Customers, friends, and investors regularly ask me how we're doing with the economic downturn. This upheaval is unprecedented in the lifetimes of all but the oldest Americans. The effects so far have been subtle for us. There are effects, however, and there are numbers that I carefully watch.
The biggest effect has been the drying up of home equity lines of credit. As home values fell, banks became nervous with homeowners with open lines of credit based on the value of their now depreciated homes. This is old news, and I've only heard this reported in the press last week, months after it started. My HELOC was no exception. I used it extensively to build out the new store as the primary loan. It was also the source of daily cash flow for us. Most small businesses need credit sources for expansion and day to day operations, and we're no exception. So when that line of credit was closed, money became more expensive to borrow, usually resulting in using credit cards with higher fees either as loans or just not paying them back in full right away. Also, if this had happened earlier, I can guarantee you that the the new store wouldn't have been built and the old store would have been closed down. It was go big or go home for Black Diamond Games 2.0.
As for the current Wall Street crisis, there is not a one-to-one connection between Wall Street and Main Street, as they say. Banks and businesses for the most part have continued to lend me and the store money throughout all this. We just bought a new Point-of-Sale machine last week with credit from Dell and business credit cards are still easy to get. Lenders are still being rational. What would be devastating is if banks pulled back from consumer and business credit like they did home equity lines of credit, deciding that risk of repayment was too great and closing down cards and credit lines. That would cripple (but probably not crush) both us and our customers. I'm assured by my finance guy that it's not likely to happen.
What is likely to happen from the Wall Street debacle are tens of thousands of layoffs that will ripple through the economy, starting with the closed companies in the news, but rippling out beyond that. Unemployment is the key fear for a hobby oriented business like ours. Games, I submit, are an excellent value, and if you're short of cash, you'll get much more bang for your buck by buying say, a board game, than a night on the town. Sales are very strong for us right now because of this. It's generally believed that hobbyist gamers will continue to buy their games, provided they have an income. It's the unemployment numbers that I watch, and a 6.1 percent unemployment rate like we have now is still modest. 6.5 is the magic number for me, which is where we were with the dot-com bust. Nevertheless, there are noticeable drops in certain game sales associated with a hanful of known unemployed key customers; more than ever before.
Finally, I was listening to the Wall Street Journal small business podcast in which they surveyed retailers about this same topic. The bottom line: slow is the new baseline. They're tired of hearing about the economy and have accepted that it will be slow for some time to come. Accept it and move on. Businesses that are teetering, hoping for change, will not be around much longer, as things are not likely to improve for a year or more. On the positive side, during a downturn like this, there are winners as well as losers. I believe we're a winner, having survived through this period while building the business off of the carcasses of our closed competitors. Note that most of our competitors closed based on retirement of the owners, rather than financial disaster (at least three). This is a gigantic advantage that may create a mini boom for us, while all around us businesses close. We're expecting a very good holiday season.
In addition, it's unlikely that a viable competitor will show up during this period, as we were able to tap credit sources a year ago that no longer exist and aren't likely to arise anytime soon for a retail business. We're not going to rest on our laurels, but the likelihood of a new competitor emerging in this economy is slim.
"The sky is falling! The sky is falling!" Rings out from the media and certain politicians who wish to create the fear that is, itself, the only thing we have to fear.ReplyDelete
Despite many claims that this is the worst economic setback since the crash of 1929, the market took much less of a hit than in the "crash" of the '80s (was it 86, or 87, I'm not sure).
Unfortunately, our government has been sending mixed messages to the financial industry, and has been tinkering too much with market forces.
Any time that the fear of consequences is removed from the risk equation - as in "Make that risky loan to the guy who can't pay you back unless the house doubles in value over the next two years, if it goes bad, the taxpayers will bail you out" or "live in a hurricane zone without any insurance, don't evacuate when you're warned to, and the taxpayers will bail you out", the market will not work properly. Even a child can see that this "safety net" only encourages riskier behaviors, even as it punishes those who try to be responsible and make wiser choices.
Fear is the tool being used to extort taxpayer money to cover the errors made by fools and the criminally irresponsible. This increased government spending on bailouts will either decrease funds available for necessary government services, or increase either the national debt or the tax burden on individuals and businesses.
Either of those options is bed for the economy in the long run. Perhaps it would be better for the corporate criminals and their political cronies to take their medicine now, to relieve the American people of longterm suffering.
Sorry for all the spelling mistakes in this one. They're fixed now. I decided we would only use Internet Explorer on the new POS machine, where I wrote this. That decision lasted one day. Firefox has an awesome spell checker among other things. I just wish it didn't have so many memory management problems.ReplyDelete