Potential Impact of War and Recession on the Snow Sports Industry; Relevant Statistics and Possible Strategies

We were looking at a recession before the September 11 attacks on the World Trade Center and the Pentagon and the tragedy raised the possibility (certainty in the minds of many) that the recession would be longer, deeper or both then it would otherwise have been. Economic activity has already rebounded since its nadir in the days following the WTC. But what’s a “normal” recovery from such an event? Who knows.

The snow sports industry may be as impacted by a recession as other sectors of the economy. As we represent discretionary spending, we have the potential to be impacted more. Add to that the “fear of flying” hangover and we can’t help but be nervous about the coming season, especially with the possibility of further terrorist attacks. Air passenger volume was down 50% for a couple of days after flying resumed and, as of October 4th, was still off 29%, according to the International Air Travel Association (IATA).
 
On the other hand, as you’ll see below, the last recession, with its very low resort visitor days, corresponded to the worst snow year in a long time, so it’s hard to lay that awful year only at the feet of the war and recession of that time.
 
Still, my feeling is that this recession, and the caution in traveling and vacationing precipitated by September 11 and subsequent events, will be worse than in 1990-91.   Rather than just be nervous and pray for good snow we should probably “do” something. What?
 
Where Are We?
 
Before I yield to the inevitable and start quoting economic statistics, I want to introduce you to the statistical concept of regression to the mean. Discovered in 1875 by the amateur mathematician Francis Galton, it’s the single biggest reason one might be cautious about predicting a short, shallow recession.
 
To dramatically oversimplify and avoid a really boring discussion of statistics, it says, “What goes up must come down.” And the further up it goes, or the further down it goes, the more likely and the faster, it is to go the other way. We haven’t had a recession since 1990-91, and it was mild.
 
Of course a statistical mean can move, and some of these trends can be over very long periods. Still, the economic rubber band looks stretched awfully tight, and a snap back is inevitable.
 
This is supported by the fact that Japan is going into its fourth recession in a decade. Parts of Asia haven’t gotten over the impact of the currency crisis that started in 1997. Other Asian countries depend on exports to the U. S. to support their economies, and those exports are likely to decline. Much of Europe seems on the brink of recession as well.
 
During recent U. S. recessions, some other part of the world was strong and could pick up some slack. This time, the rest of the world was counting on a U.S. that is weak itself. The last time Europe, Asia and the U. S. all experienced economic weakness at the same time was during the 1973-75 recession. It lasted sixteen months.
 
Consumer spending had started to weaken before September 11. September will be the 12th month of declining industrial production. That ties a record that goes back to just after World War II. The September employment report showed a decline of 199,000 jobs during the month, the largest decline in over a decade. Very little of that reflects layoffs that occurred after the attack.
 
September retail sales, reported October 12th, showed a decline of 2.4%, the biggest drop in nine years. Economists had expected a 0.7% drop. At the same time, consumer sentiment rose to 83.4% in October from 81.8% in September, compared to expectations of a 76.0% reading in the measure of consumer confidence.     
 
The consensus is that the fourth quarter statistics will confirm that we are in a recession if the September retail sales numbers haven’t done it already.
 
Regression to the mean, indeed. Any good news?
 
Some. Housing starts haven’t plummeted and, up to now, consumer spending has held up fairly well. The Federal Reserve has cut the discount rate from six percent at the beginning of the year to two percent now. The last time it was that low was 1958. There’s some concern that the impact of interest rate cuts may not be as powerful as it once was due to the globalization of the financial markets. However, conventional wisdom is that it takes six to nine months for the impact of interest rate cuts to be felt. The first interest rate cut happened January 3rd, nine months ago. The last was October 2nd. Obviously, we haven’t felt the full impact of all the cuts yet.
 
Another thing that tends to lead an economic recovery is the stock market. We’ve all had the pleasure of experiencing the worst bear market since the depression. The week when the market opened after the WTC looked like the capitulation week that’s normally required to find a bottom. There was high point loss on big volume. The put/call ratio reached a level not seen since 1985. The number of investment advisors bearish was higher than the number bullish (they are almost always wrong at extremes). The market broke out on October 24th, and followed through on the 28th. The follow through doesn’t guarantee a rally, but one has never started without it. Since then, the market has acted the way you want it to act, shrugging off bad news, going up on higher volume and declining on lower volume. Hope I don’t sound like an idiot by the time this is published.
 
That analysis and two bucks will get you coffee at Starbuck’s (a small one). But as I sit here writing this, I’ve put my money where my mouth is.
 
SIA’s Retail Audit, conducted by Leisure Trends Group, reported early in the week of October 8th that a sample of 277 storefronts showed September ski and snowboard sales up 19%. By the end of the week, when the sample size had increased to 376, the increase was at 6.1%. That’s still a lot better than the overall national retail numbers reported for September (see above) but I guess we better not breathe a sign of relief until we see results for the full 900 store fronts survey (due in early December).   
 
Finally, increased government spending in the wake of September 11th should make the recession shorter than it would otherwise have been.
 
We’re looking at a recession. Though there are some mitigating factors, there are reasonable arguments that it may not be as mild or short as recent (if ten years ago is recent) ones have been.
 
Right today, the winter sports industry doesn’t have to worry about its length so much as it’s impact on the season that’s starting right now. What does history tell us we can expect?
 
“It’s Déjà vu All Over Again”
 
A recession, a war, and a President Bush in the White House. The parallels are almost eerie.
 
Iraq invaded Kuwait on August 2, 1990. The air war began January 17, 1991. The ground war followed on February 23rd and lasted four days until President Bush declared a cease-fire on the 27th. The first U. S. troops began to leave on March 8th. We declared victory and went home.
 
Our current conflict began September 11. I’m sure none of us knows how long it will last or what exactly success will look like, but it’s not going to be as definitive as the Gulf War. 
 
In 1990, the economy started off pretty well. Gross Domestic Product (GDP) grew at a 5.1% rate during the first quarter. That declined to 0.9% in the second quarter and fell further to a negative 0.7% in the third. Fourth quarter GDP fell at 3.2% rate.
 
For the year, we ended up with a real GDP growth rate of 1.2%. In 1991, it was a negative 0.6%. Officially, the 1990 recession started in July 1990 and ended in March, 1991- eight months later. A recession, by the way, is technically defined as a decline in GDP for two consecutive quarters.
 
From a healthy 5.6% rate of growth in 2000’s second quarter, GDP has fallen each quarter. It ended the second quarter of this year with 0.2% growth. My guess is that the number we get at the end of October for the third quarter will be negative.
 
According to the IATA, airline traffic has fallen each month this year since February compared to the same month in the previous year. When was the last time airline traffic declined? It was during the 1990-91 recession.
 
1991 is the only year from 1983 through 2000 when world airline passenger growth was negative (by 5%). Obviously, it corresponded with the recession, but it also corresponded with the Gulf War. Revenue passenger kilometers (RPKs- the total number of kilometers paying passengers paid) fell 25% during the first month of the war. They were below 1990 levels from January through September of 1991. It took a year for traffic to recover to prewar levels.
 
As we all know, the 2000-01 season was a generally good snow year, and generated 57.3 million resort visits, the highest ever. The 1990-91 season saw only 46.7 million visits, the lowest of any season since 1978-79 except for the 39.7 million in 1980-81. Visits in 1989-90 were 50.0 and in 1991-92, they were 50.8 million.
 
The USIA End of Season National Business Survey for 1990-1991 reported that the average inches of snowfall per area, based on 173 reporting resorts, was 130 inches. RRC Associates in Boulder reports that for the 2000/01 season, with 187 resorts reporting, the average number of inches per resort was 185.34 inches.
 
Over the last eight seasons, according to RRC, the average number of inches per resort was 177.6. 1990-91 was by far the worst snow year for which I have data. Which is good news, because if the snow had been great in a year when visits were 46.7 million, we would have had to lay the bad year completely at the door of war and recession. So maybe we’ll find, with good snow, that people want to go do something fun with their families and forget about war and recession.
 
We are, as usual, left praying for good snow. Even with good snow, I expect to see a negative impact from war and recession. The similarity to 1990-91 is too great to ignore. It’s my judgment that the recession will probably be steeper than that of ten years ago. In addition, the war against terrorism won’t have the clear and glorious ending the Gulf War had. It started in this country with an act that has left a long-term scar on our collective psyche and potentially on our willingness to fly and take vacations. Any further acts of terrorism will only make it worse. 
 
Do It Now Rather Than Later
 
In twenty years of working with companies in transition, the last ten in action sports, I’ve worked with quite a number of financially distressed businesses. It’s a lot of fun for me when I walk in the door and am met with, “We can’t make payroll next Tuesday. What should we do?” because when you’ve got nothing to lose, you can try or suggest anything to anybody. Still, I wouldn’t wish that set of circumstances on anybody. By the time you get to that point it’s frequently too late to solve the problem except at a tremendous personal and financial cost. 
 
Without exception, and regardless of industry, companies who are so financially distressed that their survival is uncertain got there for the same reason; denial and perseverance during a period of change.
 
Universally, the owners/managers recognized the issues before they had become issues of survival. Universally, they resisted doing anything different in response to the new circumstances. Universally, they believed that doing “more of the same,” but doing it better and harder would be an adequate response to a changing business environment. For a while, this may have worked. Typically, it at least bought them some time.
 
But the business continued to decline because they simply weren’t addressing the new business conditions. As things worsened, their options, or at least their perceived options, declined. Soon, managing cash flow was taking up all of their time. They had to do it, but it still didn’t address the basic business issues. Finally, it’s typically an outside stakeholder- the bank, a supplier, a shareholder- who forces them to deal with reality. Hopefully, it’s not too late.
 
My crystal ball is no better than yours. I don’t know what this season is going to bring.    But whether you’re a resort, a supplier or a retailer, the winter sports business isn’t an easy one if only due to seasonality. Most of you, I’m sure, have already asked the question, “What if my business is off 10%? 20%? For those of you who haven’t started that process, here, in general, is how I might go about it.
 
If you were around in 1990-91, how did you fare? If you weren’t, talk to others in similar businesses and find out how they fared. What actions did they take and when?
 
Now pull out your cash flow. Cut revenues by 10%, or by whatever number you think more relevant or likely. What happens? Is your bank line still adequate? Can you pay your suppliers on time? Can you afford any capital expenditures you had planned? Does the cash in your cash flow, flow?
 
Obviously, this is also a balance sheet issue. Even when cash flow from operations turns a little negative, some companies have the financial resources, as reflected by their balance sheet, to support spending at current levels.
 
Whatever your cash flow projections show, now is the time to take any action you decide to take. Here’s why. If, for example, you need to reduce expenditures by $36,000 over six months, just to pick a number, that’s either $6,000 a month or $36,000 in the last month. $6,000 a month may be manageable through judicious expense control. $36,000 in that final month probably (typically, I’d say) damages the operational continuity of the company.
 
So whatever actions you think you need to take, if any, to cut expenses, improve efficiency, reduce inventory, or bolster sales, start doing it now. Early action is always the key to weathering hard times if they come.
 
As a retailer, you don’t just sell winter sports products- even in winter. The highest dependence on winter sports sales comes, I think, from retailers closely associated with resorts. From that point of view, I guess you’re better equipped to weather a slow season than many suppliers and resorts who make most of their money in only one season. But retailers have some problems that suppliers and resorts, which have already undergone some consolidation, don’t have. To put it succinctly, there are too many of you. I don’t think that will be a shock to most retailers. They deal with it all the time as suppliers open up competitors just down the street.
 
For most of the 90s, high personal expenditures, low interest rates, very low inflation, huge gains in net worth and low unemployment yielded high levels of growth in retail sales, averaging 6.55% annually between 1994 and 2000. Since sometime in 2000, weakening consumer confidence, slowly increasing unemployment, declining household wealth, and high consumer debt levels have begun to take their toll.
 
In the meantime, retail competition has never been tougher. There have been growing numbers of store closing. Various kinds of direct sellers are taking more business from traditional retailers.
 
As a winter sports retailer what should you be doing? Largely, what you’re already doing as far as I can tell. Watch your inventory and expense levels carefully. Focus on knowing whom your core customer is and on attracting and keeping them. Order to maximize your discounts. Have the kind of product customers are likely to want in harder times.
 
Resorts who sold lots of cheap season passes may look like geniuses if traffic does drop significantly, though I guess maybe the people who have already made the investment will be the ones who show up anyway. The issue at many resorts, in the event of a slow winter season, is financial leverage. This is an industry where extreme seasonality requires the use of borrowed money to get through the off season- often a lot of borrowed money. You have to be able to borrow enough and, inconveniently, you have to be able to pay it back and then borrow it again for the following season. Managing that debt is already the single biggest challenge some resorts have. If revenues decline significantly, it will become an even bigger challenge.
 
Suppliers have largely already ordered and/or produced for the season. They are in the middle of shipping to retailers. Some products coming into the country have been delayed by understandably more rigorous checks by U. S. Customs. Anecdotal evidence is of some cancellations from retailers, but they don’t seem very high. If I was a supplier, I wouldn’t be counting on a lot of reorders, and I’d be damn cautious about credit this year. I’d also plan my selling efforts on the assumptions that discounts will start early if retail traffic is slow.
 
Economically, the whole country has had a bunch of good years. Now, we may be in for one that’s not so good. In good times, cash flow and growth can cover up a lot of mistakes and competitive weaknesses. In bad times, the market takes no prisoners. Whether you are a supplier, a retailer, or a resort the quality of your competition position and the strength of your balance sheet are the two things (besides snow) that will determine how you do this year.
 
That’s true in any year of course, but in a recession year, you may not get another chance. My best guess right now is that this is not going to be an easy season even with good snow. Make it as good as it can be for you by starting to deal with it right now.
 
 SIDEBAR:
 
As an industry, especially on the resort side, there’s a consensus of the need to revitalize growth by attracting young enthusiasts to the slopes and keeping them coming back. Retailers, and obviously the suppliers on the snowboard side, are already on that program or, bluntly, they wouldn’t be around. Resorts recognize the same necessity, but have the understandable need to focus on the traditional customers who are older, but have lots of disposable income and provide much of a typical resort’s cash flow. In a recession, it will be interesting to watch who shows up. Will it be the young enthusiasts, who figure out a way to find money for a list ticket and some new equipment, or the older customer, who has a high enough disposable income and net worth that a little thing like a recession doesn’t change her spending habits?
 
Speaking of the kids, the most exciting new thing in snow sliding this year may be the snowskate. It has its genesis in skateboarding, which has to be as hot right now as any action sport has ever been. Skateboarding, of course, has entered the mainstream, with skate parks popping up all over the place and being funded by local recreation departments. Now, I’m hearing the first rumblings about snow parks for use, I guess, with either snowboards or snowskates being built at places other than resorts. Especially for snowskates, you don’t need that much room, and you don’t need much vertical. Gives the resorts something to think about. What if the kids don’t have to come to participate?