10! THAT is the price threshold where people feel "OK" about spending I guess. Unreal.

Keep in mind that I performed an online survey a while back about the ideal target price for my book, and overwhelmingly people said it would be a "no brainer" purchase decision if I sold it around $20. Well, that sure changed quickly! More indication of what the economy, and fundamental mentality, is right now - and why this could lead to a full blown Depression if people do not start snapping out of this mood (it cascades everyone -- if purchases are not made for products and services, companies lay off people, and it spirals downward).

How we got here...
That is a long story, but not an overly complex one.

The idiotic move the government made last year by handing our "rebate checks" to people, while gas prices were already insanely high, allowed people to essentially bid gas prices even higher... and all those checks went to cover inflation due to bidding with more dollars for the SAME fixed supply of petroleum (which then rippled through to food, etc.) This worsened the downturn that was starting, but which remained somewhat hidden by massive debt-spending (credit-cards). Credit cards sealed our fate by allowing people to spend more than they really had, all bidding on the same commodities, causing massive commodity inflation, and the gov put the nail in the coffin with rebate checks. Home equity lines and the like, based on inflated home prices from cheap money adjustable-rate or teaser rate loans also contributed to this ability to bid things higher when they otherwise could not have been.

So, here we are post-gas-price-maximum-time after people essentially had their wallets, and bank accounts, sucked dry by the gas pumps under Bush's grand plan to bankrupt the country via insanely poor foreign policy and ludicrous energy policy (one which had us buying petroleum for the Strategic Oil Reserve at the highest prices ever, when supply was constrained like never before) - idiot! So, all of the American money handed out via rebate checks was transferred to President Bush's REAL employer (Saudi Arabia - not the US citizens).

Add on top of this the housing bubble that was created to get us out of our last stock market bubble. Pile on a burgeoning debt - all debt - public, private... it is out of control. But, we are a consumer ecomony, and our only solution to overspending (per politicians) is spend more.

Where things are headed...
Fact is, we have a HUGE problem.
I predict MASSIVE LAYOFFS in January 2009 and February 2009.

MASSIVE - especially if people do not take a chance and spend some money on products and services provided by small businesses. Small businesses employ over 1/2 the workforce. All we here about is businesses that are "too big to fail", but the fact is, widespread failure of small businesses will be catastrophic.

Large businesses will weather the storm just fine and do their usual mass layoffs regardless of their sales volumes. But, small businesses do not have the resources (in general) to keep all their employees on staff for any length of time if revenue streams suddenly dry up or are reduced to a trickle. The government (i.e., US!) is not going to bail US small businesses out... only our customers can by purchasing our products and services.

The observations from my vantage point in Cleveland Ohio are certain to be similar to observations elsewhere in the country. So, if you want to see your own local economy do well, try not to fall too far down the well of fear -- engage your local small businesses when possible, and help them maintain their employees/staffing through this economic mess. These are your friends and neighbors' jobs I am talking about.

As for large companies: I am sick of reading this stuff about companies laying off hundreds or thousands of workers were it costs them $50K, $100K, or MORE on a "per head" basis to lay people off. These unemployed workers will hesitate to spend, and further flood the market of workers seeking work.

I have a better idea for companies, like Adobe for example, to consider. When I hear how they will spend $80K/head (roughly 1yr average salary) to get rid of someone, I find it insane. Instead, tell your workers that, should things NOT improve in a year, they will be out of a job with only a month of severance pay starting ONE YEAR from now, but not immediate. During that year, while still employed, they can look for a job, but they can also focus on adding value to the company and improving efficiency, and if the end result is the company does better than expected, they will KEEP their job(s). And, since they are not part of the unemployment mess, overall market sediment will likely be more optimistic, thus creating a positive impact on the economy, including the company they work for.

I just do not get the whole thing about paying tons of money to get rid of someone - it is rather short-sighted, and furthers the downward economic pressures and overall negative sediment that looms large right now (especially employment fears).  Insane.


DED said...

Who did you use to get your book published?

Mike Eberhart said...

I self-published the book. In fact, my wife and I did all phases of the book production except printing it, which we farmed out to a place that could take a full-color print-ready PDF and turn it into a final product. I had to learn Adobe InDesign, and had to take a LOT of pictures, but in the end, it came out nice.

If you ever want to do a full-color book, drop me a line and I can give you pointers from what I learned along the way (some of what to do, and what NOT to do).

Thanks for asking Ded. m