The Milan News-Leader
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Region is 'economic microcosm of the nation'
Main Street is feeling the pinch as economy suffers across Michigan, nationwide
By Sean Dalton, Heritage Newspapers
PUBLISHED: November 20, 2008
Walter Michal has been in the recreational vehicle 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 recently made a radical change to his business. The RV superstore is now known as Walt Michal's RV, Auto and 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 store, which stocked $30 million in wholesale merchandise in its heyday. It wasn't too difficult to sell 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.
He isn't the only one feeling the pinch, nor is Michigan unique in the nation. Employees at Lloyd Bridge's Traveland in Chelsea reported that they are in similar circumstances on the other side of the county.
According to the Recreational Vehicles Industry Association, shipments fell nationwide 9.5 percent and they are expected to have fallen another 14 percent when the curtain falls on 2008.
It's not difficult to see the problem with RV sales. Data collected by the U.S. Department of Labor Statistics shows housing values fell 8 percent and wages only increased 3 percent, according to the department's latest statistics.
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, according to department statistics.
The RV came into popularity under the same circumstances that many American luxury products have -- on the assumption of cheap oil and strong labor, the latter of which pass rising fuel costs on its way down the charts.
According to other U.S. Department of Labor Statistics studies, cost of benefits are increasing employer cost per employee, while the unemployment rate rose 5.7 percent in July alone, with construction, manufacturing and several service-providing industries leading the bleed.
For those that still have jobs, the department's "Real Earnings" study, which measures Consumer Price Index figures against reported wages, showed a 0.9 percent slip for workers in their most recent study in June.
Looking at the data, it's not surprising that an American luxury like an RV would be further and 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 benefits packages.
Judging by the size of his business, which he says was "built to be huge," Michal counts himself among the crowd that 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 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.
Grimes said one of the transformations that is happening right now through the U.S. economy as it pertains to small businesses is a tightening of belts.
"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," he 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 consumer force is at 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 covers December 2006 through December 2007, and shows that the index of consumer sentiment, which is an aggregate of a number of 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's report cites projections of the 2008 unemployment rate and a projected 3.4 percent increase in the rate of inflation by the end of 2008 as chief causes.
Perceptions of personal finances, both current and expected over the following year, were down and scores ranking participants' economic outlook over the 12 months following December 2007 (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 figures.
Grimes says that what the county and the nation have in common is one of a small number of bright spots, namely 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 highlights strength, Grimes said.
"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," as are the hospitals and medical schools in the area, as well as Eastern Michigan University, Grimes said.
"(They're) bringing in tons of new money for research and maintenance," he said, adding that nonmedical related operations are struggling with the state's budget.
"I know if you go back to six to eight years ago that 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.
"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 projects that the country will 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 farms tightening up credit, because they have taken such a large hit on their losses."
The only sector doing well, aside from health care, is exports, Grimes said.
"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, the bottom line, he says, is that companies are going to have to adjust to slow growth and smaller margins.
Taking action
So what can small businesses do in the face of declining consumer confidence and softening job markets in the area?
A number of businesses are dealing with the slump in their own way.
Zou Zou's CafÈ in Chelsea has seen rising labor costs as the No. 1 challenge on the horizon, said owner Marie-Anne Fody.
"You have to make adjustments ... you know we are holding our own and doing our own thing," she said.
Fody says that she pays 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 says they are faring better, in part because they are reliant on business from schools, said Don Canham.
"We sell mostly to schools, so our business is pretty steady," he said. "We are doing all right."
Canham says they are still feeling the pinch, but "don't want to say (they're) isolated from the problems."
Echoing what Zou Zou's is going through, Mark Perry, owner of North Point Seafood & Steak in Dexter, 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 current customer retention and limited marketing in a small area around the business because of high 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 Edgar Norman Creative USA based in Chelsea, says there are many things a small or mid-sized company can do to bolster performance.
Her company is a full service marketing and advertising agency that has been around for 17 years and operates in both the United States and Canada.
They work with a range of clients in the food, wine, travel and tourism industries, as well as everything from biotech firms to dentists and libraries.
"Investing in expert advice will be the best way to market in a tight economy," Ortbring said in response to general questions about what a business to do to market itself effectively.
Ortbring agrees with Perry's focus on his 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, Ortbring said, don't slash marketing and advertising at the first sign of trouble.
"Consider new approaches, new ways to community," she said. "All to 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 (and/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 trusts you enough to spend money with you."
She also says customers have a responsibility for local business, 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 everyone needs to take individual responsibility for the local economies and shop in the communities in which they live as often as possible.
"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 workforce 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 gives it 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 a 1099 working as contractors versus employees filing a W2, 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 this big facility," he said. "We're going to see these little groups putting together small operations and asking, 'Can I survive?'"
Bernstein says the answer is "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. That's the future."
On the consumer side, Bernstein says he expects to see local growing efforts being bolstered by demand for produce that doesn't have heavy transportation overhead from high fuel costs attached.
"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 the core part of the county in and around Ann Arbor. He also says leases are started to be snapped up again by businesses looking for space.
He cites the re-entrenchment of former Pfizer employees into small businesses as one reason.
"Some Pfizer employees 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.
"That's just part of the economic reality that is coming."
Bernstein says that another exciting positive 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 move than two buildings on 80 acres of undeveloped property at Plymouth and Green roads.
"That's why I'm so optimistic," Bernstein said. "Once they let it go to market that wll 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 and More Superstore, as it soon hopes to be known, are hanging in there any which way they can.
"We were the RV king, but now we're the king of everything," Michals joked, with tension in his voice. "We're going to sell ATVs, 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 the rental charge to the purchase price.
Michals wants to get customers as early as possible. He wants to let people to know right now that they can get their first car at his lot, and he hopes they will keep coming back again and again for the rest of their lives with their friends and family in tow.
His only regret is that he didn't react earlier.
"We should have diversified a year prior," Michals 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 their bonds rated junk status, Michals 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, Michals says he too is going to hope for modest growth or simply balanced books once the economy stabilizes.
Sean Dalton is a reporter for Heritage Newspapers. He can be reached at 475-1371 or sdalton@heritage.com.
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