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Avoid the pitfall of the hot dog vendor

Whether you are a carwash, storage facility, petroleum site, general retailer or service business, most would agree that the last couple of years haven’t been the easiest of times. Your bottom line, as well as your balance sheet, have been constantly challenged and threatened.

The press reports every day on the latest statistics regarding the economy. Whether it’s global, national, regional or local, rarely is there good news. With this constant bombardment of doom and gloom, how do you react? Do you put your head in the sand and pretend everything is OK, wait until the tide changes, or grab the bull by the horns, stare the beast down and find a winning solution?

Have you heard the story about the man who owned a hot dog cart? Over several years, he built a successful business and provided for his family. Although he wasn’t text-book educated, he encouraged his children to pursue college careers. As time went on, his business grew, and he invested in new products and bought more inventory.

Just before his best season began, his son came home from college for a visit. Looking over the new products and obvious investments his dad had made, the son loudly proclaimed, “Dad don’t you read the papers? There is a recession going on; you need to cut back. The economy is getting worse by the moment.”

As the dad listened, he thought, “Gee my son is in college; he is learning to be an economist. Surely he must know.” So he did exactly as his son suggested and cut back on his marketing and hours, returned inventory and basically hunkered down for tough times.

Shortly thereafter, business starting falling off, and his son’s prophecy came true. Eventually, the man closed his business and sold the cart.

When selling, the first thing a professional does is identify the pain. It’s much easier to acknowledge and offer a solution when your customer knows you understand and empathize with their economic dilemmas.

There are several things to learn from this story. First, don’t make decisions based on the general media, don’t believe economic forecasts and don’t cut back on core areas that have brought success. On the flip side, do chart your course and execute, and do look for ways to cater to a changing clientele.

As much as we have faced challenging times, we also are entering a time of enormous change and opportunity that, if we are willing to be proactive, can be a lot of fun.

First is the oncoming wave of retiring baby boomers. This group will be the wealthiest retirees our country has ever seen. Some will continue working, while others will retire with strong balance sheets and income. This group is generally well educated, understands the time value of money, and expects quality goods and services. Most importantly, they will pay for them. Additionally, many will downsize and move into smaller housing units, while others will enter senior-only communities.

This has been a generation of collectors. Don’t think there will be a mass garage sale occurring. This is the first post-war group (sons and daughters of Depression families) “where a penny earned is a penny saved,” and the items left to them have important sentimental value.

Transportation costs have just begun to squeeze consumers. Whether driving a vehicle, going on vacation, buying groceries or anything associated with energy, rising petroleum costs will change how, when, what and where we spend our dollars.

Many analysts are predicting the rebirth of cities, growth of self-contained retail, commercial and residential villages, and the gradual death of suburbia as many of us know it. The McMansion is out, and a new urban mentality of living in more efficient, smaller housing is in and gaining strength.

Natural resources, specifically water, will become a major factor in the mobility and relocation of people. According to The New York Times, experts are predicting two fronts on global warming: the rising of the oceans and the reduction of the snow pack that provides water for the fastest growth areas in the country — the Southwest.

The article goes on to explain that the average person in Los Angeles, Tucson, Ariz., and Aurora, Colo., respectively uses 125, 114 and 160 gallons of fresh water every day. Do the math on the amount of population growth in these areas, and it’s fair to say that the requirement outpaces the replacement. Taken a step further, you can see that businesses that do not manage resources properly will be at risk.

Financial implications, from the cost of trades, raw materials, real estate, labor and health care to just about anything that relates to building a business or home, are through the roof. Will they get better? Sure. Will the trend be inclining? You bet it will!

So where is the silver lining in all this? In every seed of adversity there is an equal or greater seed of opportunity. The question is how can you capitalize?

Business owners become responsible for many classes of assets. Each should provide a return on investment. What that return should be depends on the classification; the greater the risk the greater the return. If we are looking at starting a business, most would look for a minimum of a 20 percent return on cash. If you are looking at ground and building, an acceptable return might be in the range of 8 percent to 12 percent.

The point is we need to manage the investments we have made in every resource category so that a positive return is achieved.

One complicating factor is the rising cost of commercial property.

Most business owners or managers do not take into consideration the rising appreciation of ground. Whether you own the site or are leasing, the fact remains that either you or the site owner needs to be cognizant of the relationship between net revenue and value.

In real estate, the golden rule is “highest and best use.” This widely used and accepted term simply states that the resale and/or value of a commercial site is totally dependent on the ability of the site to generate enough net operating income (NOI) that, when capitalized at an acceptable interest rate (determined by the amount of risk), it will establish an acceptable price for the buyer and seller.

An example of this would be an existing business that generates $100,000 NOI. If the accepted capitalization rate is 8.5 percent, the NOI would support a price of $1,176,470. From this you can see the importance of driving the NOI (gross less variable, and fixed other than debt). If this same business had a $50,000 increase in NOI, the change in value would be approximately $700,000.

You can see how managing the profit and loss statement affects the net worth and value of the enterprise.

With all that in mind, what strategies can we use to find the golden seed of opportunity?

In their excellent book, The Experience Economy, James Gilmore and Joseph Pine clearly identify where businesses must go to attract, retain and maximize clients and profitability.

At the core of their thesis is that we have passed through three important economic and commercial phases: agrarian, industrial and service-based economies. If you look at the revenue generation per individual, the peak was the industrial sector. As we export more industrial and manufacturing jobs and shift to a service economy, competition goes up and wages go down. Given all of the factors we have already discussed, it becomes increasingly difficult to make significant profits.

As costs go up, net revenue is reduced and the return on assets and wealth creation becomes seriously challenged. Along come Gilmore and Pine who tell us not to despair; that there is a new economic opportunity on the horizon called “the experience economy.”

In the experience economy the focus of the business model is to create an experience for your clients. This is a big step up from “providing acceptable service with all the trappings.” Here you must adapt the mantra that “work is theater, and every business a stage.” Here you learn the four basic tenants of creating an experience, namely incorporating education, entertainment, estheticism and escapism into your business model.

The results of a perfectly executed experience are customer loyalty, avoidance of price issues, better margins and a stronger bottom line. To validate Gilmore’s and Pine’s premise, think about Disney and Starbucks. Although their core products are very different, their approach and total grasp of creating an “experience” is the same.

These two companies are the best in class from a margin and profitability standpoint. They understand that to compete for the expendable dollars spent in their niches, they must create an environment and customer experience that their competitors have not.

Next let’s take a look at the challenge created by high energy costs. If you were to interview 1,000 motorists and ask them what irritates them the most, it would probably be the rising cost of gasoline. Most don’t understand what goes on behind the pump. All they know is that they are pumping extraordinary profits into the coffers of the “big oil” companies.

There is no doubt that we have seen only the tip of the iceberg. All we have to do is look at any non-oil-producing country around the world and track its cost per gallon or liter to know what to expect. If you think people are annoyed now, wait a couple of years. Add into the mix concerns with natural gas and electricity, and we have some significant challenges that can be translated into real opportunities.

Cross-marketing and compensating motorists for the fuel expended to come to your business, co-marketing, and offering other services at your facility will go a long way toward creating customer loyalty.

When selling, the first thing a professional does is identify the pain. It’s much easier to acknowledge and offer a solution when your customer knows you understand and empathize with their economic dilemmas. Create a destination by making it easy for your customers to accomplish more than one objective when they come to your business. Consider offering valet services or anything that clearly says you understand and are willing to bite the bullet. What goods and services can you align that you don’t currently offer? Investigate, evaluate and invest.

There should be no question that we are facing some horrendous, global environmental challenges. As business owners there are many things we can do to be part of the solution, not the problem. It makes sense for carwash operators to look at practical ways to manage their most important resource — water. If building from scratch, add a reclamation system. If you are an existing location, investigate the cost, as well as the return. Remember that in times of drought, those who have reclamation may be the only carwashes that remain open.

In addition to the practical and moral aspects to using reclamation, there are bragging rights. Advertise it. Educate your customers on the benefits and how it works, and you may attract customers you have never seen before.

Where natural gas and electricity are concerned, recently improved photovoltaic and solar panels have been introduced. These are not only practical additions to your business, but like the recycling of water, they offer advantages in bragging rights, as well as positive impacts on the bottom line. A number of suppliers to the carwash industry are making significant inroads into energy conservation.

Financial considerations are numerous. Finding an institution to fund your business or finance changes or additions is tough and going to get tougher. Your ability to fully understand the relationship between income and balance sheet is imperative. Your ability to communicate your knowledge and the successful financial management of your business is critical to secure ongoing projects and finance expansions.

Most large businesses don’t track the increased value of their real estate, but for small businesses, it is an integral and important part of your net worth. As a result, you need to know whether or not you are earning enough net income to support a sale price if you decide to exit.

Because land prices are rising and good commercial ground is becoming scarce, it is imperative that your revenue stays even or exceeds the appreciation of the dirt. If your core business is truly maxed, you have to look at what new profit centers can be added to keep your business financially balanced between revenue and investment.

For any business that relies on the motoring public, this emphasizes the need to create your site as a destination. What items can you add that enhance the experience, bring value and fulfill the real estate mantra of “highest and best use”?

Although we have discussed several challenges facing business owners, I would be doing all stakeholders a disservice if I didn’t mention suppliers, customers and employees. Suppliers are your global eyes and ears; they see what works and what doesn’t. They know not only your local competition but where the industry is going. Good suppliers are your CIA, and they can help make you aware of what you can do to create value.

Similarly, your customers and employees talk. They can identify for you items of interest that can enhance your business position. Your job? Be available, listen, investigate, invest and, most importantly, execute.

In every seed of adversity there is a seed of equal or greater opportunity. Good luck, and remember that a great experience is very tough to compete against.

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