The Affluence Trap
I recently observed a multi-shop owner who expanded too quickly and found himself in a costly situation. There is a tendency to imagine that a momentary surge in wealth will go on indefinitely. A good accountant is likely to advise against making any long-term commitments until it becomes clear that this new abundant flow of revenue will continue on. But this advice butts up against an ingrained human impulse to spend freely when money is flowing. We’ve seen the housing bubble, the stock market crash, and other recent large-scale debacles. It seems it’s just not human nature to make the wise choices to consolidate one’s position by paying up outstanding debts and allocating new revenue to a more broadly based growth plan.
A military metaphor comes to mind. When an immediate attack catches the enemy off guard and significant ground is gained, the wise commander brings troops up to protect his flanks and to consolidate his position before proceeding with another attack. Similarly, a smart farmer, enjoying a bumper crop one year, preserves a portion for seeding in the coming year. Many in the collision industry have had less than a “bumper year,” but with an improving economy many may see a jump in revenue. Would this really be “affluence?”
Award-winning economist Milton Friedman, in a speech at Stanford University, commented on the “vigorous economic expansion” in 1983. He said the euphoria regarding that economic situation “was unjustified.” He said, “The great mistake people make is to suppose that it is appropriate to extrapolate from the present to the future. There is a widespread feeling of confidence that nothing but good is going to come….”
His point was that there was an overheated economy and the “vigorous economic expansion” was largely due to the most expansive monetary policy in the postwar period. He thought this artificial stimulus could quickly run out and result in a recession. In our present economy, even though stimulus checks are no longer being sent out, by keeping the basic interest at near zero, there is still a constant stimulus at work. In a sense this can create an artificial affluence. Planning a long-term business expansion based on this affluence could be very risky.
During the recent recession, a number of consolidator shops were closed and the work redirected to one of their remaining shops. Was that because these shops had been opened prematurely, or was it just the expected decrease in business that comes with a recession? Perhaps in a multi-shop operation, some closures may be expected, but what of the single-shop operator? When business picks up again, should he or she look into expanding into another shop or would it be better to pour new resources into improving the existing shop?
Premature expansion is only one liability of the affluence trap. The worst I have seen had nothing to do with business expansion, but it did have to do with an extended period of exceptional affluence. This guy’s shop was always busy. He had celebrities as clients and a large percentage of high-end cars to work on. You would have to say his focus was on personal expansion rather than business expansion. He dyed his gray hair red, lost a few pounds, found a young woman perhaps half his age, divorced his wife of 30 years or so, hired what he thought was a hot-shot manager, and set off for Europe with his new bride on an extended honeymoon. While he was gone, his new manager robbed him blind, lost two DRPs, ran up huge debts in unpaid parts bills, and abandoned the shop to an inexperienced assistant manager. The last time I saw this shop owner, he was running a two-bit decadent shop on low-class body shop row in a seedy part of town.
A similar guy with one of the richest shops I’ve seen that focused heavily on Jaguars, Rolls Royces, Bentleys and other expensive, exotic makes, put his affluence into buying horses and racing them. They must have lost a lot because the next time I saw him he was assisting an old-timer who had bought a run-down back-woods shop and was trying to get it back in the running. Between the two of them, they failed miserably and I never saw either of them again.
Affluence is a captivating condition. It can tempt the most conservative entrepreneur to take chances that even an experienced Las Vegas gambler wouldn’t consider. But on a more positive note, I have also seen numerous shop owners capitalize wisely on sudden spurts of business, to buy spray booths and frame machines and new model welders that put them in the running to work with new technologies and vehicle materials.
For those wise operators, affluence has offered the next step up and they have taken it.
Tom Franklin, author of Strategies for Greater Body Shop Growth, has been a sales and marketing consultant for more than 40 years.