Monday, October 12, 2009

No debt.? Who could have know'ded?

Interesting series of articles in the Oregonian: "Life after the Bubble: From boom to bust."

I refrained from commenting on yesterday's entry, which had as it main poster children a couple who built themselves a 2600 sq. ft. house, then mortgaged it to the hilt to start their business, and who, when they finally threw in the towel, owned 3 cars, including a 2008 pickup.

Can't reporters find people who are real victims, instead of these people who really don't appear to deserve our sympathy?

Anyway, today's article discusses the take-over of Harry and Davids. Typical corporate pirates took over the company, looted it, and then drove it into bankruptcy, in the meantime driving their workers into the ground. Nothing new there.

Second feature as about a chain of stores based in Portland called Storables.

"Dodd Fischer founded the company in 1982, and over the ensuing 27 years he built it into a small but consistently profitable chain with nine stores in five states.

Fischer, cautious by nature, built his business strictly out of cash flow. When other companies were leveraging themselves to their eyeballs, Storables had no bank debt.

But it didn't matter.

When the economy really got frightening in September 2008, when Lehman and Washington Mutual were failing and something truly cataclysmic seemed inevitable, Storables' sales plunged.

"They just went off a cliff," Fischer said."

O.K. Fair enough. So far, I'm sympathetic. I too built four stores with ever increasing sales. I didn't do it completely with cash-flow, but had a couple of bank loans. But the loans weren't draconian, and were well within cash-flow, if you will, as long as the stores were "profitable." It's hard to resist the urge to expand when you're successful.

It goes on:

"Fischer kept on thinking and hoping that the trend would begin to reverse itself. But it didn't.

What Fischer and his team didn't appreciate at the time was that their company had been the beneficiary of a housing bubble and consumer spending spree fueled by a towering wave of consumer borrowing."

Again, I can relate. When my sales started falling off the cliff back in the early 90's, I too, held on thinking the trend would "reverse itself." It never did.

It was the following quote that really caught my eye. Again, I can remember thinking the same thing.

"There were times when we couldn't explain why our sales were going up," said Greg White, Storables' longtime chief financial officer. "We knew that people were refinancing and that interest rates had been dropping. We just didn't understand the scale of it all."

A couple of things I learned, in hindsight.

1.) Increasing your overhead is a form of debt. If it's obligations you can't easily cut, such as long-term leases, it's the same has taking on a loan.

2.) If you don't understand why your business is increasing, WATCH OUT! Your instincts are telling you somethings wrong, and you'd better pay attention.

I have a new rule of thumb. If business increases by more than 10% a year, somethings out of whack.

That's why I'm not sanguine about the increases in my own business over the last month and a half. Some of it actually can be explained by the year to year comparisons to the 90 pound weakling that was last fall. But some of it seems overly exuberant, if you know what I mean.

The last thing I noticed about this article is that they imply that the owners of Storables took steps to extract money out of the business at the same time as they tried to drop leases. I was never that prudent. I kept throwing money, eventually money borrowed from credit cards, at my obligations. It was the ethical thing to do, but it nearly brought me down.

I've not been faced with that choice again, but I wonder if I wouldn't be more self-protective the next time. I see owners go out of business who seem to walk away with money still in their pockets, and I wonder how they do it.

But who am I to judge?

Personally, I think the economy tanking is one of those things that periodically happen, and should be planned for. There are no victims in business, except perhaps to fraud and corporate pirates. (The employees, not the management who are stupid bastards who would sell out to a Wasserstein.)

Ultimately, business mistakes can be laid at the feet of the owner.


RDC said...

Storables - I think that their business is one that is clearly linked to new home sales. I suspect that if one follows their sales trend it would largly follow the real estate bubble. I would expect their business to drop off a cliff when housing did. I expect that their sales will recover to some degree following housing sales, but think of 2001/2002 sales volume as being the norm, not 2005/2006.

As far as Harry and David, I suspect that, while they would have survived longer without the debt, I expect that they would have gone eventually. They would have been able to effectively shrink to a business level about 50% of what they were at the peak. That is something very difficult for businesses to do. While the article mentions that their sales are totally discretionary and subject to cutbacks, it neglected to mention that a lot and I do mean lot of those gift boxes were purchased by businesses as gifts to their clients. Those types of purchases have totally fallen through the floor.

RDC said...

To survive you not only have to have debt under control, but you need to be the right size in the right niche.

Duncan, you have managed to be in the right niche, and pretty much the right size for the market and economic times. A lot of what you sell is discretionary, but compared to electronic it is realtively inexpensive discretionary when you consider the cost vs the amount of use/entertainment.

Jeff said...

Duncan, your recent sales success is terrific, but if you trumpet this too loudly, aren't you afraid some potential competitor will decide to come in and try to capitalize on this? Someone who may not be able to hang on very long, but hang around enough to steal some of your sales?

Duncan McGeary said...

Well, if they do, they haven't been reading closely.

The store is such am mishmash of stuff, and even I can't figure out what happened to make it work.

Good luck trying to replicate it.

Duncan McGeary said...


point taken.

RDC said...

I would be less concerned with someone trying to duplicate it, then keeping on top of the niche as it evolves and changes. And it will continue to evolve and change.

You have definately found one of the keys to small busness survival - Flexibility.

BendBorn said...

Back in the day when I was a practicing CPA (note "practicing") I would attempt to explain to clients that wanted to start up a business that they were not escaping a mean boss by leaving their job but rather, by starting up a new business, they were gaining the toughest boss they'll ever have: Mr. Overhead. He never gives raises, vacation time or any other "benefit". He will unrelentingly be on your case day after day and month to month. Of course, most never listened and went their enthusiastic way - some to succeed in spite of themselves and some to fail and then ask me "why?".

Duncan McGeary said...

I used to get a little freaked out when competition would pop up and seem to be doing better than me.

After awhile, I realized that we all had overhead, we all had cost of goods, we all had to make decisions about location and organization and display, we all had to decide on margins and so on and so on.

Nobody escapes overhead, which must be paid day in and day out.