“The world has changed, and not for the better.”
–Tom Brokaw, Oct. 7, 2008
The drycleaning industry has seen tough times lately. We have seen increasing supply and energy costs, we can’t seem to lower our labor costs, and there are still too many plants. Now that we are officially in a recession or Depression, what can we expect?
The current economic crisis was caused largely by mortgage failures, sinking home values and securities founded on housing debt. Years ago, either through a sense of social justice or a genuine belief that making more people homeowners would improve the economy, the government began to encourage lending to new groups of people who were previously unable to own homes.
Rational businessmen filled this market niche and began selling what would become known as subprime mortgages. Rational consumers took advantage of this new opportunity to live part of the American dream. Home developers responded by building more homes, and new communities sprang up all over America.
Perhaps you live in one of these communities. Perhaps you hold a subprime loan. Some of these loans include a feature where the loan payment increases over time; sometimes, the increase is sudden, and sometimes, it’s more gradual. This, too, seemed manageable at the time the loan was issued.
Back then, most consumers could look forward to getting wage increases over time, or could refinance with a new loan — especially if the home had appreciated in value, which was a reasonable expectation. Now we know that this was a big gamble — most people never saw their real wages rise enough, and as mortgages defaulted, homes for sale flooded the market.
Supply now outstrips demand in the housing market. As the value of the average home drops and the banks tighten restrictions on lending, even more families are unable to refinance due to their homes’ loss of equity. This market failure continues to worsen, and my best information indicates that it will continue through 2009.
The good news? The Federal Reserve Bank and Treasury Department are working to minimize the damage that the market failure is bringing. We’ve heard talk of the possibility of a second Great Depression, but the differences between the first and today’s circumstances are worth noting.
After the stock-market crash of 1929, government officials made errors in setting policy in response to the crisis. They raised taxes and tariffs, the latter to protect domestic producers from foreign competition. Presidents Hoover and Roosevelt alike promoted industry/labor cartels that stifled competition.
None of these mistakes will be repeated today. The body of knowledge in macroeconomics has increased exponentially since 1929, and I can say with confidence that the world economy today will face only new and perhaps unfamiliar problems.
The huge losses the stock market is experiencing as I write this probably won’t last long. However, market losses will remain significant for some time. These losses represent a loss of market capitalization — or, for our purposes, a loss of owner equity. And this loss of equity represents a corresponding loss of production capacity and therefore, employment.
Macroeconomics says that if we don’t act in our own self-interest (remember Adam Smith’s “Invisible Hand?”), the economy will fail anyway. So how will we, as drycleaning businesses, be affected?
First, our customers are going to experience bad times. Many will find themselves unemployed or underemployed. Banks will be hard-pressed to lend money (especially to marginal applicants), so there will be less capital for acquisitions and startups.
Landlords will find that business failures provide them with surplus property to rent. Watch for opportunities to open dry stores cheaply. Employees will suffer alongside our businesses, though inflation in household costs will probably not be a big problem. Family members may be out of work, though, decreasing household incomes. But wages probably will not drop, even though there may be an army of unemployed.
Equipment sales will suffer somewhat from the lower number of startups, and leases will be a popular financing option. Suppliers will still sell supplies, but likely fewer, corresponding with lower consumer demand. Collecting on those supply sales will become more challenging.
The bottom line? There will be fewer drycleaners at the end of 2009 due to failures and bankruptcies. Many operators will not be able to sell their businesses. Like in the housing market, there will be more operators who want to sell than banks wishing to lend; selling prices may drop to the level at which most owners won’t sell.
Under the circumstances, I would expect owner-financed and store-leasing arrangements to become popular options for the transfer of ownership. Numbers of dry stores may rise because of an increase in available space due to other businesses failing, and many drycleaners will still be able to still finance the investment themselves.
In short, 2009 is going to be a year of mixed opportunities, marked by a long-overdue market correction. The long year ahead will be a good time to get back to the basics of good customer service and quality. Take care of your business, and your business will take care of you.