Doug Carleton

Consumer Services Will Lead the Recovery

The recovery is beginning to show signs of life. As the pace of vaccinations begins to pick up more and more people will begin to feel comfortable with getting out, and it is consumer services - everything from restaurants, movies, ballgames, travel and more that are going to lead the way. During normal recessions durable goods - things like washing machines, furniture, home improvements - big ticket items, are the things that lead a recovery. But the pandemic has turned things upside down.

Large numbers of people have been forced to stay home so we have situations, as a furniture retailer in Richmond told me, like people saying "I'm really getting tired of looking at that old sofa so I'm going to buy a new one." So money that would have normally spent on various consumer services has gotten spent on various durable goods and big-ticket items. But there are only so many sofas that people needed or wanted to buy, yet the money they spent on a regular basis every month for different things like restaurants etc. just continues to pile up.

Consumer services amount to approximately half of U.S. gross domestic product. In many cases money that went out in the first stimulus package went to pay down debt or into savings, and another - possibly larger than the first one is coming, and the results are probably going to be much the same as the first time. So there is a lot of money in consumers' pockets and they are soon going to start spending it - a lot of it. So looking at your business, and knowing that a burst of spending is getting closer and closer, are you ready? Do you have enough inventory in stock or on order to meet a sudden surge in demand? If you haven't yet or already have ordered are you sure your supplier has it or can get it or make it and get it delivered on time? Many supply chains have been seriously disrupted and possibly it has happened to one of your suppliers. You need to know. You don't want to run out. If customers want to buy it and you're out of stock, you may lose them.

And one more thing. If you have a place of business with a regular stream of customers coming and going, do you have the highest level of safety protocols in place that you can? Covid-19 is not going away any time soon. Fewer and fewer people will get sick as vaccines grow more plentiful; and treatments continue to improve as medical science learns more. But, the memory isn't going to fade away anywhere near as fast. So you want customers always to feel safe so that they can start emptying their pockets in your establishment. Oh, and you'd better make that restaurant reservation early.

Bank Lending Today

A recent headline on the "Heard on the Street"column of the Wall Street Journal was "Banks Need to Lend." My first thought was where were they when I needed them? But I quickly got over it and back to today. I was a little surprised by the headline since in the small business world the problems are usually more along the lines of why banks won't lend to more small businesses. But since the column was particularly about bank stocks, it didn't matter because the larger message was clear. Banks are holding huge amounts of cash, loan demand is weak, and the Fed is going to keep interest rates low for the foreseeable future meaning that banks will hardly be able to increase their net interest margins on their loans. So what are the poor banks to do?

They can lend it to you. You may not need to borrow anything and borrowing just because you can or because rates are so low would be foolish. But, if your business is healthy and the future - things such as another location or taking on additional products or upgrading machinery and equipment would be enhanced by a new loan, there has never been a better time in my forty-plus years in and around the financing industry to borrow money. It also offers the opportunity to pay off high-interest loans or refinance existing loans to obtain a longer amortization to increase your cash flow. If your credit is good and your business is healthy - even if the past twelve months have been really tough, but your realistic projections show potentially significant growth in revenue and profits that you could achieve with new financing a bank may be very interested to talk to you.

All signs are pointing to a very strong second half of the year for the economy even if we are getting whipsawed now by the economy slowing again because of the continued shortages of vaccine and the continued mutations of the virus, but better days are ahead. Consumer savings rates are at the highest level since 1975. Last month alone saw the personal savings rate rise 13.7%. All of this cash is like water building up behind a dam. When it breaks it's likely to be big.

The aircraft is getting ready to leave the gate and taxi to the end of the runway for takeoff. Don't miss the flight. The bank could help you be on it.

Could You Raise Prices?

Do you sell a high-quality product? Or does your business have a reputation for exceptional service? How would you describe the demand for your product? Elastic? Inelastic? In its very simplest terms elastic demand refers to products that fluctuate in sales if prices change. For example, the price goes up, people buy less. Down, they buy more. That is price elasticity. Inelastic demand on the other hand occurs when the demand for a product doesn't change as much as the price. Here are some factors that can lead to inelastic demand:

• Limited or no substitutes. If you have a car for example, there is no alternative (yet) to buying gas. So even if gasoline prices take a dramatic jump you're still going to have to buy gas. So the seller of gas can raise prices with very little effect on demand.
  
  
• Limited competition. Is there minimum competition for your product? Or do you sell a product that has a high barrier to entry for a competitor to get into the market for example, or any other reasons.
  
  
• Bought infrequently. If you sell a product that people don't frequently they may not be as sensitive to price changes.
  
  
• Short-run. In the short-run demand for your product may be somewhat inelastic. It takes time for consumers to look for alternatives, although it has been happening more and more during the pandemic. As people spend more time shopping on the internet they have the opportunity to look at other similar products without having to drive around looking for other alternatives. But if you have a product that has limited substitutes or competition you could be in very good shape coming out of the pandemic because consumers have not been able to find any or many satisfactory alternatives which could give you more price flexibility.

So if you do sell a product for which demand is somewhat inelastic, how long has it been since you raised your prices? Many many lives ago I was a specialist in bed and breakfast financing. One of the absolute hardest things to do was to try to convince innkeepers who could to raise their room rates even a small amount. They were often afraid that if they did they would lose business even if they had a beautiful house in a beautiful location that people wanted to stay in as long as the price wasn't far out of line with other lodging alternatives. Practically any increase in room rates would go almost totally to their bottom lines but the fear of being too expensive that they would lose business was a powerful hindrance.

So what about your product? Does it have a reputation or place in the market that could make people want to buy it anyway if the price was a little higher? How much of a price increase would go to your bottom line?

Bombs Away! Here Come the Drones

"Honey, what's that humming outside? O don't worry, it's just a drone delivering our pizza." Splat! Just imagine the visuals spreading across the internet. Too delicious to contemplate. But after cleaning up the pizza we are given another look into the future, and what sort of opportunities that might be created for some enterprising small business owners. The FAA recently released new and looser rules for flying over highly-populated areas opening whole new avenues for takeout food, packages, prescription drugs and who knows what else. There are a lot of pieces and parts that will have to be put into place as drone companies begin to ramp up the push for licenses. The public is going to have to be educated as to the benefits of drone delivery.

Package delivery may be the first of more widespread opportunities for some small businesses. Can what you sell be put into a package small enough for a drone to carry? Would the economic benefit of being able to deliver your package by drone somehow be better than current methods? One way to get a look at what the benefits might be - totally unscientific, would be to write down everything you have been buying online since the beginning of the pandemic. Then ask 10 of your friends. If you sell something that could be possibly be carried by a drone and you see that several of your friends are buying the same things it might give you something to think about. And one thing you can be sure about is that as the technology continues to develop the weight-carrying capacity of drones still small enough to fly over highly-populated areas will continue to increase. So if something might be feasible to deliver by drone would your business model gain by adding a new dimension?

There might be a humming outside in your future.….minus the pizza.