A second once-in-a-lifetime economic downturn is underway when it might seem like the last one just ended.
What became known as the Great Recession of the 2000s was officially over in June 2009, a year and a half after the economy had started contracting. It was the longest of the post-World War II recessions. The unemployment rate peaked in Minnesota in 2010.
It was more like a five-year downturn for 90-year-old Scherer Bros. Lumber Co. in Brooklyn Park.
Had he and his colleagues in this family business not managed to survive that, CEO Pete Scherer said last week, they wouldn’t be as confident as they are as the COVID-19 pandemic unfolds.
“We consider from 2007 to 2012 our on-the-ground MBA,” Scherer said. “We learned more through those negative times that we could benefit from than anybody could have taught us … out of a book. A lot of that was forced upon us. At the present time we feel pretty good about having held on to some of those lessons.”
It’s an interesting idea, that a terrible downturn that caused so much pain for so many people still taught leaders how to get through the hardest of hard times, and what they had to do to build and maintain a resilient organization. The extraordinary and swift actions of the Federal Reserve in responding to the current crisis, for example, seem unlikely to have happened without the experience of Fed leaders back in 2008 and 2009.
One hope is that a lot of business managers also came out of that period holding tight to their own costly education in resiliency.
Three conversations with Scherer over the course of a week provided a little window into how managers were responding to the changing environment due to the COVID-19 pandemic.
He couldn’t be sure, Scherer said in our first conversation, that residential construction would be allowed to continue as the government was forced to clamp down on the movement of people to slow the spread of the virus.
Scherer Bros. has other business lines, including a small group servicing wooden windows, but it’s basically a distributor of building products from three main facilities in Minnesota. It sells lumber and panels along with manufactured windows, millwork and many other products.
For now construction is proceeding, with many processes changed, like not letting two co-workers (Scherer’s term for employees) ride together in one delivery truck. No more deliveries go inside a residence, either, a little like how restaurants have started placing takeout orders on the curb, keeping customers and staff apart.
Every broad downturn seems a little different, of course, but what we’re going through right now isn’t a “normal” recession. The number of Minnesotans filing for unemployment had already shot past 180,000 in less than 10 days, and nothing like that has ever happened before.
Downturns are usually preceded by speculation and investment that had gotten out of hand in some corner of the economy, leading to a painful unwinding. That’s not what happened this time.
Even the terrorism attacks of September 2001, for those with memories of that difficult time, did not trigger a downturn, as the economy had already been going downhill, led by the tumbling technology sector after the dot-com bubble collapsed.
The epicenter of the Great Recession of 2007 to 2009 really was housing speculation, aided by incredibly lax lending standards. So in the downturn, activity in the industry served by Scherer Bros. rolled off the table. The company’s annual sales, once well north of $200 million, eventually declined by roughly two-thirds.
At Scherer Bros., they realized how poorly they were positioned. This is important context for Pete Scherer, as he said he would share what they did to get through that period as long as it was really clear that the tough steps they had to take back then shouldn’t be necessary again.
Scherer said ancillary businesses, like a small finance operation and land development, were shut down or put into runoff mode.
The company consolidated its truss-building operations to one, more productive, plant. Two of its five lumberyard sites were shut down and sold, including a Minneapolis riverfront location where the company had operated for decades. Total jobs eventually fell from a peak of more than 700 to closer to 250.
They didn’t neglect the balance sheet, either. Even when a recovery eventually began, the company continued to pay down debt, although Scherer Bros. has equipment-related debt. Scherer said all the owners, including retirees, “participated” in rebuilding the company’s capital cushion.
From the bottom of the trough, sales have since doubled to roughly $150 million. The practices that contributed to the crisis a dozen years ago — dabbling in noncore businesses, sacrificing profitability for revenue growth and financing expansion with debt — have not returned.
The employee base has only grown back to around 300.
The team that led the company through that terrible Great Recession experience remains. It includes Pete’s brothers Mark and Kris, the chief operating officer and chief financial officer, as well as their cousin John Zitur and a nonfamily member, Marjorie Arnold, in other key management roles.
One of the things they have discussed since was whether they have learned the lessons of resilience too well, Scherer said, and instead should have tried to grow faster. As of now, they are planning to do more than just survive 2020.
They continue to look for additional employees. They still plan to buy equipment to improve productivity, like the small forklifts that go into the field to quickly unload trucks, and finance some of the purchase price.
“Worst case, we’re wrong by a year,” Pete Scherer said, in looking ahead. “And at very low interest rates.”