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After the recession, horizon still is cloudy

Rochester Business Journal
July 23, 2010

Most economists think the worst recession since the Great Depression has ended, but its effects appear likely to last much longer.

For Sentry Group, an East Rochester-based manufacturer of safes and safety vaults, the recession brought drastic changes in customers' expectations and ability to pay, President and CEO James Brush said. Before the downturn, customers were more willing to select higher-end products. As the economic strain on these customers grew, however, these products-the ones most profitable to Sentry Group-decreased in demand.

"These days we either have to sell the same product for less money or offer more features at the same price," Brush said. "Customers are much more finicky, and the things that are less expensive are selling more and the more expensive things are selling relatively less."

The changes have forced Sentry to lower prices or come up with innovations that consumers would value, he said, and the situation is not unique to his company. Brush said he has seen the same from other manufacturers and expects the conditions brought on by the recession to become the new normal.

"Customers want to pay less, and we've got to learn to change," he said.

Local organizations-including the public and private companies and non-profit organizations that make up the RBJ 75-have spent the past two years trying to withstand the recession while at the same time turning the focus to how it will impact future plans. Many of these organizations say a period of uncertainty lies ahead as the economy recovers, but others see chances for long-term growth.

While predictions for the long-term economy point toward recovery, companies like Graham Corp. say the near-term outlook is cloudy. After sales fell from $101.1 million in fiscal 2009 to $62.2 million in 2010, Graham expects fiscal 2011 revenue in the range of $65 million to $72 million.

President and CEO James Lines said the recession has done little to dampen expectations for growth beyond the 2011 fiscal year, but first Graham must endure another year of uncertainty.

"We're somewhat hesitant in that we don't believe our markets are in full recovery, and clearly we would expect some fragility in that recovery based on what's happening with currency changes, like the European situation," Lines said in a teleconference accompanying the company's release of the fiscal 2010 results in May. He added that the company needs to get through "this period of time, which is unpredictable and a time to be cautious."

The uncertainty has led the University of Rochester, the region's largest employer, to opt for a more measured implementation of its major projects. The university contends not only with the direct effects of the recession but also with what it has done to state and federal governments, adding to the insecurity of the future, said Ronald Paprocki, UR vice president for administration and finance.

In the fiscal year ended June 30, UR implemented salary freezes and slowed many of its capital projects to alleviate the effects of the recession and respond to the drop in the university's endowment, Paprocki said. Though the coming fiscal year is projected to be closer to normal and the school plans to go forward with salary increases and capital projects, it is still acting with a measure of caution, he added.

"That means there will be an emphasis on prioritization as deans and division leaders in the university examine their priorities," Paprocki says.

A good example of the caution the recession has forced on the university is the University of Rochester Medical Center's Pediatric Replacement and Imaging Sciences Modernization project, Paprocki said. A roughly $250 million initiative to increase bed capacity and enhance pediatrics and imaging was divided into two parts that could be more easily adjusted if further surprises occur in the economy, he said.

Careful stewardship of resources is something UR and other universities exercise in all financial situations, recession or otherwise, he said. UR uses a smoothing formula for its endowment spending that allots funding based on a five-year rolling average, as do other local colleges. Paprocki said that helps insulate institutions against the effects of economic downturns.

UR in particular has been fortunate that it has a variety of revenue sources to mitigate the recession's effects and prevent any severe impediment to reaching its long-term goals, Paprocki said.

"Some colleges you read about going under great distress are heavily dependent on their endowment spending, and now they are having to make drastic changes," he said. "While we have some uncertainty, we are fundamentally strong and in good financial health."

Not all of the long-term effects of the recession have been detrimental to the RBJ 75 companies and non-profits. For those able to withstand the worst effects of the economic crisis and remain in strong fiscal shape, it has opened the opportunity to grow through acquisitions.

Because Sentry Group has a strong balance sheet, there are many opportunities for acquisitions of companies that have not fared as well, Brush said.

"In this gloom, if you can have some cash and an acquisition mind-set, there are some good values out there," he says. "If you can survive, there might be some once-in-a-lifetime opportunities for properties."

The recession inspired the Hillside Family of Agencies to move faster on

its own plans to grow. This strategy in part reflects an effort to be a leader in the field of support services for children and families, finding and expanding innovative programs.

Paul Perrotto, Hillside's chief financial officer, said it typically takes 16 to 17 years for innovations to make it into the field, but through targeted acquisitions Hillside can change that. In part because other groups may now be struggling for funding, Hillside is able to increase its annual growth target from 5 percent-though he notes it regularly achieved closer to 10 percent-to a goal of 18 percent.

"It is a difficult environment to survive if you don't have some kind of critical mass, and there are a lot of individual and smaller organizations that might have one really good idea, but it's tough for them to be sustainable if they don't have some kind of grip," Perrotto said. "We've been able to look at a lot of joint ventures because of that." n

7/23/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail service@rbj.net.

 


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