Managing the recession
By the time the Nigerian Bureau of Statistics (NBS) announced that Q2 2016 was our second quarter of negative growth, most businesses already knew that we were in a recession. Businesses were seeing input costs rise, and consumer demand weaken. It goes without saying that businesses in Nigeria are facing some of the toughest times they’ve faced in a decade.
With the Minister of Finance hoping to return to positive growth by Q4 2016, and Dangote predicting Q1 2017, it is clear that the tough times may last a little longer. I’ve spent the better part of ten years working to with companies in all manner of situations, and I figured I’d share some strategies for businesses to consider as they work to manage through these trying times.
It sounds counterintuitive but the first thing a business should seek to do in a recession is raise prices. A lot of businesses believe that as their customers are struggling as well, raising prices would lead to them losing customers. This is true, for some customers, but you are better off without those customers in the long run. If you don’t raise prices you are effectively subsidising your customers and you will create the impression that the primary service you provide is to insulate them from the economy. It does you no good to subsidise your customers to the detriment of your business. This is why taxis and land transportation in general is one of my favorite businesses, they subsidise no one. As soon as their costs go up, the customer is paying more. We could all learn from them.
Despite what my earlier articles may have led you to believe, I am actually a firm believer in local sourcing. My primary issue with the government’s implementation of the policy. From a risk perspective, a company that earns naira should always look to reduce the foreign exchange component in the goods and services it provides. This is true whether the naira is at 150, 310 or 450 to the dollar, though it is even more urgent in this environment where foreign exchange is both expensive and scarce. Businesses need to examine their raw materials and see which ones can be produced locally. There might be a quality deficit initially, but over time this is a winning strategy that lasts even beyond the recession. A good example of a company that has ruthlessly improved its local sourcing over the years is Shoprite.
Product development is hard. Product development in a recession is harder. Unfortunately, it is crucial. Some businesses are able to survive addressing only one customer segment, however most businesses are better targeting two or three. For every DSTV Premium customer, there are three Compact customers and 10 GoTV customers. All customer types are valuable. All are needed. Every management team should seek to figure out product differentiation and customer segmentation. Beauty Products companies build this into their DNA but all companies can do a form of this.
Cut Operational Costs
When input costs rise, most businesses start to look at cost savings. It is understandable, after all if a business can keep its costs down it will be able to maintain its base and avoid raising prices. As we all know, there are always excess costs in most businesses that can be trimmed and those costs should be trimmed. However, the mistake most businesses make in the recession is cutting to the bone thinking all costs are equal. A lot of costs are required to generate results and cutting them is effectively destroying the business. Not only will extreme cost cutting affect the ability to deliver to existing clients, it will also affect the ability to ramp up when business improves.
There’s a famous story in private equity about Steve Schwarzman the CEO of Blackstone the biggest private equity firm in the world. During the 2007 financial crisis, he walked into the Citigroup CEO’s office and told the CEO that not only was Citigroup going to restructure and write down the existing debt to his companies, Citigroup was also going to give his companies more debt. He walked out of the office having achieved both objectives. Now you aren’t the CEO of Blackstone and the only thing a banker wants to hear less than a loan restructuring is a loan default, but this is a conversation that must be had. Besides from a banker’s perspective the first is a better conversation to have than the second. There is a tendency to want to avoid difficult conversations, but the recession doesn’t give one that luxury. Every lever must be pressed, every opportunity sought and for companies that have significant loans in these times, this is a key strategy to consider.
Andela is the poster child for exporting non-obvious things from Nigeria – in this case they export software development skills. Not every business can fit into the global supply chains that provide dollars, but this can be a boon to businesses that can. The markets for human capital and services are easier to plug into than the markets for goods given our disadvantages, but there are openings even there. Obviously, this should be a low priority given the other strategic initiatives, but it is possible that some low hanging fruit can be examined if it is looked at critically.
There is a saying in my business that a brood of chickens do not make an eagle. Mergers are the true desperate option – they rarely work and they are a drain on management time. However, in the rare instances that it makes sense business combinations can unleash significant synergies that can turn two companies struggling to fight the recession into one champion that breezes through.
None of these are silver bullets, not all of them will apply to your particular situation. Recessions don’t last forever, but one or more of these could be the difference between weathering the recession and closing down.