The Chelsea Standard
A Heritage Newspaper
Weekly Publication
Region is 'economic microcosm of the nation'
By Sean Dalton, Staff Writer
PUBLISHED: August 14, 2008
Walter Michal has been in the RV business for 35 years and says he's never seen anything like the economic downturn of the past several years.
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He has owned Walt Michal's RV Superstore in Belleville for the past 11 years and is getting ready to make a radical change to his business.
The RV superstore will soon be known as "Walt Michal's RV, Auto & More" Superstore.
"I've cut my inventory by $6 million this year - we usually stock $12 million wholesale," Michal said from the office of his Belleville dealership, which stocked $30 million in wholesale merchandise in its heyday.
What's worse, it wasn't too difficult to move that much product at retail to customers back then and make $70 million in revenue, he said. Now revenue is more in the $16 million range.
Michal isn't the only one feeling the pinch, nor is Michigan unique in the nation. On the other side of the county, employees at Lloyd Bridge's Traveland in Chelsea reported that they are in similar circumstances.
According to the Recreational Vehicles Industry Association, shipments nationwide fell 9.5 percent last year and are expected to fall another 14 percent when the curtain drops on 2008.
It's not difficult to see the problem with RV sales. Looking at the latest data collected by the U.S. Department of Labor Statistics, housing values fell 8 percent and wages only increased 3 percent.
Meanwhile, fuel oil and gasoline prices increased 48 and 35 percent, respectively.
Over the same period, the cost of eggs rose 27 percent, bread 16 percent, milk 13 percent, chicken 10 percent and ground beef 7 percent.
The RV became popular under the same circumstances that many American luxury products have - on the assumption of cheap oil and strong labor, passing on rising fuel costs down the line.
According to other U.S. Department of Labor Statistics studies, the cost of benefits are increasing employers' cost per employee.
Additionally, the unemployment rate rose to 5.7 percent in July, with construction, manufacturing, and several service industries leading the bleed.
For those who have jobs, the department's "Real Earnings" study - which measures the Consumer Price Index against reported wages - showed a 0.9 percent slip for workers in its most recent study in June.
Looking at the data, it's not surprising that a particularly American luxury like an RV would be even further out of reach for most people in Michigan, who are losing jobs in the auto industry as Ford and General Motors continue to adjust their restructuring efforts and retirees lose their once-guaranteed lifetime benefit packages.
Judging by the size of his business, which he says was "built to be huge," Michal counts himself among the crowd who never would have guessed things would get this bad.
"It's a tough row to hoe here in Detroit," he said. "People who were buying RVs here are (now) scrambling to pay their mortgage every month.
"We've had back-to-back the worst years I've ever seen ... this is the worst economic status that has hit Detroit ever.
"Even with the mortgage rates in 1980 and '81 we were still building a lot of cars and everybody was still working. Now a $30-an-hour guy on the line is going to be bought out or told to start over at $10 an hour and pay for his own insurance."
Power of perception
Washtenaw County is a "microcosm of what goes on nationally," says Donald Grimes, senior research associate for the University of Michigan Institute for Labor & Industrial Relations.
He is responsible for annual economic forecasts for Oakland, Washtenaw and Wayne counties, monitors economic development throughout Michigan and is an expert on the relationship between education and high-paying jobs.
According to Grimes, one of the "transformations" that is happening right now throughout the American economy, especially in small businesses, is unprecedented belt-tightening.
"There has been a pulling back of consumer spending and that affects the tightening of credit and conscious awareness that we have to rebuild our savings rate, which is near zero," Grimes said.
"A lot of businesses, including small retail, restaurants and small stores, have had to retrench because consumers are just not spending money in their places of business."
Grimes thinks that the country's consumers are on the cusp of a new wave of frugality that will reduce demand for years and possibly decades to come.
"You also have to realize that a lot of your smaller businesses were affected adversely by the increase in minimum wage and food costs, so they kind of got squeezed from all ends."
The University of Michigan's Institute for Social Research keeps track of consumer confidence in a collaborative effort with Reuters news service.
The most recent available data, from December 2006 to December 2007, shows that the index of consumer sentiment, which is an aggregate of several factors measured in the institute's survey, has fallen from 91.7 to 75.5 over the previous year.
Perception of current economic conditions fell from an index score of 108.1 to 91, and the index of consumer expectations plunged from 81.2 to 65.6.
The study cites as chief causes projections of the 2008 unemployment rate and a projected 3.4 percent inflation rate by the end of 2008.
Perceptions of personal finances, both current and expected over the coming year, were down and scores ranking participants' economic outlook over the 12 months from December to December (down from 105 to 68 index points) and the same outlook over the next five years (down from 97 to 81) weighed heavily on the overall consumer confidence.
Grimes says what Washtenaw County and the nation overall have in common is one of a small number of bright spots: health care.
"(It) is our best growing industry," he said. "It is growing here as it has throughout the state and nation."
But at the same time, the auto industry is taking a beating so the overall picture is still gloomy for consumers.
"Most people in Washtenaw don't understand that the auto industry in (the county) used to be much bigger and more important to our local economy," Grimes said.
Looking at other parts of the local economy does highlight some strength, according to Grimes.
"Construction isn't doing so well except when it's related to expansion of (the University of Michigan."
Overall U of M is doing "OK," according to Grimes, as are the hospitals and medical schools in the area, as well as Eastern Michigan University.
"(They're) bringing in tons of new money for research and maintenance," he said, adding that non-medical-related operations are struggling with the state's budget.
"I know if you go back to six to eight years ago the amount of money that the universities overall have declined substantially ... it's a share of a shrinking pie," he said.
It's a tough situation for what he says are the biggest employers in the county.
U of M, for example, has 38,845 employees, of which 15,816 are in Washtenaw County.
"Consider the spinoff jobs and the spending of employees is huge," Grimes said. "How U of M goes will decide how the county goes, — the same goes for EMU and the hospitals."
On a national scale he projected that we'll get over the "perfect storm" of factors that include the housing-bubble burst, fuel costs, food prices, the value of the dollar and unemployment that are culminating in a recession.
"When you think about what has happened, it truly is a perfect storm," Grimes said. "You have oil prices, which pulls $250 billion out of Americans' pockets and sends it to countries like the Middle East, South America and Africa; and then you have the decline in home prices, which makes everybody feel poor since that's all the investment a lot of people have.
"These people would already be spending less, but then you have the credit crunch where you have financial firms tightening up credit, because they have taken such a large hit on their losses."
Aside from health care, the only sector doing well is exports, according to Grimes.
"Our exports are exploding," he said. "If you just took oil out of equation, our trade deficit is greatly shrinking. A lot of that is stuff coming in from overseas that people aren't buying. Companies doing exporting tend to be larger firms and their presence overseas is doing really well."
Aside from that, he says, the bottom line is that companies are going to have to adjust to slower growth and smaller margins.
Taking action
So what can small businesses do in the face of declining consumer confidence and softening job markets?
A number of businesses in the area are dealing with the slump in their own ways.
Zou Zou's CafÈ in Chelsea has seen rising labor costs as the No. 1 challenge on the horizon, according to owner Marie-Anne Fody.
"You have to make adjustments ... we are holding our own and doing our own thing," she said.
Fody says that she is paying more attention to her inventory and expenditures in general.
"We are monitoring our costs very closely (and) we are shopping more wisely and keeping less inventory," she said.
Ann Arbor's Olympia Sports is faring better, in part due to the fact that it is reliant on business from schools, according to owner Don Canham.
"We sell mostly to schools so our business is pretty steady," he said. "We are doing alright."
Canham says he is still feeling the pinch, but "I don't want to say we're isolated from the problems."
Echoing what Zou Zou's is going through, Mark Perry, owner of North Point Seafood & Steak, said things are slow in the restaurant business in general.
"People simply are not eating out as often as in the past when the economy was better," Perry said.
He says his business doesn't focus on discounts, opting to focus on customer retention and limited marketing in a small geographic area, due to gas prices.
"We emphasize our good service to customers who come in ... we try to impress our customers so they come back," Perry said.
Janice Ortbring, president of Edgar Norman Creative USA in Chelsea, says there are man things a small or mid-sized company can do to bolster performance.
Hers is a full-service marketing and advertising agency that has been around for 17 years and operates in the U.S. and Canada.
They work with a range of clients in the food, wine, travel and tourism industries, as well as biotech firms, dentists and libraries.
"Investing in expert advice will be the best way to market in a tight economy," Ortbring recommended, and agreed with Perry's focus on customers.
"Anything that speaks to your clients is the place to start," she said. "Don't necessarily go looking for new business, but cater to your existing ones."
But whatever you do, don't slash marketing and advertising at the first sign of trouble, according to Ortbring.
"Consider new approaches, new ways to reach the community," she says. "All too often, the marketing or advertising budget gets cut and it seems the message gets cut, too.
"You have to find a way to stay in front of your customer."
Building an electronic database when times are good and resources are available will give businesses something to "lean on" when money spent on postage and printing would be better spent elsewhere, Ortbring said.
Being a small-town resident, she also recommends a number of more conventional, sound business practices.
"Know your consumer, use register receipts for messaging, partner with a business with the same customer base for cross-promotions, (or) ask for supplier-side co-op monies," she said.
"Give consumers a reason to come to you, other than a sale. Once you start the markdown or giveaway, it's hard to come back from that. Building or growing is best from your existing base, who already trust you enough to spend money with you."
She also says customers have a responsibility to do business locally, which lends strength to a community.
"I hear people coming to small towns because of the great old homes and nice offerings in the downtown ... then leave to shop elsewhere."
Ortbring says people need to take individual responsibility for the local economies and shop as often as possible in the communities in which they live.
"And if we can't find what we need, ask," she said. "I bet that your local store would love your business and do whatever it takes to keep you coming back."
Silver lining
Most people with an insider view of the situation say that things are never going to return to the way they were, but it isn't the end of the world.
Jesse Bernstein, president of the Ann Arbor Area Chamber of Commerce, says that the makeup of the work force is going to be the biggest factor.
"If you ask an auto worker, it's terrible, but if you ask someone at TDI Infotec or Downtown Home and Garden, or the folks at Zingerman's (Mail Order LLC), business is pretty good and exceeding plans and expectations," he said.
Bernstein said it will be about a decade before the county has settled into a "very different economic picture."
Bernstein says he would like to know how many workers are collecting W-1099s working as independent contractors versus traditional employees filing W2s, as the business climate shifts to more entrepreneurial operations.
"To me, that is the future and where the growth is going to be," he said. "You might have a company headquartered in California that needs five programmers. Instead of having them move and hiring them, those five could work out of our area.
"Or we could have a 40-person outfit here and they could have the choice, 'Do you want to be an employee or can we hire you on a contract basis?'"
Bernstein says it's merely a matter of "asking the right questions," as looking at employment figures alone becomes less relevant.
"We're never going to have the big auto plants, we're never going to have the Pfizer that builds a big facility," he said. "We're going to see these little groups putting together small operations and asking, 'Can I survive?'"
Bernstein answers his own question with a "yes."
"There is a lot of good stuff going on, but unfortunately it's not going to be around 'battleships,' but smaller companies of individuals doing creative things," he said. "That's the future."
On the consumer side, Bernstein says he expects to see local agricultural efforts bolstered by demand for produce that doesn't have burdensome transportation overhead from high fuel costs.
"How cool would it be to be able to buy food locally year-round?" he said. "We have a long agricultural history which I think is going to get revived. Why ship lettuce from California or other things from Chile, when you can produce things like potatoes locally?"
Even in the short term, there are good signs, he said, pointing to a bounce in retail in and around Ann Arbor. He also says businesses looking for space are starting to snap up leases again.
He cites the re-entrenchment of former Pfizer employees into small businesses as one reason.
"Some Pfizer people who were laid off said that this is their chance to start a small business; others are working for smaller operations that opened satellite shops here," Bernstein said. "That's just part of the economic reality that is coming."
Bernstein says that another exciting aspect to the whole situation is what will happen when the shuttered Pfizer facilities on Plymouth Road in Ann Arbor become available on the real estate market.
"There are lots of people waiting to use it," he said. "We could end up seeing more development on that site than Pfizer ever would have done."
The property has more than 20 buildings on 80 acres of undeveloped property on Plymouth and Green Road, adjacent to U-M's North Campus.
"That's why I'm so optimistic," Bernstein said. "Once they let it go to market that'll be another economic engine for us. Those are the most modern laboratories in the world. It was completed the day they announced the closure.
"The sooner we get that to market, the better."
Meanwhile, existing businesses like Walt Michal's RV Superstore - or Walt Michal's RV, Auto & More Superstore as it soon hopes to be known - are hanging in there any way they can.
"We were the RV king, but now we're the king of everything," Michal joked, but there was tension in his voice.
"We're going to sell ATV's, boats, used cars, snowmobiles, everything. We're just trying to survive. We'll sell anything with wheels ... we'll put the ultimate deal together."
You can even rent under the new business plan. Like it? Then buy your rental within 30 days and credit your rental charge to the purchase price.
Michal wants to attract customers as early as possible. He said people can get their first car at his lot, and he hopes they will come back again and again for the rest of the lives with their friends and family in tow.
His only regret is that he didn't react earlier.
"We should have diversified a year ago," Michal said. "Guys who refuse to change will either go out of business, or they're second- or third-generation dealers who have had money in the family for years.
"They don't get any highs or lows. They have been able to maintain, because they don't have the debt, so they don't have to worry about that."
Despite the credit freeze for businesses in Southeast Michigan and the automakers having bonds relegated to junk status, Michal is going to fight for the business that has "been so good to (him) over the years."
Closing up shop and moving to Florida is not an option.
"I'm advertising this on billboards and TV stations are coming out ... depending on the response I'll do more billboards outside of my area and the county," he said.
Once he has adjusted to shifting from a customer base that is 85 percent UAW workers, Michal says he, too, is going to hope for modest growth or simply balanced books once the economy stabilizes.
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