June 1, 2008

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The R Word

Though a Storm May Be Brewing, Working Smart Will Keep Companies High and Dry

Spencer Sutherland, Sarah Ryther-Francom

June 1, 2008

Are we or aren’t we? No one wants to say the dreaded “R” word, but everyone is at least questioning. Whether the U.S. is technically experiencing a recession may still be up for debate, but the effects of a slowing economy are all around us. And while Utah’s economy continues to hold steady, some local companies report experiencing economic trouble. With rising gas prices and a looming economic slowdown, smart companies are planning for tougher times ahead and looking for ways to guard their businesses against possible downturns. The Real Deal on Real Estate The residential real estate market has experienced a brutal blow nationwide and is taking most of the heat for the country’s economic woes. Though Utah’s real estate market has continued to remain stable when compared to the rest of the nation, there’s no denying that the industry has experienced some turbulence. According to a report released last month by the University of Utah’s Bureau of Economic and Business Research, Utah’s residential construction fell at a record-breaking pace, as the state experienced a 58.2 percent year-over decline in total residential building permits during the first quarter of 2008. This ranks as the worst decline recorded in Utah since 1987. “This will be a very difficult year for home builders,” says James Wood, director of the University of Utah’s Bureau of Economic and Business Research. As the housing industry slows, residential construction job numbers decline, putting further strain on the economy. The good news, however, is that housing prices are becoming more affordable. “For home buyers, even with the decline in construction, there should be plenty of homes on the market to choose from, both new and existing. Prices will also be more negotiable,” says Wood. “Even now, the Utah market is much stronger than the rest of the nation,” says Brian Verhaaren of RealCove, a real estate Web development firm in Park City. “Everyone is saying that the sky is falling, but that’s really not true in Utah.” Verhaaren says that there will always be fluctuations in the marketplace, so companies should retool and work a little smarter during an economic slowdown. “There’s a saying that a recession is when money returns to its rightful owners - and that’s particularly true in the real estate market,” quips Verhaaren. “The good agents, instead of battening down the hatches and waiting to weather the storm, are being aggressive, pricing listings properly and really working with buyers.” Pain at the Pump Though Utah’s economy hasn’t come to a screeching halt like much of the nation, there has definitely been some braking. “Utah’s economy has slowed from a pace of about 60 mph to 25 mph,” says Jeff Thredgold, economic consultant for Zions Bank. According to Thredgold, high gas prices have further stirred the state’s economic trouble. “Gas prices are impacting everybody,” he says. “Small businesses in particular, especially small businesses that deliver [goods] or involve transportation, are seeing costs going up tremendously.” Jonathan Sweet, owner of Hills House Antique Gallery in Salt Lake City, says that gas prices and the so-called recession have influenced his day-to-day operations. “We’re experiencing a slowdown and I think it has a lot to do with gas prices,” he says. “Freight costs are up, everything is up. Gas prices have increased the cost of getting things shipped to me and the cost for me to ship things out. And people can’t afford to go out and go shopping as much, so we’ve lost some of our customers. It’s starting to hurt.” Lindsay Vieta, co-owner of Tri-Fec-Ta, a floral, design and events company in Salt Lake City, says that Tri-Fec-Ta’s gas costs have doubled in the past six months. “Our costs for fuel have gone from about $100 a week to between $200 and $250 a week,” she says. “Right now we’re eating the costs.” Beyond her own increasing fuel costs, Vieta has been impacted by rising costs from the wholesalers she purchases supplies from. “When gas prices first started to rise about a year ago, the wholesalers raised their prices to cover shipping costs. We have not had to raise [our prices] yet, but we’ve had to think about it.” John Dye, president of Fluid Studio, a design, advertising, marketing and communications firm in Bountiful, says that he’s witnessed the gas increase affect not only his business, but also his employees. “The current high price of gasoline and the recession have impacted Fluid both internally and externally,” he says. “Internally, we are seeing more employees consider public transportation, bicycling and even walking to work. Some associates have even relocated to Bountiful to be closer to the home office.” Candace Daly, state director of the National Federation of Independent Business (NFIB), says that the rise in gas coupled with a slowing economy has made it difficult for companies to plan for the future. “Small businesses are struggling with the rising gas prices,” she says. “Businesses don’t know whether gas prices are here to stay, so they’re having to absorb the prices within their budget.” The Chopping Block When times are tough, businesses are forced to make changes. Whether increasing their product prices, cutting employee benefits or adjusting their budgets, local businesses are preparing for an economic storm. “One of the first things I’ve seen go is health insurance,” says Daly. “Small businesses can’t afford the premiums. I’ve also seen entrepreneurs that have to have a spouse working just for the health insurance…In other cases businesses will pass the costs over to their customers. For example, you might see a restaurant raise their prices if they don’t have a loyal clientele.” Dye says that his advertising workload has slowed, indicating that companies are cutting how much they spend on marketing. “Many [businesses] seem to be tightening their advertising budgets,” he says. “What they do not realize is that if most of their competitors adopt the mentality of spending less, they should keep their budget the same as originally planned or even increase it to build more exposure and be more front-of-mind with their target audiences. The savvy ones realize that while their competition is dormant is the best time to make an impression.” Matt Belkin, vice president of consulting at Omniture, agrees. “Marketing is often perceived as a variable expense, one that can easily be tossed by the wayside in lean times,” he says. “Yet numerous studies have shown that the companies that invest in advertising and marketing aggressively during times of recession are those that are the most successful, both during and as the recession starts to turn.” Vieta says that she and Tri-Fec-Ta co-owner Pam Ostermiller have been stretching their creative muscles to attract more business and avoid raising their prices. “We just became members of a fine flowers network and we’ve taken bids on improving our Website,” she says. “We’re also thinking about pushing discounts a little harder…We’re expanding our retail side and we’re promoting seasonal open houses/gallery nights. We’ve had to become creative.” A Helping Hand As businesses face the economic storm, it’s important to have options. Building a strong relationship with a financial institution from the beginning can provide a relationship for business owners to fall back on. “Our goal is to be a trusted advisor to our clients. We want to be talking to our clients on a regular basis, not just when a problem occurs,” says Lori Chillingworth, senior vice president and director of business banking at Zions Bank. “But the borrower needs to take on the same amount of responsibility in the relationship. “[That way], when you think that you’re going to be coming upon difficult times, you already have a strong relationship with somebody who you can really talk to about it.” Though the sub-prime lending crash wreaked havoc on financial institutions across the nation, Utah’s financial institutions say that the local market is surviving the catastrophe and lenders remain confident that they can meet the needs of businesses. “We are starting to see the effects of a little bit of a slowdown in the real estate market,” says Chillingworth. “But in general, we’re not really seeing a lot of problems with our clients in terms of a recession…It is a false notion that banks aren’t lending right now.” In fact, Chillingworth says that this may be the perfect time to look for additional funding. “There are advantages of borrowing money during slower economic times. Right now interest rates are lower, so [borrowers] can get a business loan at a better rate than they were able to a year ago, before the Fed started cutting rates.” When asked whether business owners should spend time worrying about the recession or continue with business as usual, Chillingworth recommends companies “move forward. Move cautiously forward.”
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