NEW YORK — Long-term deflation poses a more serious threat to the apparel community than any short-term economic downturn or political turmoil.
This was among the points emphasized by Joseph Abruzzo, senior vice president of J.P. Morgan Chase Bank, as a group of bankers specializing in the middle market discussed "Banking: Today and Tomorrow" during a New York Institute of Credit presentation last week. Also participating were Lissa Baum, first senior vice president, Israel Discount Bank of New York (IDB Bank), and Daniel Greene, senior vice president, Fleet Bank.
Harvey Gross, managing director of the Institute, moderated the session.
Abruzzo was fairly optimistic about the current outlook, pointing out that the economy is "not that bad. The consumer is spending, maybe pulling back a little. As we get into 2003, I believe it will be positive."
A more serious issue is price integrity.
"The problem is deflation," Abruzzo said. "People are spending, but they’re spending less for things. They are spending at Target, Wal-Mart and Kohl’s. [Firms] should be asking themselves, ‘Am I selling in a distribution channel where the consumer will go and spend?’"
Baum noted that, while most of her banking clients are in good shape, many are still coping with the impact of consolidation resulting from past downturns, which left many vendors with fewer retailers to which they can sell.
Domestic manufacturers can’t compete on the basis of price anyway, she noted, asking rhetorically, "How can companies make money when they’re forced to lower prices?"
Contrasting the current downturn with its predecessors, Abruzzo noted that much of the financing present in the Eighties was for leveraged buyouts and that lending options were relatively limited.
"When we had a credit crunch, the banks pulled back on their lending. Most of the lending back them was bank-reliant because there weren’t a lot of alternative sources to go to," he said. Today, interest rates are low, credit is available and banks are willing to lend.
While all endorsed the adoption of a long-term view, the panelists didn’t underestimate the large number of factors — including the dock shutdown, the decline in consumer confidence and the threat of war with Iraq — that put results for the remainder of 2002 at risk.Baum said recent developments suggest "tough sledding ahead. A lot of it is psychological, and it seems to be headed in the wrong direction." She noted that some banking clients in September reported "problems with receivables and getting them collected. They’re also seeing sales declining and orders canceled."
Greene said, "The unanticipated is the most frightening. You can’t plan for everything. The consumer is starting to show some stress. How will one deal with a full scale war? No one knows."
One way for firms to ensure adequate financing during tough times, they all agreed, is to keep open the channels of communication between client and banker.
According to Greene, "There is no substitute for planning conservatively in this environment. Financial flexibility [also] means cultivating the relationship with your business partners to see where the market is going."
To ensure adequate financing, Abruzzo advised, firms should maintain solid banking relationships and consider — even if they don’t need it — increasing their liquidity. That way, credit is available should they need it.
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