Make Plans for Down Markets While Times Are Good

Originally published in the May/June issue of RVBusiness magazine

Backlogs of sales are strong for dealers and manufacturers, and profits are at an all-time high. The job market is terrific, house prices are rising, and in spite of recent turbulence, major companies are still reporting excellent profits. What a great time to be in the RV industry!

For certain that’s true. Still, interest rates are climbing, record levels of inflation are beginning to stagger consumers, and a troubling war promises to further disrupt global trade and supply chains. More directly, fuel costs have seen dramatic increases and show no signs of retreating anytime soon.

A common refrain we heard during the 2008/2009 financial crisis was, “There are so many things I wish I had done when the market was good to make sure I was ready for all this!” What was true then is true now: there is no better time to prepare for a down market than when you are in a good one. Now is that time.

Inventory: Now is the time to get your arms around your inventory. Have you been taking anything you can get? Buying wide because you can’t buy deep in the best sellers? Paying over book for trades? It might just be time to get back to the disciplines of a normal market and spend the time needed to develop a true inventory plan for 2022, rather than just “open to buy.” Do you have “red flag” stops by product and category?

Cash Flow: Now is the time to really focus on your cash position and your true net cash. Think of it like the business version of musical chairs … if the music stopped right now (like a sudden disruption in the spring/summer selling season) how much cash would you really have on hand? Have you been expanding so rapidly during COVID that you have lots of cash float and a lot less cash flow? Dealers have been putting crazy number into trades for the past couple of years; if the market got really tough, what is all that merchandise really worth in hard cash?

Balance Sheet: Do you know what your debt-to-equity ratio would look like if you had “normal” inventory? Don’t forget, prices of units are up significantly. Do you have the equity in the business to be in a good debt-to-equity position when inventories go back to “normal”?

People: Now is the time to start planning how you would manage your people in case there is a sudden drop in business. If you had to shrink your dealership by 20% to 40% tomorrow, who would stay and who would go? Who are your star performers, and who’s just a body warming a seat?

And More: What Business Plateau are you in, and where are you at within that Plateau? What is the true value of your used units and parts and accessories inventories? If you had to turn your inventory into cash tomorrow morning what would that bring? How stable is your relationship with your floorplan provider, and do you have a backup in place?

What Ifs: Now is the time to start thinking, “What would I do if?” If gross margins go back to reality and if sales dropped 20% to 40%. If interest rates increased to 12%. If labor costs increased 20%. If fuel went to $10 per gallon? This is not about fear mongering, this is about getting ready for another potential fight for your business life … again.

There is no harm in being prepared; nothing is lost by doing an advance plan. In many ways, preparing yourself for a challenging future is a great way to ensure profitability now. But there could be plenty lost if the market suddenly does an about-face and you are unprepared. Take the time now, this week, this month, to get with your key management team and start asking the tough questions.

With any luck, none of this will come to pass, the world will return to sanity, and the RV market will continue its positive trends. You will still be better for having prepared for the alternative and for having kept yourself and your team sharp. Still, if all of this global turbulence continues, at some point the consumer is probably going to get scared. And when that happens, purses snap shut and major discretionary purchases get put on the shelf.

Maybe the shift is already underway. According to the March 2022 University of Michigan Consumer Sentiment Index, consumer sentiment was at the lowest level in 11 years. With everything going on, at the very minimum we can say that the immediate future for our industry looks a lot less clear than it did three or six months ago. This alone should be causing your antennas to go up.

Lots of things in life and business look obvious in hindsight. The key is to recognize a changing market as it happens. Some signs are changing; ignore them at your peril.