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How to Recession-Proof Your Business

19 tips for ensuring that your store stays healthy during the next economic downturn.

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BEING A SMALL BUSINESS OWNER can necessitate looking foolish — such as when you tell your partners about your plan to let customers borrow replica diamond rings to make proposals, or you declare your intention to take advantage of the next downturn just as the economy racks up another month of unprecedented growth.

Yet, as with most unconventional business bets, should you persist and be proved correct, the rewards can be outsized. Businesses that prepare for the day the sky falls are not only much better positioned to survive but to take advantage of the downturn and enjoy accelerated growth when the economy finally rebounds.

It is often during recessions that the seeds for future success are sown. In a similar vein, the counter-cyclical nature of business success — the best times to advertise are when your rivals aren’t, the best time to ask for a loan is when you don’t need it, the best time to hire is when the economy is weak — supports launching initiatives or change programs when the outlook is least rosy.

To be sure, economic good times are well, great. Customers have cash to buy your goods, banks have abundant capital to lend at low cost, there’s money to invest in new inventory, take on new staff, maybe invest in a little vanity project. There’s no pressure to try new things — you don’t even have to be the best in your marketplace to make a healthy profit.

And that’s the problem with good times. You get sloppy. And when market conditions change — and when they do it is often abruptly — you’re in no shape to deal with them.

For anyone who ran a business during the Great Recession, the memories are unlikely to be pleasant. In 2009 alone, more than 1 million companies filed for bankruptcy. Recessions are particularly tough on small businesses, especially those selling luxury goods. But the other thing the survivors learned was that recessions don’t last forever.  They rarely persist past a year. If you can keep an eye on the horizon, there are always better times ahead.

Picking when a recession is going to happen is notoriously difficult. Downturns are rarely similar. While it’s true Wall Street always seems be involved somehow, the triggers are manifold: Sometimes they are the result of an external shock (a virus that emerges from a provincial Chinese market), and sometimes it is something homegrown (an asset bubble like the dot.com crash). The tipping point could be a surge in oil prices, a financial market panic, a geopolitical crisis. The only honest thing that can be said about the timing of the next recession is that we’re probably closer to it than we are to the last one.

To survive requires resilience. To thrive, optionality and agility. And to be prepared.

A natural response to a downturn is to “batten down the hatches” by focusing solely on the problems in front of you and waiting for things to turn around. But such inaction can often be the riskiest response. And it wastes the opportunities that emerge during economic disruption.

In the following pages, we offer tips collected from fellow jewelers, business books and business schools to allow you to take a rapid but measured approach that will put you in the best position to take advantage of an economic slowdown. The ideas start with suggestions on assessing the strengths and weaknesses of your business and then move on to the exciting part: how to get in shape to strike when everyone else is running around in panic.

That’s a view endorsed by Michael Kanoff, owner of Michael’s Jewelers in Yardley, PA, who said an agile approach based on preparation allowed them to emerge from the 2008 slump even stronger. “The main lesson I learned from the last recession was don’t ever get too high or too low based on how business is. Overall, the jewelry business is a rollercoaster. I do my best to keep an even keel.”

01
Act early / Jewelers who survived the last recession say reacting before rivals gave them an edge. “Identify the downward direction very early. Trust that you are correct and react and adjust accordingly,” says Bob Goodman, owner of Robert Goodman Jewelers in Zionsville, IN. It’s a viewpoint backed up by research. A 2019 analysis of over 5,000 companies across the last four business cycles found that those who acted early ahead of a recession enjoyed a 6 percentage point leap over their competitors as measured by total shareholder return. For smaller companies, the advantage is likely to be much bigger.

02
Assess the risks / Among the first steps for a company to take in a challenging economic environment—especially one that could significantly worsen—is to assess in a systematic manner its own vulnerabilities. ConsultancyRecession.com offers a free, 20-question “Recession Readiness Assessment” that allows you to see how your business is placed should a downturn happen. You can take it here: instoremag.com/recession

03
Don’t crash the company / Rebecca Henderson of Harvard Business School likes to remind her students, “Rule one is: Don’t crash the company.” That means, first and foremost, don’t run out of money. Small companies with high levels of debt are especially vulnerable in downturns. In a 2017 study, Xavier Giroud (of MIT’s Sloan School of Management) and Holger Mueller (of NYU’s Stern School of Business) found that the vast majority of businesses that were shuttered during the Great Recession had become highly leveraged in the run-up to the downturn. To keep up with payments, companies with more debt are forced to cut costs more aggressively, which can impair their productivity while also leaving them little room to act opportunistically. Worse, it can result in owners “borrowing” from the business to meet personal obligations — a usually disastrous path. Russell Criswell, owner of Vulcan’s Forge in Kansas City, MO, says high debt levels caused him great stress in the last recession. “There were times I nearly did not meet obligations because of poor cash flow. I would rather grow more slowly than ever worry about making payroll again,” he says.

04
Set up red flags / Have a way to measure for early warning signs that your business may be headed in the wrong direction. That might include slow-paying customers, vendors tightening credit terms, or a decline in average ticket. (See the results of our 2019 Big Survey for the red flags other jewelers use.)

05
Protect yourself legally / Be sure your business and its assets are protected. Becoming an LLC or S-Corp doesn’t automatically remove the risk. Keeping insufficient insurance can be a disaster, exposing your business to a range of legal issues. “Before you do anything else to recession-proof your business, focus on making sure your business is built on the best legal foundation possible. Consulting with a lawyer, accountant, adviser, and trusted bank are essential in keeping your business assets secure and airtight,” writes digital consultant John Boitnott in Inc. Magazine.

06
Shorten planning cycles / If you normally meet once a year or every six months with a board of advisors to assess strategy, aim to meet quarterly. If your small, nimble business already meets with advisors quarterly, aim to meet monthly. “Focused reporting and effective forecasting are critical to both effective planning and day-to-day management, particularly in a downturn,” notes the PricewaterhouseCoopers guidance sheet. In the short term, the consultancy recommends focusing on a limited number of key performance indicators. “These measures should be transparent, unambiguous and easily understood with a focus on cash generation.” Christine Matlack the owner of E.G. Landis Jewelers in Boyertown, PA, says the years 2008-10 were traumatic. She now runs reports at the end of every month and asks employees for more input into what they find easier to sell. “I have never looked at business the same. I view $500 opening orders now the way I looked at $5,000 openings then.”

07
Review your contracts / Maybe now isn’t the best time to lock into a 10-year lease if you believe a recession could happen soon. Take time to look over your contracts and agreements. Is there an “out” clause? Can you re-negotiate agreements into annual contracts? Even if it means paying a slightly higher rate or fee, you will appreciate the flexibility if the economy takes a turn for the worst. Similarly, review any plans for large-scale projects. New equipment, store renovations and new product lines all sound like smart investments when times are good. What is the return on your investment, and will the completed project enhance or diminish your ability to weather a financial downturn?

08
Bring in a pro / A qualified strategic planning consultant will do a full analysis of your business and help you identify and understand areas of weakness and opportunity, setting you up to take full advantage of any change in economic circumstances. A similar option is to “rent a CFO.” In addition to providing financial advice and business connections, an experienced CFO can help give your business a reality check without adding to your long-term payroll. These people are not cheap —in some cities, a part-time CFO can cost at least $1,000 a day, or about $180 an hour, so ask to do a quick interview with three and go with the one that you feel most comfortable with.

09
Secure capital early / The best time to apply for a bank loan or a new line of business credit is when you don’t actually need it. It may be counterintuitive, but it’s also the first rule of business financing. Now, with the economy strong and your business likely thriving, is the time to apply for new financing. During the last recession, banks all but stopped lending to small businesses. Obtain a business line of credit and begin building good payment behavior so you can continue to strengthen it.

10
Loop in your staff / While a recession can have a damaging impact on morale, you need your employees to be more productive than ever. The key is to accompany any major change with an explanation of what makes it necessary and what effect it will have—in as much detail as possible. This advice is rooted in psychological research: Human beings consistently react negatively to unexplained events. The effect is so strong that it is better to give an explanation they dislike than no explanation at all. When it comes to internal communications, your mantra should be “Simple, concrete, and repetitive.”

11
Build a war chest // In a recession, it’s pretty much a given that sales will taper off and cash flow will become strained or at least more irregular. “Bank all you can now so you have a cushion for when the market turns down,” advises James Doggett, owner of Doggett Jewelry in Kingston, NH. It will support both your peace of mind and provide opportunities. As a general rule, small businesses are advised to have a cash reserve that is equal to no less than three months of standard operating expenses, but more is better to be truly prepared. Charlene Foltz, who runs Pentaltha Jewelers in Tallahassee, FL, said “six months of capital” kept her store safe between 2008 and 2011. “You want a disproportionate amount of cash on hand so you can buy things on the cheap,” says Jonathan Slain, a business consultant who specializes in providing advice to entrepreneurs looking to “rock” the next recession.

12
Train for price objections / Train your staff in dealing with price-conscious buyers and their objections by doing the following.

  • Welcome them. Price objections show you the customer is interested, but that you haven’t answered all their concerns.
  • Build answers to objections into your presentation without identifying them explicitly. Focus on the value, the rarity, the romance, the extraordinary story of the stone or the designer. A price objection is an intellectual statement. It means you haven’t hit the emotional spot where the real buy trigger lies.
  • Be aware that a price really can be too high. Make sure you have price points that are friendly to those feeling the pinch. At the same time, never refrain from showing an item based on your perception that a customer can’t afford it.

Desperation can make salespeople pushy, and that only drives customers away. Tell your staff to take it easy, that slow times should be considered a relationship-building year, and that good times are on their way.

13
Examine tax planning / While still ensuring that your organization remains fully tax compliant, it should be possible to improve your cash flow position by reducing or deferring tax payments. Opportunities here would include making maximum use of losses in calculating Preliminary Tax Payments and ensuring that all available deductions are being claimed. At a more strategic level, falling asset values can also be taken advantage of for crystallizing losses and tax-effective succession planning.

14
Prep your emergency brake / This refers to the expenses and the people you will have to cut when — should worst come to worst — you’re just about to go under water. “You want to have an emergency brake created in the cold, rational light of day and hope you will never have to use it,” says Slain. As a general rule, layoffs should be an option of last resort, as productivity nearly always suffers when employees feel uncertain. Meg Rankin of J. Rankin Jewellers in Edmonds, WA, says she supported her staff by “allowing them to maintain hours, even if profit sharing diminished for a time.”

15
Manage inventory / One of the greatest hazards during a recession is being caught with extensive back stock. Now is the time to find ways of reducing slow-moving goods. If it’s not selling now, it will never sell in a recession. A leaner inventory will also give you greater flexibility, allowing you to respond to changes in the market quicker and with minimal loss of investment capital. David Blitt, owner of Troy Shoppe Jewellers in Calgary, AB, urges you keep in mind that the face value of your stock is fluid. “I learned a valuable point from the guys at Wilkerson’s, which was that stock is not worth what you paid if it doesn’t sell, but debt is worth the face amount. In simple terms, less debt is better than more inventory.”

16
Don’t cut advertising / It seems logical to reduce advertising and promotional expenditures during a downturn: People aren’t buying, so better to hunker down and wait for the good times to return. But such an approach leaves a void in the market, says Roy Williams, author of The Wizard Of Ads. If your competitors are cutting back, you can actually get a boost in the effectiveness of your advertising because your “share of voice” just got bigger, he says. Williams recommends monitoring your competitors’ advertising. If they’re cutting down, seriously consider increasing your ad budget and hitting harder. (Advertising also becomes cheaper during a recession).

17
Develop alternative revenue streams / “Have a service that everyone needs. When no one can afford to buy, they’ll always repair or buy estate,” recommends Lisa McConnell, owner of Lisa McConnell Design Studio in Fort Worth, TX. Without the additional revenue provided by gold buying during the last recession, a lot of small jewelers would have gone to the wall. While you don’t want a new line or service to take time and money away from what you do best and/or damage your brand and reputation, some form of diversification is important, especially into market sectors that are counter-cyclical, staples or otherwise escape the brunt of a recession. Buying off the street can go beyond gold, and new online channels mean you also have more options than selling scrap to a refinery.

18
See challenges, not threats / Shawn Achor, the Harvard professor-turned-consultant and author of The Happiness Advantage, did a study of bankers right after the 2007 crisis hit. He found most of them were incredibly stressed and their productivity slumped as a result. But a few were happy and resilient. What did those bankers have in common? They didn’t see problems — even industry collapse — as threats; they saw them as challenges to overcome. Such behavior can be taught. Achor’s work with the bankers resulted in a 23 percent drop in their stress-related symptoms and produced a dramatic improvement in their levels of engagement at work as well. To be sure, keeping a positive mindset is not always easy, says Brenda Newman, owner of The Jewelry Source in El Segundo, CA. “Left foot right foot, one day at a time, one step at a time. Think about what to do to create a lean monthly obligation, but just always remain positive.”

19
Have a shopping list / “History shows that the best deals are made in downturns,” write David Rhodes and Daniel Stelter, senior partners at Boston Consulting Group in their paper “Seize Advantage in a Downturn.” Liquidation sales of everything from equipment to inventory become more common. Great employees also become more available. Adds Sven Smit, a McKinsey senior partner, “If some other player moves a little oddly, that’s a time for you to snatch assets, snatch people, and take a proactive stance, which is that a crisis is truly an opportunity.”
To do so, stay in touch with banks. “When banks foreclose on your competitors and sell their assets for pennies on the dollar, unless you have relationships with banks, and you’re one of their first calls, the cheap assets will be sold to someone else,” says Recession.com’s Slain.

LESSONS LEARNED
Jewelers reveal the survival lessons they learned from the Great Recession

  • Looking back is as scary as when we were going through it. I buy tighter, I buy more conservatively. I negotiate phone, trash, etc. that may seem like little expenses, but they add up as a whole. – Christine Matlack, E.G. Landis Jewelers, Boyertown, PA
  • Focus on bridal. That never goes away. Also repurposing clients’ jewelry — it’s an inexpensive way for them to get “new” jewelry and they are able to rationalize it. – Elizabeth Saba, Presley Co Fine Jewelers, San Diego, CA
  • The Internet has truly kept our business thriving and growing. Having a brick-and-mortar store is critical as it lends stability, but having an e-commerce site has proven to be a must! – Patty Gallun Hansen, Dorothy Gallun Fine Jewelry, Cedarburg, WI
  • Must not be caught with too much money tied up in inventory. Need to be able to keep purchasing fast-turning product during leaner times. Must be able to adapt to consumer price point changes. – Rob Divinski, JB Hudson, Minneapolis, MN
  • When, not if, the next slowdown occurs, I will be ready with no debt on my books. In 2008, I was fully leveraged with a line of credit from my bank. They were very understanding, but it was no fun for me. – Steven B. Goldfarb, Alvin Goldfarb Jeweler, Bellevue, WA
  • I learned that you should not give up on advertising when things go south. You have to work smarter, be wiser in decision-making, but you can power through. – Jon Walp, Long Jewelers, Virginia Beach, VA
  • Switching from colored gems predominantly in my designs to commercial bridal. I looked at the business and thought one thing people are still doing is falling in love and getting married. Saved me. Now we are in both areas. I’m glad to see color trending again! -Kas Jacquot, Kas A Designs, Jefferson City, MO
  • Have reserves, a rainy day fund. Be prepared to offer those “bread and butter” pieces to keep afloat. Try new marketing strategies. Appeal to new markets. – Theresa Peregoy, Classic Facets, Edgewater, CO
  • Custom design! This allows us to be flexible and offer more price options. For example, when a customer has less to spend, they can remount an existing diamond rather than buying a new diamond. And we can usually create a less expensive version of the ring style that they like by offering other gemstones and metal choices. – Dianna Rae High, Dianna Rae Jewelry, Lafayette, LA

Chris Burslem is Group Managing Editor at SmartWork Media.

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