PLANS—Local Business Puts on the Brakes, Just in Case

As stock indexes fall, blue chips miss earnings estimates, retail sales slow and consumer confidence wanes, thinking and strategies have begun to shift across all sectors of the San Fernando Valley economy. Managers are reviewing costs, delaying hiring and capital expenditures and slashing inventories, regardless of whether their particular businesses are actually showing any signs of a slowdown. Whatever the status today, most believe business will turn sour, at least a little, and no one wants to be caught holding the bag when it does. “Companies that were considering expansion are not at this time,” said Greg Lippe, managing partner with Lever, Lippe, Hellie & Russell LLP, who has observed the trend from his vantage point handling accounting for business clients. “Companies that were considering capital outlays for new equipment have decided they’ll repair the old. People are tightening up. I think everyone is getting a sense that it’s a time to sit back and wait a little bit and forego spending.” By no means wholesale changes, the shift is nonetheless noteworthy because most businesses relaxed the rules over the past several years when the economy was expanding. But with most convinced that the landing, be it soft or hard, has begun, betting on the come is looking far more risky. Better to expect the worst and hope for the best. “A year or two ago, we were more aggressive because the economy was building,” said R.A. Tony Palmer, president and chief executive officer at First Western Bank. “You were looking more toward the future.” Banks are tightening lending criterion, looking to past history instead of the future to determine credit-worthiness. Manufacturers are outsourcing to avoid hiring extra help. Those that once spent the bulk of their marketing budgets looking for new customers are plowing those dollars into making sure their current customers remain loyal. Those who never targeted their marketing before have begun to, carefully separating the good prospects from the fly-by-nights. “I’m looking for a sustainable customer base,” said James Segil, chief operating officer for Virtualis Systems, a North Hollywood-based Internet service provider recently acquired by Allegiance Telecom Inc., “customers who are reliable, credit-worthy and in it for the long haul. Before we would end up with a lot of mom and pops who might one day realize they don’t need their Web site. I’m less interested in that customer today.” No time for steeling The shift in outlook began for many companies about nine months ago, but managers say that last year they were doing little more than steeling themselves for the possibility of a downturn. As 2001 dawned, the perception gave way to a reality that has deepened over the past several weeks as the stock markets have been battered. “I think you’ve been seeing it since year end, but it’s been accelerating lately,” said Richard Giss, partner for the retail services group at Deloitte & Touche LLP. “You get five months of declining consumer confidence, you had a poor retail season, the stock market clearly is in full retreat, you have headline stories of companies either announcing hiring freezes or laying off workers, you have a continuing trail of companies reporting missed earnings, so all that adds to kind of a negative atmosphere. None of that is disaster yet, but people have had their confidence bruised.” The reality recently hit Alysia Vanitzian, vice president and chief learning officer at Employers Group, an L.A.-based organization that offers human resources consulting services to its 5,000-member companies, as she tracked job openings for human resources workers. “I have seen a 50-percent drop since October, and the jobs being hired for are more generalist positions whereas last year you saw recruiter jobs from here to eternity.” Good help may still be hard to find, but fewer companies are looking for it. While Vanitzian said she has not seen any wholesale layoffs underway among her members, the Employers Group is getting more inquiries on how to prepare layoff lists and notify employees. At best, employers are opting to make do with their current employee rosters, even if it means everyone is working harder. “We’re in a position where we are looking to justify the need for hiring a lot more than we did in the past,” said Mike Hundert, president and CEO at Rem Eyewear in Sun Valley. “We’re going to do this in a careful and strategic manner. We’re seeing whether we can live within our present means even if it means an increased workload.” The new conservatism is affecting nearly every aspect of a company’s operation, from hiring to marketing and accounting. “Receivables are dragging out,” said Lippe. “What used to be collected in 30 to 45 days is now dragging to 60 or 90 days or beyond. And what basically is happening is because companies are having trouble getting outside financing, they’re trying to finance inside by not paying their bills very quickly.” Watching every penny Manufacturers are especially aware that weakness at any point along the supply chain can come back to bite them. It doesn’t matter how well they run their own business if their retail accounts go out of business or if their suppliers can’t provide timely deliveries of quality merchandise. Rem is diverting money from expanding its distribution to making sure its current accounts remain loyal. The company has reviewed much of its pricing, lowering the cost of some of its eyewear so retailers can offer discounts without eating away at profit margins. At the same time, Rem raised prices on other items to try and keep its own profit margins from dropping too low. “The bottom line is we have to accept the fact that we may not be as profitable as the boom years, but we have to make sure we are profitable (enough) to support the initiatives we need to follow,” Hundert said. Retailers have been among the first to feel the effects of the changing economic landscape. To spur sales they began discounting early in the Christmas selling season, and as their profit margins eroded, they began squeezing their suppliers for lower prices to ease the burden. That put suppliers in a double bind. How to provide the better prices without sacrificing quality? If merchandise is not up to a retailers’ quality standards, the store can return it, and the manufacturer takes the loss. “When business gets very tight, retailers are looking to get out of merchandise,” said Richard Hirsh, co-CEO at John Paul Richard, a women’s apparel manufacturer in Calabasas. “They look for every area to find problems. We’ve gone into our quality control area and made sure the ‘i’s’ are dotted and the ‘t’s’ are crossed.” Reluctant to carry inventories, retailers are also placing orders later, but demanding timely deliveries just the same. John Paul Richard has to keep its suppliers the overseas manufacturers who actually make the apparel at the ready without driving up their inventories. “If we know we’re selling ladies suits for a certain delivery date, and we know that the biggest percentage is going to be in the color black, we can alert our suppliers so they can start preparing the fabric,” Hirsh explained. “They can start spinning and weaving and dying (so that when orders are received they are ready to make the garments).” “When things are tight, you really want to make sure that the right hand knows what the left hand is dong. After that, it’s watching spending and maintaining a good sense of humor, and we’re doing just fine.”