The 800 Pound Gorilla in the Room

Something has been bugging me throughout the long-winded analysis and never-ending media coverage of the U.S. financial markets. It's this concept that several gargantuan banks in this country are 'too big to fail'.

First and foremost, we are supposedly a free market economy, and that means that if you stink in business, rip off customers and take chances that don't pay off you are allowed to fail. Not to mention the fact that, in spite of huge injections of taxpayer money, several financial giants are in fact failing and failing miserably. There's no way they will still be in business in 20 years no matter what we do.

After taking the time to learn about the little 'securities shell game' that led to the stock market debacle, and after listening to the pathetic excuses offered by top bank executives, I am convinced that quite a few bloated multi-national banks deserve to fold. They have been reckless... they have securitized the nation to the brink of disaster... and when their bets haven't pay off they have held out their hands to Washington with the excuse that they are 'too big to fail'. And we bought it!

Bankruptcy and annihilation are exactly what these banks deserve. There are literally thousands of smaller banking institutions in this country who are fiscally sound, who have strong loan portfolios and who are still lending. They have a right to grab the market share of over-sized behemoths who fold. They are far more capable of building a diversified system that spreads risk around, cares for consumers and enforces accountability. No one should get a free pass or an automatic bailout simply because they dominate a huge percentage of the market. All the more reason to let them fade quietly in the night to trouble us no more.

The surf industry is not banking, but there's a lesson to be learned from recent events. In December of 2005 a monopoly folded. Surf legend 'Grubby' Clark faxed out a letter to shapers around the globe saying that his factory was closing effective immediately. Clark Foam at the time manufactured an estimated 90% of the surfboard blanks used in board production worldwide. Surf magazines and blogs from California to Hawaii to Australia predicted ruin for the entire industry.

Can you guess what happened? The free market economy kicked in. There were several lean months in which shapers had a tough time getting enough blanks to keep going, but a new crop of innovative and driven blank manufacturer's cranked up production and filled the gap. Within 6 months supply levels were strong and prices had stabilized due to increased competition. Clark Foam cornered the market because they were there, not because they were the only ones who could... and when a gap opened up capitalism flowed in with new upstarts, better technology, wider selection and fair prices.

Both Washington and Wall St. should take note. Right now the quandary is this: we can't undo the past. We can't go back and fix billions in toxic assets. We can't retroactively limit the size of banks. We can't launch new rules right in the middle of a recession and allow the immediate failure of the banking system. It would spiral the U.S. into a real Depression! So for now, we'll probably have to prop up some financial institutions that have been completely irresponsible.

But I hope that the government will learn from past mistakes. In a free market economy nobody is guaranteed a rescue - nobody gets to dodge the rules. I don't know what all the solutions are. A socialist state doesn't seem alluring; limits on bank sizes, government-ownership of private firms or heavy-handed regulation. But there must be a balance somewhere in which the fundamentals of the banking system change and common sense reigns. CitiGroup, AIG, Bank of America and other institutions should probably be broken up into smaller, more palatable units. Some deregulation should probably be rolled back to bring in more oversight and accountability.

Corporations can never again be allowed to become 'too big to fail'. Massive failure is supposed to be the fate of businesses that make dumb decisions. Smarter survivors will pick up the pieces, take over the customer bases of extinct companies and enrich the economy. We cannot allow the current crisis to reoccur.

Right now we need to deal with the 800 pound gorilla in the room. The stimulus plan doesn't address this crucial issue. Neither does the Treasury Department's proposal for the remainder of the TARP money. But someone has to - and soon.

Take the Long View

Recent downturns in the economy are generating a lot of negative talk and fear in the business world. While I don't want to pretend that some challenges don't exist, I'm also encouraging clients to be positive, avoid panic and continue to take the steps that have made them successful in the past. So, look beyond today and take the long view.

Here is my brief synopsis of the threats and opportunities that exist in the marketplace today...

1. Business isn't a straight upward curve! We Americans are an optimistic bunch and tend to expect to win more often than we lose; however, it is folly to think that any company, stock, industry or individual person will ALWAYS WIN. Things naturally fluctuate, and there will be times of plenty and times of belt tightening. It's best to just accept the inevitability of lean times, have contingency plans in place, and not allow yourself to be shocked or shattered that every year is not infallibly better than the last.

2. Economic downturns cull out the competition. Now you don't want to BE one of the companies that flops, but seeing low level players with poor quality, inefficient systems and bad marketing strategies fail shouldn't make strong, stable businesses get scared. Let some of your competitors file for bankruptcy! What do you care? Just make sure you are ready and waiting to snatch up their customers and boost your own market share. Recessions are the business world's version of 'survival of the fittest' and they can raise the performance of entire sectors through a healthy separation of wheat from chaff.

3. Don't stop doing the things that work. Panic can cause companies to seize up... to stop focusing on what is going right, to drop future plans, to abandon new product development, to stop hiring, to cease marketing. While you don't want to waste money in a recession, you don't want to stop investing in the future either. So balance risk with wisdom and keep doing the things that have made your business thrive over the years.

4. Focus on controllables - not uncontrollables. We tend to spend a lot of time pondering things we cannot change. You and your team cannot personally alter the outlook for your industry, or change a stock price, or halt foreclosures, but there are a myriad of small things that are completely within your grasp. Keep your eye on the controllables and invest your time, energy and money on activities that matter in your little world and will make a difference in the bottom line at the end of the day.

Small businesses fighting to survive

This is a great article I read this morning on MSNBC. It just goes to show that business owners have to be proactive and rise above the crowd to make it in tight economic times.

Enjoy!

PITTSBURGH - Small business is risky business these days.

Costs are rising, profits are shrinking and the ability of the big guys to keep prices relatively lower is drawing away customers.

Things are so bad that many small enterprises, which account for about 99 percent of the country’s businesses, say they are hanging by a thread that may soon snap.

“We are basically losing money every month, about $1,000 a month. It’s been about two, three months now,” said Tom Weisbecker.

Weisbecker owns Isaly’s in western Pennsylvania where patrons sit on green barstools at a Formica countertop and gobble the legendary Slammer, a sandwich stuffed with a half-pound of chipped ham and smothered in onions and cheese. Prices for many of those ingredients have skyrocketed in the past year.

“We know our customers are already feeling the pinch with the gas prices and when they go to the grocery store. We’re trying to hold out, but we can’t go on much longer,” said Weisbecker.

In barely a year, the cost of pork has jumped by 50 cents a pound, while beef is up 20 percent; a five-gallon jug of canola oil that used to cost $15 is at $40; a 50-pound bag of flour jumped from $7 to between $20 and $25.

And then there are fuel surcharges of between $5 and $9 that have been added to nearly all deliveries during the past six months.

In the meantime, wages haven’t grown and the job market is tepid, at best. On Friday, the Labor Department said the nation’s unemployment rate jumped to 5.5 percent in May — the biggest monthly rise since 1986 — as wary employers cut 49,000 jobs. Average hourly earnings for jobholders rose to $17.94 in May, up 0.3 percent from the previous month.

The feeble employment market may be making consumers less willing to spend. Also, paychecks aren’t going as far as they did before food and fuel costs rose.

“In a good economy, you can makes mistakes. But in a bad economy ... you can’t afford to make a mistake,” said Larry Lagattuta.

“I am three very bad decisions away from bankruptcy at any given time,” said Lagattuta, who has been running Enrico Biscotti Co. on the Pittsburgh Strip for 15 years.

Over Christmas, he made hundreds of shipments; 2007 was his best year ever.

The last quarter was his worst.

A National Small Business Association survey of 500 small business owners in February found that sales and profits had dropped and job growth was at the lowest point in 15 years, problems that could have a significant impact on an already shaky U.S. economy.

The survey also found that 71 percent of business owners have a “negative outlook” on the economy compared to 43 percent a year ago; confidence in their business’ success dropped from a high of 81 percent a year ago to 70 percent now.

A separate survey done by the National Federation of Independent Business found that for the first time in 25 years, small business owners cited inflation as their single biggest concern, rising from 4 percent a year ago to 14 percent in April.

The survey of more than 1,765 businesses showed that for the first time in a decade, skyrocketing insurance costs were not the No. 1 concern.

As gas and food prices climb, consumers are bypassing small businesses and seeking out bargains in places like Costco Wholesale Corp., which reported a 32 percent jump in its fiscal third-quarter profit, surpassing Wall Street expectations.

“The bad thing that’s happening to us, is the economy is driving people to shop at the big-box stores ... They can buy their staples and pick other things up so they don’t have to use gasoline,” said Cindy Baker, who has been a gift shop owner for 20 years, half at her current location, Collage, in Pittsburgh’s bustling Strip District.

“This is the first time, even taking 9/11 into consideration, I can say I’ve really seen a pinch in my business,” she said.

Just like airlines and car companies, some small business owners are shrinking and letting people go to survive the squeeze.

Last month, the Oklahoma City gas station owned for 22 years by brothers Harley and Hadley Hintergardt shut its doors for good because of rising gas prices. Harley Hintergardt said the station suffered because unlike big chain gas stations, they didn’t have a convenience store or full-service auto shop to fall back on.

“We were the victim of high gas prices,” Hintergardt said. “Everybody thinks that we were making the money selling at the pump at the gas station. And trust me, we were not.”

Small businesses, measured by the U.S. Small Business Administration as those with fewer than 500 workers, employ some 58.6 million people, more than half of the total U.S. labor force. In the past decade, they have generated between 60 percent to 80 percent of new jobs, and in 2004 all the new jobs.

While no data is available on how many small businesses have gone under in the past six months, federal officials are reporting a decline in the number of loans they guarantee, a consequence of both lower demand and tighter standards.

Experts say the shrinking demand indicates businesses are reluctant to take on debt and expand. Many would-be entrepreneurs are hesitant to open new businesses.

Eric Bradlow, a marketing professor at the University of Pennsylvania’s Wharton School of Business, said that historical data suggest that 90 percent of new small businesses shut down in the first year. Meanwhile, a Small Business Administration study found that one-third of new small businesses close within two years and only 44 percent survive four.

“Anecdotally, you hear that this is a very difficult period because of higher gas prices and higher component prices ... definitely in the past 10 to 15 years,” says Bradlow, who is also a director in Wharton’s Small Business Development Center.

It’s an environment that also makes it difficult for small businesses to raise prices to cover their costs.

The Pittsburgh Popcorn Company is feeling that pain. It opened on March 1, since then, the price of packaging tins has tripled. Other food costs have risen between 5 percent and 30 percent, the hardest hit being canola oil and chocolate.

The company’s owners, Janelle and Rob Day, are reluctant to raise prices, though. The enterprise is new and they are afraid of driving away patrons.

“I want to attract customers, that’s my primary goal,” Rob Day said.

Only when it is certain people will keep buying, will Day raise prices. “Whether that’s a month, or two months or three months, I don’t know,” he says.

Not all small businesses are feeling the pinch, however. Those that cater to the wealthy or have niche products may be having a less hard time right now than food or apparel stores.

“Business has actually been steady for us. We haven’t seen a large drop-off,” said Bradley Bodart, who owns Daly’s Pen Shop in Milwaukee. “Our customers tend to be more well-to-do, people who don’t shy away from a $600 pen, so they’re not too affected by gas prices.”

Bodart understands that people are surprised by his success.

“I see people walk by the store and they whisper, ’How does that place stay in business?”’ he said. “It’s because it’s a niche business. There aren’t too many people about to start up a pen shop.”

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.