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Positioning Your Business for the Future

Positioning Your Business for the Future. Overview. The economy will remain sluggish for a few years before returning to steady growth Chester County’s economy is one of the best in the country and offers numerous opportunities The competitive environment is changing fast

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Positioning Your Business for the Future

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  1. Positioning Your Business for the Future

  2. Overview • The economy will remain sluggish for a few years before returning to steady growth • Chester County’s economy is one of the best in the country and offers numerous opportunities • The competitive environment is changing fast • You must recognize these changes to protect and grow your business

  3. Trends • Defined as the direction in which the economy and society are moving • Occurs in small steps, not revolutionary • However, rate of change is accelerating • Over time, dramatic impacts • Every business owner must understand and adapt to the changes

  4. The Major Trends • Less affluence, less disposable income • Significant demographic shifts • Domestic energy and transportation changes • Digital/electronic revolution continues

  5. Introductions What’s the leading indicator or most critical factor for the success of your business?

  6. The Current Economic Environment

  7. How is PA Doing? • Unemployment rate 9.3% in July vs. 9.6% for US • 200,000 jobs lost since recession started • About 7% of mortgages underwater - Much better then the national average • SERS and PSERS are large and growing issues • 2011 budget battle still underway • Stimulus funds have delayed the day of reckoning • Natural gas development is starting to help

  8. How is Chester County Doing? • #1 in PA for per capita and household income • One of the wealthiest counties in the US • 7.6% unemployment rate third lowest in PA -Lower than all surrounding counties • Real estate prices back to ~2005 levels • Signs of emerging growth

  9. C. C. Commercial Real Estate • Too much “near new” space available • Office vacancy at 20.6% is 16 yr. high - Normal rate is ~ 10% • Retail in Wayne and King of Prussia showing signs of life -Malvern, Exton and West Chester worst • Nearby I-78 & I-81 warehousing is active

  10. C.C. Residential Real Estate • Nationally >1yr. of excess inventory • 20% more homes than households! • Chester County prices at ~ 2005 levels • Chester County inventory averaged 58,381 homes in ’09 down 3% from ’08 • Prices down 5.8% ’09/’08 • Signs of life in Oxford and West Chester areas • New and used rental properties lead

  11. Some Local Projects • Uptown Worthington, West Whiteland • $700M commercial project, still delayed • Whiteland Village, Exton • 100 acre CCRC project being restarted • Turk’s Head Stadium, West Chester • $40M for Phillies Class A team announced 9/21 • Hildeburn Mews, West Chester • 12 new rental townhomes, fully occupied • Highpointe at Shanahan, West Chester • 60 townhomes under construction, many units sold • Jefferson @ West Goshen, 230 unit high end apartment complex now under construction

  12. Survey of Small Business Optimism • NFIB monthly index dropped this summer - Outlook is back to fall 2008 level - More firms to decrease than add jobs - Poor revenues #1 problem - 90% say credit is not an issue “Owners do not trust economic policies in place or proposed”, Bill Dunkleberg, Chief Economist, NFIB / Temple U.

  13. ECONOMIC TRENDS • The prime factor which will dictate the future economic climate is the national public debt • Trillions of debt added in response to the “Great Recession” • Trillions of debt will be added due to unfunded Social Security and Medicare liabilities

  14. National Debt Outlook • Debt to GDP ratio • Last 65 years ~40% average, proven to be manageable • FY 2010 ~ 65%, probably tolerable for a short term • Next 20 years , will go above 100%, unquestionably unsustainable • “US financial crisis possible as early as 2012” • Source, Mark Zandi, Chief Economist, Moody’s Analytics- 3/15 talk to Phil. World Affairs Council

  15. Probable Impact of Budget Deficits • Higher taxes • Weaker dollar • Higher commodity, energy and transportation costs • Higher inflation • Higher interest rates

  16. Higher Taxes Inevitable • End of “Bush” tax cuts? • Top marginal tax goes back to 39.5%, ~ 10% increase on 1/1/2011 • Dividend and capital gains taxes go from 15% to much higher rate ( 40%?) • New health care taxes in 2013 • 3.8% on investment income • 0.9% increase in Medicaid tax • AMT expected to hit an additional 7M people in 2011 • Higher state and local taxes • Must balance budgets so can not be delayed • Higher school taxes, pension issues • Longer term, possible VAT

  17. Impact of Higher Taxes • Lower disposal income • Lower growth for firms serving consumers • Intercity and interstate migration to low tax areas • Non taxed “perks” become important to employees • Underground and barter economies thrive • Importance of tax attorneys, accountants and financial planners

  18. Chester County School Taxes • Tax base down $7M last year on lower property valuations • School retiree’s pensions are biggest problem • Local contribution goes from 8% today to 33% in 2015, adding millions to each school system’s budget • All systems cutting costs and many raising taxes

  19. Weak Dollar/ Higher Commodity Costs • Foreign tourism increases • Outbound tourism decreases • Export businesses thrive • Imports cost more, especially commodities like oil and copper • Foreigners buy US real estate and businesses • Manufacturing with high imported material content will suffer • Domestic goods are favored

  20. Higher Energy/ Transportation Costs • Eventually expect $6-8/gallon gas cost similar to Europe and Japan • Higher cost hybrid and electric vehicles will be effectively mandated • Higher cost of electricity - PECO rates deregulated as of 1/1/2011 - 10% increase is probable for first step • Reversal of urban sprawl

  21. Higher Interest Rates • Rates increase because deficits must be monetized • US Treasury must sell bonds and buyers will demand higher rates • The yield on 10 and 30 year bonds currently indicate long term 3-4% inflation • At 4%, people on fixed income will lose 50% of their buying power in 18 yrs.

  22. Higher Interest Rates • Cost of debt increases • Depresses residential and commercial real estate • General low growth, stagflation • “Instant gratification” is suppressed

  23. Winners and Losers • Last 50 years the economy driven by the consumer via low interest rates • Real estate, communications and electronics prime beneficiaries • In 2007, 72% of GDP was driven by consumers • Currently at 67% • Removes $750B/yr from consumer market • Not expected to rebound • Industrial and government sectors benefit at the expense of consumer sector

  24. Predicted Losers by Occupation • State and local governments • Construction • Auto manufacturing • Pharmaceuticals • Big telecom • Newspapers • Airlines • Real estate agents • Bank tellers

  25. SOCIETAL TRENDS

  26. Less Affluence • People spend less and save more • Many restaurants hurt but: • Bistros, tapas bars, specialty trucks and hotel restaurants in favor • Rise of big bars that also serve food • Recent conversion of Spence and High St. Cafés to bars • Subway adds breakfast, others open on Sunday • Home remodeling thrives instead of spacious new homes • 2010 forecast of 5% growth • More “do it yourself” landscaping, cleaning, painting etc. • Especially true if VAT imposed

  27. Less Affluence • Vehicles will be used longer • Good for auto repair and used car dealers • Home care for the elderly and sick increases • Retirement and marriage delayed • Couples have fewer children and divorce less • Less costly vacations • Outward sprawl reversed • Retirees sell off suburban property to finance future • Non profits suffer from lack of funds but more volunteers available

  28. Interstate and InterRegion Migration • Population and businesses move to low cost, low tax, pro business areas • NJ, NY, Conn., Philly, NYC are already impacted • So far Chester County is “benefiting” • Diversified economy: financials, pharma, tourism, universities, agriculture, professional services • Retaining good schools, pleasant environment and skilled workers is a prerequisite • Some low cost areas will be resurrected • e.g. NE PA will grow with Marcellus shale, east coast warehousing and retiree low cost of living • Whirlpool building new plant in US not China!

  29. Working at Home • Higher transportation costs and better communication capabilities will accelerate trend to work at home • High bandwidth fiber optics and cable make videoconference and group internet use practical and inexpensive • Many at home workers will be independent contractors “free agents” • Home office products will be growing market

  30. Learning at Home • On line education is fastest growing segment of educational market • K-12, college, graduate school and specialized training impacted • Kindle, IPAD and interactive internet assist trend • On line college was 11% in 2008 up from 1% in 1998

  31. Changes in College Education • Three year degrees becoming available - Already common in Europe - Lower cost for student - Student can get a paying job earlier • Two year community colleges growing over 10% per year - Now 11M enrolled vs. 8.7M in 4 year colleges

  32. e-Care or e-Health • Control medical costs via technology • Fastest growing segment of health care • Monitor and treat patients at home • Wirelessly measure heart rate, blood pressure, oxygen in blood, glucose, EKG, falls, panics etc. • Implantable and “in clothes” sensors • Drs, nurses and EMS will be “on call” via internet • Many hospital treatments replaced by home medication

  33. Multigenerational Homes • Lower growth economy, higher educational costs and delayed marriages will lead to children staying with parents longer • Aging less affluent population will lead to elders staying with their children • 30% increase in extended family homes in last decade • Bigger, older homes in an urban environment will be favored ( good for home offices too)

  34. Demographic Changes:An Aging Population • 20% of PA residents are now > 65 • % will increase significantly • 77 million baby boomers retire in the next 15 years • Wealthiest, most active, longest living and best skilled senior segment ever • Looking for meaningful roles in the community • Fiscally conservative • Concerned about inflation and taxes • Increase in hip fractures, cancer, Alzheimer’s and traffic accidents • Segmentation of media, entertainment and services for seniors

  35. Demographic Changes:The Rise of the “Millenials” • The generation born between 1978-2000 • Completely at ease with digital life style • Not really interested in the traditional corporation, newspaper, TV or church • Their “on line” world features Twitter, texting, Facebook, You Tube, Linked In and their limitless successors • More educated, progressive and racially diverse than the baby boomers • Well suited for the “free agent” role in the economy

  36. Other Demographic Changes • Chester County ethnic mix changing • Rise in Hispanic and Asian segments • Each have distinct needs and are opportunities for service • 2010 census results may have some demographic surprises • Is the County changing more than we think? • Local banker and insurer say >50% new business is with Hispanics

  37. Digital Life Style • Ubiquitous communications • All time attachment to internet, phone and entertainment device • Home entertainment at consumer’s demand • TV delivers any program, movie, game or internet at any time • “Open Table” links customers to restaurants • You decide on time and type and Open table provides the options and confirms your selection • Expect concept to expand to other service providers (plumbers, hair salons, auto repair shops, etc.) through their web sites

  38. Digital Life Style • e books make reading and learning easier and less costly • Gradually replace newspapers, magazines, hardcovers and text books • Print size can be adjusted for seniors • $1B market now, $40B market in 2018 • IPAD may be game changer • Combines lap top, book and game player in light weight package • Salesmen and professionals adopting in lieu of lap top

  39. Energy and Technology Trends

  40. Energy/ Technology Trends • Revitalized domestic energy industry • Hybrid/Electric vehicles take the stage • Electronic revolution continues • On line computing accelerates mobility, lowers costs and enhances productivity

  41. “New Domestic Energy Age” • Natural Gas • Low cost and relative “greenness” • Nuclear Energy • Answer to CO2, complements battery power • Solar and Wind • Heavily subsidized – small role • Clean Coal • Not a near term answer • Biofuels • Possible but ethanol experience a negative

  42. Natural Gas • Plentiful and low cost • Technology breakthrough in horizontal drilling • PA will benefit enormously • Exploitation of its Marcellus shale deposit • PA 2020 impact per PSU • $25B added to state GDP • $1.4B added in state and local taxes • 176,000 new jobs • Tighter environmental controls required • Reserves sufficient for 100 years

  43. Marcellus Shale Thickness map of the Marcellus Shale. Modified after: United States Geological Survey, Open-File Report 2006-1237, Assessment of Appalachian Basin oil and gas resources: Devonian Shale-Middle and Upper Paleozoic Total Petroleum System, by Robert Milici and Christopher Swezey. [3]

  44. Natural Gas • Many coal fired power plants will be converted to NG - 43% lower CO2 emitted - Technology is well established - 57% of all new electric generation - Several states now prohibit new coal units • Use of NG for large vehicles will increase • Export of LNG may evolve over time

  45. Nuclear Energy Prospects • Worldwide, plants will double in next 20 years - China, India and Middle East lead • US today has 104 facilities, 20% of electricity - None built for 30 years - 31 applications pending - Energy Dept. loan guarantees available • Much safer Generation II plants now supply 77% of French, 46% of Swedish, 35% of Japanese power • Generation III plants to be modular, safer with less nuclear waste

  46. Hybrid and Electric Vehicles • By 2020, up to 25% of new vehicles sold • Forced by CAFE standards, higher gasoline prices and govt. subsidies • 3 types being commercialized: - Current hybrids where a small battery assists a gas engine- Prius - A “plug in “ hybrid where a large battery will power the vehicle with assistance from a small gas engine - An all battery “plug in” vehicle

  47. “Plug In” Hybrids • The real game changer • Requires home, office or service station charging • Practical range, much higher fuel economy • Cost and performance of unproven lithium ion batteries are the key to success

  48. “Plug In” Hybrids • 12 million/yr plug ins forecasted for 2020 • Higher up front costs suggest that leasing will be key to initial adoption • Chevy “Volt” due this winter - $41,000 before tax credits - 4 passenger compact - 40 mile range on battery - 12 gallon gasoline engine to extend range - 6-8 hours to recharge on 110 volt circuit - GM claims 230 mi/gal. fuel economy

  49. Full Electric Vehicles • Targeting the commuting market • Nissan “Leaf” being launched now - 5 passenger hatchback - 100 mile range, ideal conditions - $32,000 before tax credits - requires a $2200 charger (220 volt)

  50. Local Impact • Need for skilled technicians and repair shops • Need for recharging, replacement and recycling stations - Battery will be valuable • Used car and repair shops will thrive as many consumers resist the trend • Auto parts suppliers severely impacted • Insurance policies revised due to uncertainties and safety issues

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