Surviving the Recession
Fear can be a motivator, but it can also lead you into bad decisions, particularly in times like these. I have no doubt that a lot of business owners have spent the past couple of months implementing cost-saving plans and survival strategies that will weaken their companies and damage their long-term prospects. They've done it because they've been afraid, and fear makes us shortsighted. With the economy falling apart around us, we forget that recessions always end. Yes, some businesses will go under, but some companies will emerge stronger. If you want yours to be among the latter, you need to be careful about which costs you cut and which deals you offer your customers.
These thoughts came to mind after my first meeting with another one of the entrepreneurs I'll be following in the months to come. Her name is Lisa Kristine, and she is a fine-art photographer. I met her on a recent trip to San Francisco, where I was taping a video about my book, The Knack. The video producer mentioned that her partner, Lisa, had some questions she wanted to ask me about her photography business. I said I'd be happy to talk to her and asked where she was based. In Sonoma, the producer said, about an hour north of the city, but she also had a gallery in Sausalito, on the other side of the Golden Gate Bridge. As it happened, my wife, Elaine, and I were free the next day, and we arranged to meet Lisa the following afternoon.
As we stepped inside the gallery, we got our first look at Lisa's work. Our reaction was wonderment bordering on awe. The walls were covered with stunning photographs of people in far-off places: nomads in the Sahara, monks in Myanmar, nuns in Angkor Wat. After exchanging introductions, Lisa and I found a quiet café where we could talk.
I began, as I usually do, by asking Lisa about her life -- where she lived, what family she had, what she liked to do, what her personal goals were. I also asked about her business. "I have my financials here," she said. "I have a lot of questions."
"We'll get to those," I said. "Why don't you tell me what your business does."
She said she had four galleries, the one in Sausalito, plus one in Sonoma, another in Mendocino, and another in Santa Fe, New Mexico. At the time, all but the one in Mendocino were open seven days a week, eight hours a day. They carried her work exclusively, and each had an on-site manager. It had taken her a while to find the right people, Lisa said, but she felt great about the managers she now employed. She also had a studio, where she made her own prints, including large, signed limited editions that sold for $3,000 to $30,000 and smaller, unsigned versions available for $85 and $150. She had produced two books of her photographs and two DVDs about her work, which sold for $75 and $25 each, respectively. She also sold her photographs at shows and on the Web at lisakristine.com.
"When do you take the photographs?"
"I go on shoots," she said, explaining that she lives with the people she photographs. "I try to do two to three a year, and I'm away anywhere from a month to two months for each one."
Finally, I said, "OK, let's talk about what's going on now."
"My business is off 50 percent in the past two months, and I don't know what to do," Lisa said.
"Fifty percent," I repeated. "That's not surprising. In recessions, people stop buying luxuries, including art. You could be off 50 percent for the next year." She turned white. "Don't panic," I said. "You just need to prepare. What have you done so far?"
"Well, I'm about to reduce the time we're open by two hours a day," she said.
That sent up a red flag. It's one thing to close a store because it isn't financially viable. (Indeed, Lisa eventually decided to shut down the Mendocino gallery for that reason.) But reducing selling time across the board is something else. I believe it's a terrible idea to cut back your sales efforts in a recession. If anything, you should increase them. "Right now," I said, "a store is open seven days a week for eight hours a day, right? That's 56 hours of selling time per store. You're going to reduce that to 42 hours? How much are you going to save? Two-fifty, $300 a week per store? Meanwhile, you've cut your selling time 25 percent. A couple of sales of the large, limited-edition pictures would have a bigger effect on your bottom line, and you might lose them because you're not open when the customers come by."
"I didn't think of that."
"There's another consideration," I said. "You say you have great people, and it took you a long time to find them. Why risk losing them? If you cut their hours, you cut their pay. If anything, I'd want to reassure them that their jobs are secure. Then I'd get them involved in finding ways to cut costs and increase sales."
"OK, but I'm losing money."
"Well, first, we need to know how much we're talking about," I said. "You have to figure out how you can keep paying all your bills, assuming your sales will be down 50 percent for the next year." She winced. We took the financial information she had brought and did a rough calculation based on half the sales. The shortfall was $200,000. "OK," I said. "That's the amount of cash you have to come up with by either spending less or selling more."
"Omigod," she said. "I'm going to be $200,000 short?"
"Right," I said. "And the actual number may be higher. It won't be much lower."
She took a deep breath, and we started going through some of the possibilities. One involved her rent. Lisa said she'd thought about asking her landlords to renegotiate her leases. I asked if she had signed personally for them and shared her financials. She said yes -- she'd had no choice. I pointed out that no landlord was likely to renegotiate a lease with a tenant who was on the hook personally and had three other stores. Then again, the landlords might be willing to offer some temporary relief. "You could ask them to reduce your rent for the next six months by, say, 30 percent and add that onto the end of the lease," I said. "So, if you're paying $10,000 a month now, you'll pay $7,000 for the next six months and $13,000 for the last six months of the lease. If you can get the landlords to go for it, you'll save $18,000 on each location, or $72,000 altogether, in the next year. Now you're down to $128,000."
Lisa began to get excited. "Maybe I should run a sale," she said. I told her that I thought it was important for businesses, if possible, to hold the line on prices in a recession and add value instead. Maybe she could hold a customer-appreciation week and offer something extra to the people who buy her smaller, unsigned photos -- say, a special limited edition of select photos signed by her.
She could also look for untapped markets. Though she had a strong West Coast presence, she had low visibility elsewhere in the country. She didn't like paying commissions, and she had a problem letting go. I could relate to that. "But you need to give up some control if you want your business to grow," I said. "Who cares if they charge a big commission? You have enough gross margin to pay it, and that's all new revenue at very little cost to you."
As we talked, she began to come up with her own ideas. "I'm a little nuts about inventory," she said. "I spend $15,000 to $18,000 a month replenishing it. I could probably not do that for five months or so."
"Great," I said. "You can save another $75,000 to $90,000. That's exactly how you need to be thinking."
Lisa had one other question before we parted. She said she'd considered applying for a bank loan. What did I think? I suggested that she think about getting a credit line as a backstop, though she should try not to use it: "It should be the tool of last resort. You can't borrow your way out of debt."
That's a thought we should all keep in mind during times like these. At the end of the recession, the winners will be those who have taken advantage of their most important resources -- imagination and creativity. Lisa has plenty of both. I'll keep you posted on how she's doing.
Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio last October.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.