“The World has changed, and not for the better.”
Tom Brokaw 10/7/08

The drycleaning industry has not been great lately. We have seen increasing supply and energy costs, we are still overbuilt, and we are still waiting to lower our labor costs. Profits have been acceptable at best for most of us.

Now we are officially in a recession at best, or a depression at the worst; but, what can we expect from the economy in the coming year? A little background: The current crisis has been caused largely by a mortgage failure and sinking home valuation problem. Years ago, whether through a sense of social justice or a genuine belief that make more people home-owners would improve the US economy, the government began encouraging home lending to new groups of people previously unable to own homes. Rational businessmen filled this market niche and began selling what would be known as sub-prime mortgages. Rational consumers took advantage of this new opportunity to live their part of the American dream.

Home developers responded by building more homes, and soon new communities sprung up all over America. Perhaps you live in one. Perhaps you have such a loan, a sub-prime mortgage. Not all, but some, of the loans had a feature where the loan payment increased over time. Sometimes the increase is sudden, like on the anniversary of the loan, and sometimes it was more gradual in transition. This too seemed manageable to many. Either the consumer would receive wage increases over time, or the consumer was advised that a new loan could be taken out especially if the home had appreciated in value a reasonable expectation based on historical data. Now we know that was a bit too much of a gamble. Most did not see wages rise enough, and as mortgages defaulted, more houses for sale flooded the market.


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Supply1 Sorry about the lose of this graph....
Demand
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Graph 1: Supply & Demand Model.
Generic but it helps us illustrate principles.




and this one..............
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Supply1
Demand
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Graph 2: As we add the second (greater) supply line, we see the value of the average home sold, drop. As the equilibrium of sold homes drops the average value of homes, even more families find themselves unable to refinance due to the loss of equity which was cased by the home value drop. This situation is a type of market failure and has not stopped occurring. My best information is that this will continue to occur through the entirety of 2009.

The good news is that our Federal Reserve and Treasury Department are actively working to minimize the damage that this market failure will bring. We have heard talk of the Great Depression. The differences between the past event and the present circumstances are worth noting. After the stock market crash of 1929, the government made many strategic errors in policy making. Tax rates rose, tariffs rose (reflecting special interest groups attempting to protect domestic producers from foreign competition), and both presidents Hoover and Roosevelt strongly promoted industry-labor cartels that were designed to stifle competition. None of these mistakes will be repeated today. The body of knowledge in macro-economics has increases exponentially since 1929, and I can with great confidence state that only newer problems will be visited upon the world economy.

A note about macro-economics. The total stock-market losses as of the date of the writing will probably not last long. However, some significant market losses will remain for some time. These stock market losses represent loss of market capitalization or for our purposes loss of owner equity. We know that this loss of equity represents a corresponding loss of production capacity and therefore employment.

Let’s discuss how we as businesses will be affected. After all, if we do not act in our own self interest (remember the Invisible Hand?), the economy fails anyway.

- Our customers: are going to have a bad time. Many will find themselves unemployed or under-employed.
- Lenders: Banks are going to be hard pressed to loan much money, especially to marginal applicants. There will be less capital for acquisitions or startups.
- Landlords: will find business failures provide them with ample property to rent. Some opportunities may present themselves for dry stores.
- Employees: will suffer along with us, although mostly household costs will not inflate. Their family members will be out of work, though, lessening household income. I don’t see the reserve army of the unemployed forcing wages down much. Only the lower end of our industry will benefit from this.
- Equipment sales: Equipment will still be sold, often leased. But again, fewer start up plants will lessen this.
- Suppliers: will still be selling supplies, but most likely fewer of them, and collections will be challenging.

Bottom line: There will be fewer of us, due to failures and bankruptcies, at the end of 2009. Many will not be able to sell our businesses. Note the difference between the first supply and demand model and the second one. More of us would want to sell as compared to the banks that would want to loan, so the selling price would drop to a level where most would not be willing to sell. I look for more owner financing and store lease arrangements. If the consumer allows it, dry stores may rise in number because of an increase in available space (due to other business failures and the firm’s ability to self finance). In short, I expect a year of mixed opportunities, and a market correction that has been overdue. This would be an opportune time to get back to the basics of customer service and quality. Take care of the business, and the business will take care of you.