Americans are entrepreneurial by nature, hard working, and creative. While I’m confident that American ingenuity and entrepreneurship will once again lead us out of this economic downturn, it will no doubt be a painful process.
Warren Buffet once said the only way to go broke is on borrowed money.
We are at a point in time where we, in almost every sector of society, are over-leveraged. We read daily about the “need” for credit to sustain daily operations at businesses ranging in size from family-run service companies to International mega-corporations. We must separate ourselves from this financial heroin.
The biggest current challenge we see facing the industries we serve is liquidating on-hand inventories. Many sellers have too much inventory for their contracted market size. In addition to their bloated inventory position, that inventory is getting more expensive thanks to accruing interest and finance charges. On top of that, due to model year depreciation, inventory units are losing resale value every day.
Making matters worse, these same businesses rely heavily on their customer’s ability to borrow in order to purchase their products. Because of the credit freeze at the retail level, there are now fewer customers who have the ability to purchase these products.
Thusly, there are too many units for sale; that are getting more expensive; that are losing resale value; and now there are a fewer number of customers to sell them to. This is going to end up badly for a lot of people.
Now that dealers aren’t selling units at the retail level, they are not replenishing those inventories. Manufacturers are now unable to sell more units to dealers, and the vicious cycle begins.
In order to re-ignite the market we must plunge this aging inventory… fast! Like a clog stuck in a pipe, new units cannot start flowing again until the aged inventory is purged from the system. Once the aged inventory has been moved, builders must then carefully adjust their production output to match the contracted demand for product.
The good news is that customer interest hasn’t waned. People still want to live the boating lifestyle. People still want to drive nice cars. People still want modern appliances. People still want to move into bigger, newer, nicer homes. And renters want to take the step into home ownership.
Businesses with cash, less debt, and an ability to quickly contract their available inventory to the current market demand will be most likely to prosper through this downturn. Even if it means selling products at a loss, liquidating aged inventory will reduce overhead and free up cash that can be used for keeping the lights on. Those who can most aggressively reduce their inventory positions will be the ones to succeed in the long run. Unfortunately, to get there, a lot of painful and expensive decisions will have to be made.
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