Dealing with recession

The current economic recession in the US is into its third quarter and the effects are now being felt on the street - even in India. In the recent past, I have come across several "How to" books on dealing with recession or tough economic times, but the best lessons are the ones learnt on the ground. In this blog, I will describe one case study of a small business dealing with these tough economic times:

The case of Little Paramount Hotel

Little Paramount Hotel is a small restaurant located right next to my office. The office complex where I work is occupied by IBM, Cisco & EMC - all IT companies which are severely affected by the US recession. These companies have taken steps to deal with recession - mainly by pay cuts and layoffs. The impact of pay cuts and layoffs on the employees has been severe, and naturally employees reacted to the changed situation by cutting back on discretionary spending - which included eating out at restaurants.

Little Paramount's restaurant business got seriously affected and the number of customers visiting the restaurant for lunch dropped drastically. I guess that the loss in revenue for the restaurant was about 30%-40%, and the trickle down effect of the recession could now be seen in full force on the hotel employees as well.

Small businesses have an advantage in such tight situations - provided they have a cash hoard. In case of Little Paramount hotel, the owner reacted to the changed situation in a way - that is described in all the leading business books.

He first decided to invest in changing the interiors. This was a bold decision - given the prospect of lower revenues in the pipeline. The interiors of the restaurant was redone to give it a more modern look and it was designed to attract casual customers who might walk in. Little Paramount Hotel is located on a very busy road and opposite to a bus stand. The new interiors was designed to give the restaurant a new and a clean look - which is essential to attract any customer who might be walking around searching for food.

The next move by the owner of the restaurant was the real winner.

Little Paramount restaurant created a new value menu - a whole meal with prices ranging from Rs. 35 to Rs. 60 - as a standard offering. The food items in the new menu was not new to the restaurant. The old menu items were repackaged into value menu and was offered at a different price point. At these prices, the restaurant did not lower the price on the food, but it offered the same food in a fixed meal options instead of the earlier "al carte".

The impact of these steps was immediate. Little Paramount Hotel was once again a busy place at the lunch hour. The restaurant got back its customer base and the business is thriving. Although, I would guess that the total revenue for the hotel may not have reached its pre-recession peak, but the hotel stopped the slide in revenues and also managed to win back customers. Customers are now happy with the value meals, enjoy the new interiors and appreciate the fast service. I guess that in a few months, the hotel would have regained its earlier pre-ression revenue numbers and also show a modest growth. This is a classic example of how business should cope during tough economic times.

On the other hand, the IT companies I mentioned earlier - IBM, Cisco, & EMC are still reeling under recession, and stranger still, is that a small business is better able to cope with the recession and emerge from it stronger, while the big businesses are still struggling.

Lessons Learnt

Just by studying the experience of Little Paramount Hotel, one can learn some of the key aspects of dealing with recession. The lessons can be summarized as:

1. Recession is part of the business cycle, so be prepared for it. In good times save cash and maintain a healthy cash hoard. Little Paramount Hotel was able to invest in a recession mainly because of its cash reserves. This investment was vital for the recovery of the business and investments in the time of recession will help business to emerge stronger from the recession.

2. Invest and build your business during the recession. Recession affects all businesses - but the weaker ones will not be able to invest and thus when the economy recovers they will not be able to compete effectively. On the other hand, companies that invest during a recession will emerge stronger and will be more competitive when the recession ends. Another way to look at a recession is - A recession is a mechanism to weed out the weaker businesses.

3. Optimize every aspect of your operations for minimal cost structure. Cash is the king in all business - big or small. During the time of recession, it is prudent to revisit all aspects of the business operations and weed out inefficiencies and wastage's. Optimize the business operations to free up cash. Little Paramount Hotel optimized its menu to serve select items and faster turnaround of customers at the table - this means lower inventories, efficient kitchen operations and lesser man power requirements.

4. Repackage your product offerings to provide value to customers. Recessions do not come unannounced. There are always leading economic indicators of a possible recession, so one must keep an active watch for a possible recession. When a recession really sets in, customers tend to react to the changed economic landscape by changing their buying habits. Business leaders should closely observe the changes in buying behaviors and tailor the offerings to meet the new buying habits. In case of Little Paramount Hotel, menu was changed to accommodate a lower priced offerings - so that customers will still be able to reduce their expenses and still patronize the restaurant.

5. Do not lose your customer base. Customers are valuable assets to the business. Once a customer is lost during a recession - then the customer is lost of good. Given the cost of acquiring a new customer, it is always cheaper to retain an existing customer than acquiring a new customer. Therefore, it is essential to retain customers - even if it means less revenue during tough economic times. Eventually, the economy will improve and sales revenue will increase. There are no simple or straight forward way to retain customers - other than to provide greater value to customers. i.e, repackage/reprice/reposition your product during recessions so that you don't lose your existing customer base.

Closing Thoughts

Recessions are cyclical events in the business life cycle, therefore one needs to be prepared for a recession before it happens. Once in a recession, business leaders should act on the changed reality. There are no avoiding techniques in the long run. Acknowledge the recession and make organizational adjustments accordingly to deal with the new reality - and do it quickly. Develop a determination to win and work hard for it, and the business will emerge stronger from the recession.