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Shift Happens

First off, I am feeling a little guilty for not being able to keep up with Greg’s writing production, or Geno’s proclivity for the English language (I am, but a young “padawan” in master Yoda’s presence). That being said, we all have bills to pay and I have been painfully buried in required due diligence that a new listing demands in the midst of the end of the year holiday rush. I know I’m considered the commercial specialist in this forum and may have not been pulling my weight around here as far as my production is concerned, but it has become apparent (at least to me) that the recent slowdown in housing shall inevitably be felt by those businesses (and properties associated with those businesses) most closely tied to the residential markets, especially in the hardest hit residential areas, as referenced in today’s “town hall meeting” with Treasury Secretary Paulson and the Governator in Sacramento:Town Hall Meeting

At a town hall-style event in Van Buskirk Community Center here, Paulson and Gov. Arnold Schwarzenegger spent more than an hour listening as local officials, loan counselors, community members and borrowers described the troubles they were having getting help from their lenders.

“Unfortunately, there (are) all too many stories like yours in the country,” Paulson told one borrower who said she could no longer refinance her home and would almost certainly lose it. “This is why we’re trying to find solutions.”

What most of us know (but secretly sweep under the rugs in of our minds) is that there is a “spill over” effect from residential to commercial that we hope doesn’t affect our own checking accounts. We’re use to hearing the obvious verification of current events:

That plan came just weeks after Schwarzenegger announced a similar agreement with four lenders he said represented 25 percent of California’s subprime loans. On Tuesday, the governor said three more lenders have joined the voluntary pact, covering about one-third of the state’s most troubled loans.

California is home to the nation’s largest numbers of foreclosures – more than 52,000 so far this year, according to DataQuick.

Paulson promised to investigate the claim of one borrower who said her lender had refused to offer any solutions and would not talk with her until she had defaulted.

But, what we don’t hear is that one of Northern California’s most successful and prolific ancillary housing suppliers (having been in business 20+ years) is facing the business equivalent of Russian Roulette in 2008 and asking me take inventory of their value in the market. As it stands for their specific “wares”, the Home Depots, Wal-Mart’s and Lowe’s of the world have decided to adjust their inventory allocation systems to “pay by scan”, meaning that the item is never sold to the vendor but consigned to the store. The item sits on the shelf until it is scanned at “point of sale”. Once sold, the supplier will be credited for each item purchased on a piecemeal basis paid weekly, bi-weekly, or monthly as agreed per vendor. Long gone will be the days of vendor meetings at Vegas strip clubs pushing the contract line of supplier “garb”. New online industries will emerge as old purchasing habits may soon be replaced by the online “dot com’er” bidding up shelf space to the highest bidder at Home Depot #6620 in Sacramento, CA.

In this market, think about the “little guy” for a moment. He owns a business that he, his father or grandfather started. They have pushed, pulled and persevered their way to a point in time where their efforts were rewarded with supplier contracts to the “boxers” of the world. All is good. But there’s a catch, the boxers won’t pay for delivered product for 60+ days, floating on the “little guy’s” money. No problem, the “little guy” is just going to have to wait to be paid or figure out a way to factor his receivables until “ends meet”.

Adjustments are made, belts are tightened, but the production is managed and the employees continue to be paid. We move through 2006 and as corpses are financed (quick dig) and houses are built to meet the demand, corporate profits suggest that all is well with the boxers. The engines of local commerce continue to chug away supplying contracts negotiated years ago with VP’s of business development at Cheetah’s in Vegas (so I’ve heard).

Then, it’s announced quickly and quietly within the last 30 days, that all inventory purchases for your product will be conducted on a “pay by scan” system starting in 2008. Now, the little guy is left with all the risk as the boxers “hunker down” for a slowdown in inventory turnover. Do you still produce the quantity of items requested by the boxers wanting to keep the shelves “full”, knowing that you won’t get that big check every 60 days from purchase order? Do you trickle the inventory to the boxers hoping to keep the contract (and the customer happy) without going broke in the process? Are you going to freeze hiring for 1Q of 2008 until you see how things shake out with your cash flow? Are you going to test the market and see if there’s a regional competitor looking to grow in this market? Shift happens and this situation will play itself out at a local retailer near you in 2008.

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