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Just recently, I spoke with the owner of a large Canteen franchise about how he was coping with the current economic downturn in the US. One of his observances prompted me to write this article.
The operator explained how increased prices for fuel and products were forcing him to raise prices at accounts for the second time this year. He said if he had known much earlier that he would be facing this increase in costs, he would have raised a larger amount the first time, thereby eliminating his need to raise again so soon.
In November of 2007 and again in January of 2008, in newsletters I sent out to over 1,500 operators in my database, I predicted that gas at the pump would be in the $4-5 per gallon price before the end of the summer. And that was at a time when gas was still under $3 dollars per gallon. How did I know this? Do I have a magical crystal ball in my office? What did I know that he didn’t?
I review the financials, commodities, and even overseas markets daily for clues on not only what may happen to my personal investments but how the world’s financial condition will effect the operations of my clients here in North America.
There are a number of economic indicators that gives us clues to what may happen in the future. Although many of them are indications of past results, most will highlight trends and directions of particular economic activity in the future.
At the beginning of the year, indications from the Petroleum Institute, the General Services Administration, and weekly supply and demand reports for crude oil showed a continuing scenario that prices for crude, along with gasoline, would continue to trend higher. Oil at that time just broke $100 per barrel but many were predicting oil as high as $120 per barrel or more at some point in 2008. (This week, oil reached an all time high of $144). Of course, a supply disruption in Nigeria because of civil war, Iran continuing to test fire missiles, and experts’ predictions for another devastating hurricane season haven’t helped matters.Taken together, an informed analyst would not have a difficult time in his prediction of higher verses lower crude prices.
On the commodities front, many individual products such as corn, rice, and soybeans have hit all time highs this year. Our government has mandated putting aside huge amounts of corn-planted farmland for the production of Ethanol instead of food. This has helped increase the cost of food products made from corn and even the cost of beef and other meats as the cost of feed for livestock has risen due to lower supply. Then when heavy rains and flooding devastated large farming areas in the Midwest this spring, thereby shorting the growing season and again reducing supply, it wasn’t that hard to predict that food prices would rise and could continue to rise for the rest of 2008.
On the general economic conditions of the country, reports on labor and unemployment, consumer confidence, CPI and PPI, retail sales, and other indicators will certainly give even the casual observer an insight as to where the country has been and what are the near term likelihood of economic activity in the next 3-6 month periods. As I write this today (as I predicted in my January newsletter), 2008 is turning out to be the worst economic scenario we have experienced in the US for the past 30 years. And all signs point to no probable positive change until at least the second or third quarter of 2009 at the earliest.
Understanding these indicators and using them effectively will enhance your operation and in fact tell you, based on your particular financial situation, your age and the general conditions of economic activity in your area, whether you should be trying to expand your operation at this time by purchasing market share from a competitor or in fact if declining revenues and profit potential for the immediate future have caused enough stress on your personal and professional life, that it may be time to exit the industry by exploring a sale of your operations.
USING THESE INDICATORS TO YOUR ADVANTAGE
How can you take these economic indicators and use them to benefit your operation? Let’s explore just a few of many possibilities.
Obviously, our Canteen peer above gave us one such example. If he had seen the continuing increases to his costs he would have raised pricing in his machines to a higher level the first time. Now, considering the high price of gas and all the economic indicators that tell us these high prices will continue indefinitely, let’s look at some other operational changes that could help.
First, get a map of your service area. Calculate drive times to your furthest-out locations. Pro forma each location and see what the true costs are in terms of personnel, fuel and repairs at that location. Let’s say you have a major account 40 minutes away that you are servicing daily. After you factor in all the above costs you may determine that the profitability of that account is very low. Let’s look at your options for that account.
Obviously, you can just pull the account because the low profits there are wasting the manpower and costs to service it. However, you may be able to approach an operator closer to the account and see it he would buy the equipment from you and pay you something for his introduction to the account. Maybe he has accounts near you that he would be willing to trade to you. Perhaps you can find room at the account to install another bank or two of equipment you have in your warehouse, thereby cutting the number of service days down to just one or two times a week. Or, if the account is large enough, find a storage area at the location to deliver product to twice a week and hire a part time local resident employee to fill and clean the equipment daily. Keep a safe in the storeroom and have your delivery driver pick up the money weekly to bring back to your warehouse for counting. Now you have eliminated the cost of daily delivery, including fuel expense and valuable driver time.
If you look at all the accounts at 30 or more minutes from your warehouse, choosing one of the above options could eliminate many costs and make your operation more efficient.
Other economic indicators that will help are labor reports for the country in general but more importantly indications of employment conditions in your region or town. If Ford just announced they will be closing the local plant in 3 months, whether or not you are servicing their operation, you may in fact be servicing local companies that supply them. If they are a major employer in your town, you know that the ensuring layoffs will cause less traffic at the local car dealership, Home Depot store and other retail establishments that you do service. If you see where your revenues may decline because of this closing, you may want to start planning ahead for reducing your service schedule at these locations and possibly even the reduction of employment at your company.
Looking at the websites for Coca Cola, Pepsi, and other major suppliers along with looking for news headlines for these companies in the financial sites I will show you in a minute, will many times give you advanced info. These companies may be announcing price increases at a certain time in the future, or have decided to eliminate a certain brand or that the high cost of crude indicates they will be raising their prices higher for plastic bottle products. Wouldn’t it be helpful to know how much your product cost will be going up in the next few weeks or months, today, instead of waiting for your local bottling rep to inform you those prices will be increased starting tomorrow?
I’ve attempted to give you just a very few examples of some of the moves you can make based on the proper use of economic indicators available to you. Now you may ask where you find them?
If you read the Wall Street Journal, Barron’s, or Fortune Magazine today you are reading YESTERDAY’S news. You need to know what’s happening today and what will likely happen tomorrow.
On my car radio I have the Bloomberg and CNBC stations preset. I listen to them when I drive. On my computer I have CNBC.com, MarketWatch.com, and business news headlines from Reuters, AP, USA Today, and other news gathering agencies. Sometimes I keep tuned to the CNBC business channel on my TV when I work, with the sound off but the closed caption device turned on so I can glance at what’s currently being reported. All of the computer sites will have links to most major government and private industry report such as current nonfarm payrolls, supply reports for crude, gas prices, consumer confidence indicators, manufacturing surveys, major company announced layoffs, etc. After awhile you will understand where to find the few best indications that are most meaningful to you and your operation.
Of course there is no better indicator then talking to local business and government people. Attend networking gatherings in your community, read the local paper and the local business publications if your area has them. Call on the local Chamber of Commerce, city hall and other approachable government institutions to see what info they can give you. Knowing someone at the local unions, zoning boards, and city planning commissions and other entities may give you tips as to who is planning on laying off, who is planning a plant closing or moving out of town, and who in fact may be building a new plant or distributorship and who is planning an increase in personnel.
The US is in economic turmoil right now, and most of you tell me that these conditions have resulted in decreased revenues and lower or non-existing profitability. Obviously, in order to remain viable in this environment you need to fine tune your operations and make adjustments where and when needed. Understanding economic indicators will help you stay ahead of the curve and eliminate the need for you at some point to have to admit, “I wish I would have known.”
