How to Profit in the Coming Recession

Unprepared people get hurt in an economic downturn. But if you have a plan, you can come out stronger than ever

SPECIAL REPORT

Someone once observed that there are no bad predictions; there's only bad timing. Regular readers of this magazine may recall that three years ago I predicted the economy was headed toward a full-scale, across-the-board recession like nothing we'd seen since the early 1980s.

OK, so I was three years early.

These days you don't need the Hubble telescope to see the recession coming. It's not here yet, at least not as we go to press, but I doubt it's more than a few months away. My guess is that by next fall we'll all be dealing with the effects of a general downturn in economic activity. That will be very bad for some companies--and it can be very good for others.

Listen, everyone doesn't get hurt in a recession. I don't want to sound like a cheerleader for bad times, but change creates opportunities, and moving from boom to bust is a big change indeed. Some companies automatically get a boost because of the nature of the industry they're in--collection agencies, for example, or makers and sellers of automotive replacement parts. But even if you're not in a business that usually does well in a recession, it could still turn out to be the best thing that ever happened to your company, provided you've done your homework. The people who get into trouble during a downturn are invariably the ones who go into it unprepared.

How do they get into trouble? In the first place, by thinking the recession won't affect them. That's a real danger if you've never been through one before. There's a natural tendency to approach your first recession in a state of denial. I know I did. You tell yourself that you're too smart to get hurt, or that your company's in a unique niche, or that you could use a breather anyway, or whatever. You just don't want to think about all the bad things that might or might not happen 8, 9, or 10 months down the line.

But when you're drowning in slow accounts receivable and you have to start laying people off, it's too late to come up with a contingency plan. You need one now, and it has to begin with a clear understanding of what you're going to face when the recession hits.

Recessions are not mysterious. They're periods during which the economy gets smaller. Business activity goes down. People buy less and worry more. Everybody looks for ways to save money and conserve cash. The big fear is that you won't be able to pay your bills--and that, as a result, your company will fail.

To do well in such an environment, you have to turn the situation to your advantage. That means mobilizing your entire organization to focus on cash flow and then using the cash you have to maintain and expand your customer base.

There are actually four steps involved. Let's take them one at a time.

Figure out how to become the low-cost provider
The first step is to determine in advance how you could compete on price if you had to.

In a recession everybody competes on price. Why? Because customer attitudes change. During periods of economic growth, customers look for service, reliability, and fair prices and are very loyal to suppliers who provide all three. But when the economy goes south, customers get scared like everybody else. They aren't satisfied with a fair price anymore; they want your lowest possible price. If they don't like what you offer, they look elsewhere.

So you need a plan whereby you'll be able to reduce your prices and yet maintain your profitability. In my storage business, for example, I compete on quality and service, not price, but I could change my strategy overnight if I had to. Our costs are already substantially below the industry average. We figured out a long time ago that we could save a lot of money by building warehouses with very high ceilings, allowing us to store more boxes per square foot than our competitors do. So there's room to cut prices if necessary, assuming we can find ways to save money in other areas of the business.

Understand, I'm not saying I'll be happy to do it. I'd greatly prefer to help my customers reduce their costs in other ways--by giving them something extra for their money or by showing them how to get more bang for their buck. But in a recession, a real recession, you may not have a choice. You may find that without cutting prices, you simply can't compete. In that case, you'd better have a plan to reduce prices profitably or you won't survive.

Watch for the signs, and move fast when you see them
A recession is no time for procrastination. You have to be ahead of the curve or you'll lose whatever advantage you gain by being prepared.

That's especially true when you're dealing with customers. You can't wait for them to tell you your prices are too high. By then you've already become part of the problem. You need to approach them first, right when they're beginning to panic. You need to say, "I know times are hard, and we've figured out how we can save you some money." You can become a hero to your customers--but only if your timing is right.

So when exactly should you move? As soon as you see clear indications that the recession has started. I'm not talking about looking at official statistics or waiting for an announcement on the evening news. If you're paying attention, you'll know the slide has begun long before it surfaces in the media. More to the point, you'll know it's happening in your market. You'll see the signs, not only in your business but among your friends and acquaintances.

What you should look for are changes in both psychology and behavior. Recessions happen when people spend less, but often they spend less because they expect bad times. Anticipating slower sales, companies stop hiring. Projects are put on hold. People don't pay their bills as quickly as they used to. Everyone becomes more conscious of cash.

So I keep my eyes open for any clues that a change is occurring. I notice, for example, when sophisticated people I know start checking prices or cutting back on their purchases. I listen to the gossip among business associates. Most of the time they tell me how unbelievably great they're doing. When they start saying that business is just "good" or "OK," I take it as a bad sign.

Another one is a sudden increase in the number of requests for financial information that businesses are getting from their lenders. You know something's up when the banks stop beating the bushes for new customers and focus instead on the loan covenants of the companies in their portfolios.

But mainly I look at the signs in my own businesses. There are four key indicators I watch closely.

First, I keep track of service requests from current customers as a way of monitoring how they're doing. When their business is good, they move a lot of boxes in and out of our warehouse. I want to know right away if the box traffic slows down, and I want to find out why.

Second, I track the number of unsolicited inquiries we receive from potential customers looking to save money. A significant increase could mean that more people are beginning to feel squeezed.