Friday, December 16, 2011

Thoughts for 2012

As my father and I prepare for 2012, I keep coming back to one primary concern: Europe.
My concern is not so much about whether or not specific countries default on their debt, the EU finds a way to muddle through somehow, or even if the currency falls apart.  My main concern is about lending and the crisis’s effects on confidence and spending. Unfortunately, uncertainty about the various possible outcomes have already had an impact in this area – European banking institutions have reportedly been shoring up their balance sheets by repatriating assets and curtailing lending and there are also reports US institutions are curtailing their daily overnight lending to those same European banks.

If this condition persists and credit becomes less and less available, it will work its way through the European and US economies down to the level of small firms’ and individuals’ sources of credit.  The prospects are similar to 2008, when central banks increased funding to banks to help them weather the mortgage crisis: that increased credit did not continue much further past the banks’ balance sheets.  Our experience was that the impact of this on our industry seemed to be felt about a year or 2 later, in late 2009 and 2010, which, besides natural lags, was I think probably due to the lead times associated with most projects.

So, our concern is: the longer the uncertainty of any resolution to the European crisis persists, we will have a continued general reduction in the availability of credit.  And I believe this uncertainty will translate into reduced economic activity, in a broad sense.  However, within our industry, recent activity seems to give reason for some optimism.  Our experience is that this activity has been centered around the higher end spectrum – either truly style defining pieces or commissioned pieces that address a clients exact needs. In both cases, pricing has been essential to reinforce the value proposition of a piece or project to the client.

Here is what it boils down to in our in house discussions:
  • We expect the euro to lose value against the dollar for at least the 1st half of 2012
  • We are watching for borrowing costs to start increasing in the US sometime near the middle of the year.
  • To insulate against any potential slowdown, we suggest modeling budgets around flat and/or lower revenue expectations for 2012.
  • Cutting costs associated with high cost/potential client marketing – in other words cutting expensive marketing efforts with limited potential client exposure in favor of efforts that enhance our web presence.
  • Pricing pieces and projects to reinforce the value represented by a piece to clients will remain key.
  • We believe we are only seeing the beginning of a new-ish trend focusing on the unique character of a piece. We believe that clients will be increasingly sensitive to owning items unique to them or to a very limited number of people. Items that set them apart from their peers and define their home or taste.
Happy Holidays and best wishes to you and yours for 2012!
Freddy & Tony

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