The Banking Crisis

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So, what next?

 

by Bruce Ackland

 

End of the world or unique business opportunity? OPI explores how turbulence in the global economy will affect the OP industry

 

 

 

"It’s the economy, stupid."

 

Former US President Bill Clinton – or Democrat strategist James Carville to be exact – created one of the most iconic political soundbites of the post-war period when he used that mantra to speed his path to the White House in 1992.

 

And that was at a time when economic conditions where positively peachy compared to now. While world powers have been caught up in debatable and financially crippling war campaigns and rendered paralysed by fear of extremist terrorists, the world economy was slowly collapsing in the background. If only someone had been there to shout "It’s still the economy, stupid" and maybe added "…but even more so!". Despite the media being as hell-bent as ever on keeping its collective readership in a state of perpetual fear, I’m afraid the truth is that it is very much as bad as it seems and maybe even worse.

 

Have you ever sat there and thought about the events you have witnessed in your life that will go down in history? The ones that had the most impact? Well, this is it ladies and gentlemen; this is the one that we’ll all remember. The great global economic meltdown that changed the world’s financial system forever.

 

Nervy banks

 

So should anyone have seen this coming? And what effect is it having on doing business in a new low credit environment? Well, Christmas has come early but only in the sense that everyone has turned into Scrooge. Banks are nervous about lending money to you, your business and, most crucially, each other.

 

Trevor Chiddicks, a former Managing Director of global money markets at Credit Suisse First Boston, has more than 25 years experience in money markets, currency and futures and derivatives trading for various top banks including HSBC.

 

He believes the reason for the current mess is pure and simple – greed.

 

Chiddicks says: "For some years now we have seen the problems associated with the ‘profit at all cost’, and ‘greed culture’ of financial markets. Just look at Baring Bros and Enron, to name two large well known examples. Greed is part of human nature, and only governments and regulators have had the power to regulate and oversee the markets. It has been absolutely obvious that there has not been enough regulation, and to some degree the regulators are under resourced in terms of legal powers.

 

"The housing bubble burst was foreseeable, which is where this all started, but the severity was not. Regulators and governments could and should have done more in my view. Look at something like the wild movements in oil prices over the last year or so – that has not been caused solely by demand and supply but mainly by the speculators, who without regulation are far more powerful than the underlying market."

 

Obviously, the effect on business of the financial meltdown has been significant across the board with companies finding it tough to borrow money on favourable terms.

 

Current economic conditions will be extremely challenging for any leveraged business, and sadly many otherwise sound businesses may not survive, or will be swallowed by stronger cash rich businesses.

 

So how is the OP industry finding the current climate? Well, it depends on who you talk to. Eric Bigeard, CEO of Lyreco, said his company has seen its growth rate slow since August but the company is nevertheless still growing and says it is well placed to weather the credit crunch.

 

Bigeard says: "Because Lyreco is a debt-free company, I consider that the credit crunch might be a fantastic opportunity on the market as some operators get ‘squeezed’ and potentially ‘caught’ in the credit crunch. On our customer credit side, with an integrated worldwide credit management tool, I believe we are better armed than our competitors and will remain very cautious with risk taken in this field."

 

He adds: "Lyreco is a private company and therefore we can keep being focused on our customers rather than having to worry and react to try and ‘rescue’ the value of shares."

 

At OyezStraker, CEO Jeff Whiteway managed to prepare somewhat for the economic nosedive by reacting to the events at the end of last year including the collapse of Northern Rock bank. His company has, like everyone, felt the effects of the credit crunch but he believes it is how management reacts that counts.

 

He says: "Organic sales have undoubtedly been affected as confidence has been squeezed out of the economy. You can’t open a newspaper without being bombarded with gloom and doom. However there are tremendous new business opportunities which we are grabbing with both hands. The downside is these are filling the hole from the slowdown and not providing us with strong sales growth we would have otherwise enjoyed."

 

And how are things at OP powerhouse Staples? Well, CEO Ron Sargent told OPI last month that the current conditions were "probably the most challenging economic period we have been through in the history of our company." During the last recession Staples posted seven quarters of negative same store sales in North America and its recent Q2 results presented its fifth quarter of negative comps in a row.

 

Staying calm as ever, Sargent said he wasn’t hugely surprised by the slowdown due to the over-extension of credit and that he would not "mortgage our future by cutting costs to the point where we alienate our customers". Pointing out the importance of investing in good times as well as in bad, he added that Staples would "focus on investing for the future" and that it will "bode very well for us in 2009 just like it did during the last recession in 2001".

 

Over in Australia, Bruce Haynes, Managing Director of vendor Pelikan Artline, has felt less impact. As yet the effect on his company has been minimal, although there has been some shrinkage in demand due to the attempt of dealers to lower their stock levels.

 

Haynes adds: "The real problem is nobody knows what’s next. We have not experienced anything of this type or magnitude before. The fear is of the unknown."

 

Survival tactics

 

Those sentiments are echoed by most of the OP industry. Such extraordinary times mean that no one can be sure of exactly what is round the corner and preparing for the unknown is something of a crapshoot. Nevertheless, prepare they must.

 

Chiddicks believes survival is a question of maintaining healthy cash flow while Lyreco has pledged to keep the same strategy it has had for the last 20 years. "It has been pretty successful for us," Bigeard says. "Our shareholders are the same and very serene with the whole situation. They are not financial operators. They are not in for a few years or months. They are keen to keep investing in this industry and we will review every opportunity."

 

For the most part though, the industry agrees that in these circumstances you have to react and make sure you have a Plan B. The financial turmoil that has gripped the globe is sure to change the landscape of the OP industry and the global economy for good. After all, this is not your traditional economic ripple in a pond but more a tsunami across the entire globe. Doing business will never be quite the same again and cheap credit and reckless lending have probably gone the way of all flesh.

 

Chiddicks says: "Regulation will become far more prevalent, and I think businesses may have to become more socially responsible. Many large Western companies now rely heavily upon investment from the previously ’emerging’ economies such as China, India, Russia, and the Middle East and this will affect the way business is done going forwards and who are the global economic forces. This is as well as the effective nationalisation and partial nationalisation via the stakes taken by governments."

 

Bigeard hopes there will be some good to come out of the crisis. He explains: "I hope this crisis will stop companies and bankers putting together deals that do not make business sense. The system had to collapse and it is collapsing. The only good coming out of the crisis is that it will clean up most markets, including the OP market."

 

Opportunities

 

Of course, even in the most extreme of trading difficulties, opportunities abound and let’s not forget that as extraordinary as the current crisis is, the economy is cyclical and it will bottom out and start to go in the opposite direction eventually. The good news for now is that the central banks and governments are starting to work together globally to make a unified effort to turn the ship around or at least stop it from sinking any further. Like an addict on a ten step programme, the first stage of dealing with this mammoth problem was to admit just how serious the issue was. Now, at least, everyone is on the same page.

 

Chiddicks explains: "We are seeing the first signs of governments trying to work together as they finally realise how serious the problems are. Maybe we could bottom out in three to six months, start to get the new version of normal trading conditions within the year, and recover over the next five to ten years."

 

Continuing to be positive, Whiteway hopes the opportunities will be there once the dust settles and that his company can be strengthened in the end.

 

He said: "I believe there will be company failures and that provides opportunities for consolidators and clears the market for the remaining dealers. OSG will come out of this stronger and a better company. It is certainly making us move projects and opportunities on at a faster rate than ever."
As bullish as ever, Bigeard also sees Lyreco as a company ready to prevail amid the financial upheaval.

 

He said: "Lots of people look at the difficulties but when I look around I only see opportunities. In addition to our customer dedication, experienced sales force and quality indexes, we can now also win with financial solidity compared to any of our competitors. The short-term is going to be tough for everyone in the industry…but tougher for some."

 

Haynes is also seeking to look forward. He explains: "You can only play with the hand you are dealt. While the current conditions are unique, we are fortunate that we have great brands and excellent distribution throughout the industry, our company is financially strong and we will develop the appropriate plan to ensure not only our short term performance is satisfactory but a plan that ensures when things turn around we are in a strong position to take advantage of the improved conditions."

 

It’s hard to know which is more difficult to believe at times, the size of the economic problems or how quickly it all seemed to go wrong from a key warning by a French investment bank to the US sub-prime crisis contagion that spread like wildfire. It is tough out there but the unified global action that we are now starting to see should push us in the right direction, even if it comes at a huge price."