‘Dr. Doomsey’: How To Get Ready For The Downslide

downslide bust broken dish

Right after I submitted my last article entitled “Boom, Bust or Bubble”, I got an email from Fred Klashman the Publisher of Total Food Service, saying “Yikes, Dr. Doomsey, I hope you are wrong! But if not, what can we do about it?” After I chuckled to myself, I realized that I left the readers hanging, because it just sounds like Chicken Little running around screaming “The sky is falling!!”

As I get older, it gets clearer to me that certain patterns of behavior repeat themselves particularly as younger generations move into the mainstream economy.  The big one in America is that most people confuse positive economic growth as sustainable without considering a downslide. Many of the periods of economic growth or “boom” economies were merely good looking houses built on sand. It may be very cool for the moment, but no one takes into consideration the consequences of doing so. Everyone loves living near the water or on a beach until Hurricane Michael tears through your town! 

What I tried to point out in a very condensed article was that predicting the changes in the economy is like weather forecasting. There are patterns, signs and conditions that predict what is coming and we are seeing many of them, yet most people just feel good about having their nice new house on that sandy beach. Denial doesn’t make it go away, nor does it protect the house from floating out to sea. The patterns we are seeing are:

  • Over-valued stock market. An easy bubble to predict.
  • Interest levels still too low to affect a stimulus when a downslide comes.
  • Real wage growth is zero. Probably even less when considering other fluxes in costs such as rent, insurance and healthcare all going up.
  • The average cost of employer health coverage for a family plan has risen to approximately $20,000 per year increasing premiums an average of 5-10% meaning employers must increase deductibles and increase employees out of pocket expenses. Another dramatic decrease in spendable income. Despite the windfall profits in corporations and the monster tax break they have gotten there are no signs they are absorbing any of this increased expense.
  • A shell game tax cut that only benefitted corporations and the rich. Middle class people with two incomes and a home are either screwed or get nothing.
  • Federal tax cuts to the corporations and rich along with loss of deductions on state taxes, property taxes and mortgage interest push the tax burden onto states like NY, NJ, CT, MA, CA which already pay the most in federal taxes per adult citizen and are struggling right down to the local towns and cities.  Your costs are going up. No “break” for you unless you live in a red state.
  • The states most dependent on Federal money (NM, KY,MS, AL, WV, SC, AZ, AK, MT, LA) have the lowest gross domestic product and they take far more from the Federal government than they pay in taxes.
  • As a result of the “tax cut” which is punishing homeowners in the states which contribute the most – real estate / home sales have slowed dramatically and prices are dropping particularly in homes over $750k.
  • Trade wars and tariffs will cause significant increases in our cost of living regardless of what the talking heads in Washington are telling you. You cannot hit a product with a 25% tariff and not expect prices to go up.
  • Unstable relations with oil producing countries could result in pressure on fuel which will cause everything that is transported, cooked, cooled or heated to cost more. As tensions between the biggest oil producers Saudi Arabia and Russia escalate, let’s not forget we are sticking our thumb in the eye of our “friend” and top exporter of oil Canada. 

Now my job in this column is to speak to the financial concerns of the restaurant, hospitality and foodservice industries, which I am. The total and complete disruption of many, many sections of the economy will have broad and long-lasting consequences for us.  The message for our industry is to be prepared for the downslide and be realistic about what is going on. We are an industry that depends very heavily on disposable income and economic stability. 

Some things I would do if I were still in the restaurant business to prepare for the economic downslide in-order to weather the storm.

1. Tighten up your operation. Very often, when things are good operators get a bit lax and spend a little more. They very often give themselves a “raise” and try to improve their quality of life. I don’t blame them, but only after they prepare for a sizable drop in the economy and sales.

Milea February 2019 728×90

2. Start to accumulate cash. If your sales are strong and you are riding a stronger economy with low unemployment and greater disposable income, don’t spend money on non-essentials. Start to save as much cash as you can and build a strong nest egg / emergency fund. You can ride out a downslide if you have enough liquidity.

3. Become a purchasing lunatic – If you aren’t already, become hyper aggressive in price comparison and product selection. The disciplines you develop now will help when the bottom falls out and prices go up.

4. Do aggressive menu engineering – Get rid of low selling or waste generating menu items.  Know the true profitability for each menu offering and kill the low yield items.  Reduce the overall size of the menu where possible and focus on specials that you can adjust pricing on and burn through quickly. This also allows you to buy ingredients that are on sale and improving your yield.

5. Consider prepaying larger recurring bills such as insurance. Many operators find the recurring payment of larger G&A expenses such as insurance or license renewals a drag on cash flow when times are slow. If you have the ability to do so, pay these off as quickly as possible.

6. DO NOT use tax money for operations. I have said this many times: Tax money does not belong to you. You should impound sales tax every single day and over reserve if you can. This is one of the great trip wires that push restaurants over the edge when we hit a downslide.

7. Watch the economic indicators. If you are aware that a hurricane will hit, you can make plans to ride it out.

8. Many more other things, but we don’t have room in this column!

Being prepared is not being “Dr. Doomsey”. Until you have pushed your car down the street in long gas lines (1973 Brooklyn!) you may not realize that this stuff can happen and when your “booming economy” is a house of cards, you should be prepared. If you have any questions or just want to discuss your business, please contact me at dsederholt@ragnarpartners.com

David Sederholt
David Sederholt is a multi-discipline entrepreneur who has launched and built numerous companies in specialty finance, foodservice and commercial real estate over 40 years. After owning, financing and operating over a dozen restaurants in his career he found a niche in serving small businesses seeking financing and strategic advice. For 10 years he served as Chief Operating Office of Strategic Funding Source, Inc., (now called Kapitus). David has also been a Managing Partner at a boutique investment bank and a specialty commercial real estate firm. He is a regular guest lecturer and contributor to business and industry publications as well as serving as a Board member and advisor to numerous companies and non-profit organizations. He is currently owner of Ragnar Partners, LLC, a private investment and advisory firm.