Forecasting 2009

It’s quite clear that the U.S. economy is in a recession that will end up spilling over into 2009.

“The economy will remain in a recession through at least the first half of 2009 and possibly longer,” suggests Dr. Adam J. Fein, president of Pembroke Consulting, a Philadelphia-based management advisory and business research firm.

In fact, economists say the forecast for at least the first half of 2009 shows even more difficult times ahead as tight credit markets, crippled by a volatile housing market, will force American business owners to tight-grip budgets, cut back on spending, struggle to pay payrolls, and lay off employees in record numbers.

That’s tough news to swallow for Americans considering the unemployment rate in October 2008 rose to 6.5 percent, the highest since March 1994, according to the U.S. Labor Department. In fact, with 1.8 million job cuts, the economy has lost more than a million jobs in a year for the first time since 2001 — the last time the economy was in a recession. And the cuts aren’t expected to end any time soon. Economists suggest that monthly job loss totals could grow in excess of 300,000 and the unemployment rate could rise to around 8 percent. In the 1980-1982 recession, the unemployment rate rose as high as 10.8 percent before leveling off.

Jan/san distributors say the state of the economy is directly affecting their businesses like never before.

“I’ve never seen the economy like this in my life. What we’re currently experiencing is unprecedented,” says Bridget Shuel-Walker, president and CEO of HP Products, an Indianapolis-based jan/san distributor. “The economic difficulties our country and our industry are currently facing are going to continue for quite some time. I don’t believe there is a quick way out of this situation.”

With many uncertainties on the horizon, one thing is clear: 2009 is going to be a very challenging year for the jan/san distribution industry as the recession is only expected to deepen.

“What we’re going to experience, many of us have never experienced in their adulthood. That’s how significant it will be,” says Frank Sansone, chief operating officer for Miami-based Dade Paper Co.

Recession-Proof?

Traditionally, most jan/san distributors have made it out of recessionary environments unscathed. Thus, their thinking was that their line of business was less likely to succumb to a recessionary environment. That thinking however has changed over the last few months as distributors have felt the direct effect of an economy in peril.

“I don’t think our industry is recession-proof at all,” says Shuel-Walker. “In times like these all industries are affected and adversely so. Companies large and small are experiencing tough times and we’re forced into making tough decisions by laying people off or cutting costs in any way possible. So when customers do that, it most certainly has an adverse effect on the distributor as well as the jan/san industry as a whole.”

Several customers have been forced to lay off employees and at worse, close their operations, costing hundreds and even thousands of industry employees their jobs in the tail end of 2008, says Shuel-Walker. Not only does this directly harm the failing business owner and its employees, but it also impacts the distributor who counted on that business.

“There’s not any segment of business that we

service that has not been impacted by what’s going on with the economy,” says Sansone. “The client base that we’re servicing, they’re looking for alternatives and ways to be able to save money within their operation. So, we have to be able to go out there and communicate with them and be their partner to try to help them in ways that can help save money in their operations. Obviously, when we do that it affects ourselves.”

Results from the third quarter showed that the decline in consumer spending was the sharpest quarterly drop since the second quarter of 1980, says Fein. But distributors say they started noticing significant losses before then.

“We started seeing the biggest effect of this in the second quarter of 2008,” says Sansone. “So we’ve now seen the second quarter calendar being affected, third quarter which we just completed and now, unfortunately I have no reason to believe it’s not going to follow through in the fourth quarter. We’ll probably end up feeling the impact of this for four to six quarters.”

With 2009 turning over a new leaf to a Democratic-run White House, distributors can only hope there is some relief coming soon.

A Democratic White House

President-elect Barack Obama is coming into office in the midst of recession on Inauguration Day confronted by all the economy’s woes — a housing collapse, mounting foreclosures and unprecedented financial and credit market volatility. The nation’s first African-American president and his administration will have to get up to speed quickly, after taking over the largest government intervention since the Great Depression, distributors say.

“Whoever was going to be in office was going to be dealt a pretty bad hand at this time,” says Sansone. “This is global, this is not just the United States, this is an economic downturn that’s affecting the entire world. It’s significant, it’s serious and it’s going to be with us probably through the end of 2009.”

An otherwise Republican-backed sector, jan/san distributors say the jury is still out on what they should expect to see with Obama leading the country.

“I’m sure everyone on the Republican side of things are very concerned about growth in government spending and growth in taxes, which are the typical hallmarks of a Democratic administration,” says Dave Kahle, expert sales coach and president of DaCo Corp., in Comstock Park, Mich. “Those are already concerns, but I’m not quite sure how that filters down to the business of the jan/san distributor. I think there is just a lot of questions out there and we’ll see as this administration takes over, what exactly this administration looks like. At this point, I don’t see a direct connect yet. But we’ll see. The jury is still way out.”

Distributors say in times like these, they can’t get too wrapped up in the Democratic vs. Republican debate and have to continue running their business the best way they know how despite who is heading the country.

“What we’ll do is continue to focus on what we know best, which is our customers,” says Shuel-Walker. “And what they want and provide the products that they need, when and where they want it at fair prices. We’ll also help them to become more efficient, more productive and more profitable. And that focus on servicing our customers will continue regardless of which party is in the White House.”

Keeping The Doors Open

With large corporations across the board posting significant third quarter losses in 2008, jan/san distributors say it has opened their eyes to the severity of the current economic state of the country. It’s also forced them to re-evaluate their own company’s stance in the marketplace in order to stay in business in 2009.

“In this economic environment we continue to hone in on reducing our costs to goods sold,” says Shuel-Walker. “So, negotiating with our suppliers, we have a goal of reducing our costs to goods sold by 1 percent. We also have got to have extreme focus on new business while continued focus on reducing our expenses. And all that focus has got to happen with a continuing high-level service for our customers.”

Shuel-Walker also cautions other distributors to pay particular attention to their accounts receivable department, as customers who are hard-pressed may be delinquent on payments.

“It’s more challenging today and our customers become a little more vulnerable today than maybe what they’ve been in the past,” says Shuel-Walker. “We just have to be very careful about our accounts receivable and making sure that doesn’t get out of line.”

Distributors also say they will continue to stay aggressive to avoid succumbing to this tough marketplace.

“You still have to be aggressive in the field and look to grow business, find new business, new clients to service, and the other side internally, you have to be very prudent on how you are spending your money,” says Sansone. “You can’t sit back on the sales side. You always have to be aggressive on the sales side but at the same time internally, your productivity has to go up. You still have to be aggressive out there because there still is a client base that needs or is looking for someone to service them. But at the same time you have to be able to keep your house clean inside and put yourself in a position to fight your way through the tough times.”

In today’s recessionary environment Kahle says it is also a perfect opportunity to shore up and to focus on the core of the business.

“The last few years as the market has expanded, there has been some slop that has come into every distributor’s system,” says Kahle. “And in every distributor’s business there are probably some marginal customers, some marginal products and some marginal salespeople. Now is the time to look very closely and focus on the more solid aspects of the business. Look at your customers and be selective on who you focus on. In fact, it could be that as many as one-third of your customers are dragging you down and are not to be part of the mix. Look very closely at your customers and focus on those customers who look like they’ll do well.”

In a recessionary environment, distributors should view this time as a window of opportunity, as it’s much more amenable to make changes in the structure of the business, says Kahle.

“Some of the things you’ve been hesitant to do, maybe change a comprehensive plan or reorganize sales territories, now is the time to do those things,” says Kahle. “It’s easier to bring changes about. It’s also a window of opportunity to upgrade the sales force because there are people out there now, and there will be in the next year or so. The market for salespeople is going to be richer and more significant than it has ever been before. So look at your current sales force. If there are marginal people, think about this as a window of opportunity to bring in some better, high-quality people.”

Distributors also say expanding into other markets and acquiring companies who are struggling is also a possibility for those who are up for the challenge.

“We’re still in the mode of acquiring companies,” says Sansone. “That’s not going to stop. When good opportunities come along, we’re going to continue to pursue them. But there are some things that are out of our control when it comes to the economy. It’s not the first time we’ve been through this. Yeah, we’ll survive it but a lot of people are going to get hurt by this.”