Traits of Recession-Resistant Businesses
Before we get into which specific industries weather or even thrive in an economic downturn, let’s look at some of the qualities that recession-resistant businesses share. The types of businesses that are sustainable in a recession usually fit into one or more of these categories.
Necessary is necessary. If a business is essential for food, shelter, health, or basic utilities, it can reasonably expect some sustained revenue. Households will wait the longest to cut these expenditures.
Any business with a focus on low costs will benefit from an economic downturn compared to its upmarket counterparts. Households seeking to keep costs low ignore other factors in the buying process.
Affordable luxury is slightly different from discount options. Affordable luxuries aren’t necessarily cheap, but they replace something much more expensive—for example, treats from high-end food shops might replace an even more expensive dinner out.
Does your business produce something patented, trademarked, or copyrighted? If your customers and clients do not have a reasonable substitute for your goods or services, you will likely hold on to them.
Certain services can’t be outsourced or done remotely, and certain goods are better bought locally, either because they are perishable or urgently needed. While Amazon still tries to figure out same-day delivery and brick-and-mortar retailing, some local retailers remain safe for now. The same is true for service providers that aren’t facing a challenge from an Uber-like app.
Benefitting From Hardship
Economic hardship creates its own kind of consumer demand. Bankruptcy lawyers, collections agencies, and repossession agencies are just a few of the firms that see increased businesses when everyone else is seeing lean times.
Discount retail is the only industry to appear twice on the list of the top 10 S&P 500 stock performances from 2008, the year of the last serious economic crisis. Walmart’s stock grew 20%, and Dollar General’s was up a whopping 60% that year. It’s not just stock prices either—in 2008, Dollar General’s sales increased 9%. The last recession is seen as a complete resetting of consumer behavior to focus on low costs, coupons, and sales.
Small businesses can see this bump, too. During a downturn, convenience stores and local shops may replace grocery stores and bigger retailers if they can provide low prices and convenience. In light of the coronavirus pandemic, shoppers may also appreciate the absence of crowds at smaller retailers.
If goods are still being bought and used, they need to get from Point A to Point B. That’s why FedEx’s and UPS’ domestic operations will continue running even during a slowdown. The broader “shipping and logistics” industry is vulnerable during a recession, especially as the pandemic disrupts international supply chains. But domestic shipping related to online retail will be relatively safe.
Groceries and Specialty Foods
Households still need to eat, and most will be eating out less or not at all during a recession. Sales of basic staples will explode, and consumers will be looking for the most value possible.
You might think then that fancy foods would see a decline during a recession. But as consumers stop dining in restaurants to save money, they still need to enjoy a special meal sometimes. As a result, they turn to items like fine chocolates and cheeses to enjoy at home.
“We’re seeing an increase in items like pate and robust cheeses, blue cheeses, washed-rind cheeses,” said Whole Foods specialty coordinator Frank Schuck back in the middle of the last recession in 2008. “With these items, a little goes a long way.”
As we’ve seen already, any store that sells toilet paper and Clorox cleaner is probably doing great right now. Falling under the same umbrella as grocery staples, certain household essentials and toiletries will be some of the last things cut from household budgets.
Household essentials can be both discount items and affordable luxuries. A consumer might buy store-brand disinfectant spray, seeing no difference from the name brand, but splurge on a skin moisturizer as a treat.
Once thought to be recession-proof, the healthcare industry has already lost 1.4 million jobs due to the coronavirus pandemic. Hospitals and private practices have temporarily discouraged elective procedures, and seniors (the main drivers of healthcare spending) are hesitant to pursue even vital medical attention.
However, the healthcare industry is still doing better than the job sector as a whole. Healthcare jobs have fallen by less than all jobs. With the rise in telemedicine, businesses related to remote care could see a bump.
The demand for gas, water, and power continues during a recession. In our current situation, growth will slow but increased power usage from homebound consumers may help offset the lack of demand in large retail and office spaces.
A 2014 study confirmed what conventional wisdom always held: “that public sector jobs, while not generally recession-proof, do offer more security than private-sector jobs, and the advantage widens during recessions.” These government jobs include everything from administrators to teachers to firefighters and police. Job security depends on a number of factors, including what level of government (federal, state, local) one works for.
As the saying goes, only two things in life are certain, and accountants help prepare one of those things. Accountants generally have low unemployment. During the last recession, the accounting sector added thousands of jobs as unemployment neared 9.7%.
Funerary workers help prepare the other certain thing in the aforementioned idiom. The death industry has faced numerous issues not directly related to the recession, including consolidation of small businesses and longer life expectancy. The rise of cremation affects numerous secondary businesses like hearse drivers and monument makers. Even the primary work of undertakers is affected as families try to cut costs with more affordable caskets and services or are forced to defer costs to state agencies. But even as spending decreases, it doesn’t stop, so funeral homes will still see a steady supply of business.
Home Repair (Retail and Service)
Another saying goes, “Remodelers hire as builders fire.” During a downturn, households can’t afford to buy a new home. However, they might have enough money to repair and remodel their current home. Other homeowners might opt to attempt remodels and repairs themselves, leading to a boost for home improvement retailers like Lowe’s, Home Depot, and local hardware stores.
Auto Repair (Retail and Service)
Usually, auto repair and auto parts stores see some business during a recession as consumers do their best to hold onto their cars instead of buying new ones. But consumers will only invest in the most necessary repairs. The auto repair industry is highly unpredictable at the moment because, unlike during past recessions, Americans are now largely homebound. Quarantines might ease in the summer months; if so, auto stores and shops will see a decline in business, but perhaps not as much as other industries.
People continue washing their clothes during a recession. Cleaners and coin-operated laundries still face numerous challenges: consumers might wait longer between washes. Location and changing demographics can also wreak havoc on a laundromat if its customer base moves out or is evicted and no one replaces them. But well-located laundromats can expect to see at least some business even during a downturn. Households might not be able to afford to repair a broken washing machine and will use a laundromat instead.
Fast Food and Fast-Casual Restaurants
Sit-down restaurants always suffer during a recession as households stay in and cook more to save money. But people still need an occasional indulgence and food-on-the-go. Fast food stalwarts like McDonald’s and KFC see relatively steady sales during downturns as consumers look for value and comfort. But the last recession was also one of the major catalysts of the fast-casual trend. Restaurants like Chipotle, Shake Shack, and Noodles & Co. found success with slightly higher-quality ingredients and made-to-order meals, even if it was a bit more expensive than traditional fast food. The losers in this restaurant realignment? Casual chains like Applebees and Chili’s, who found in the last recession that both their prices and quality were lacking for newly value-conscious consumers.
So-called “sin” industries often do well during recessions, and alcohol sales grew following the 2008 crisis. Drinkers will likely be spending more at liquor stores than at pricier bars and restaurants. Interestingly, craft beer sales grew in the last recession as sales of macrobrews (Budweiser and Coors) mostly fell significantly. Perhaps value-conscious consumers were treating their 6-pack in the fridge as an affordable luxury, prioritizing taste (not to mention higher alcohol content) rather than price.
Some businesses only do well when someone else is having a terrible day. While the US economy is eyeing the worst state since the Great Depression, bankruptcy attorneys see blue skies. According to Fortune, job listings “for bankruptcy attorneys have tripled since January on online job board ZipRecruiter, while postings across all industries have fallen 48%.”
Collection and Repo Agents
Lawyers aren’t the only ones who have to swoop in during tough times. Collections agencies see huge increases in traffic during recessions, although it’s a double-edged sword: the last downturn showed that as work for collections agents increased, profits decreased because they were collecting smaller sums and cutting their profit margins.
Repo services see a huge surge of repossessions early on in a recession, but it doesn’t last. If the economic stagnation lasts for more than a year or two, there are simply fewer cars left to repossess.
The failure of garbage pickup is one of the most commonly-cited signifiers of infrastructure failure. Expect garbage disposal to be one of the last services to be cut or reduced. Barron’s notes that “80% of sales are service-based and not tied to the health of the overall economy.”
How to Make Your Business More Recession-Resistant
Regardless of what your business is, there are steps you can take to minimize the damage of an oncoming recession.
Cut Nonessential Spending
Capital investments, major new product launches, and the company retreat need to be put on hold during a downturn. Save that capital for the essentials that will power your organization through tough times and let you outperform your competitors.
“However, this does not mean cutting cheap but morale-boosting expenses like cake for birthdays,” writes Gregory Go at American Express. Hold onto coffee and snacks to keep your staff as content as possible.
Reduce Your Inventory
The big reserves of product you are storing might have just become “nonessential.” As consumer spending slows, you can keep less inventory on hand. Start with inventory that sells slowly and/or has the thinnest profit margin.
With possible reductions in inventory, work hours, workload, and even staff, you might have unused space. In this case, consider subleasing the unused space to make up some of the difference.
Strengthen Relationships With Existing Customers
Your most important accounts will likely be suffering their own hardships due to the recession. Reach out to them to let them know you understand and are eager to work out an arrangement—and also so you’ll be aware of just how much trouble they are in. Consider accommodating them by adjusting your billing from quarterly to monthly. Offer them incentives to pay early, like 1 or 2% off.
Be Tough on Receivables and Collections
At the same time, you have an obligation to your business to maintain revenue. Be clear with customers that you can be flexible on your agreements, but timely payments in full are still required.
As for your vendors, ask for the same consideration that you would offer your customers, like a 1% to 2% discount for early payment.
Talk to Your Bank
Capital dries up quickly during a recession. Talk to your banker early to reassure them of the basic stability of your company and to keep lines of credit open.
Maintain Your Marketing Budget
Marketing budgets are often the first things to get cut, but this is a mistake. The Small Business Administration reports, “Studies have shown that those maintaining or increasing ad outlays during slowdowns wind up outselling rivals who cut back.” As competitors stumble and contract, marketing can attract their former customers. Maintaining outreach during a recession is often the difference between companies that suffer and those that thrive.
Communicate With And Support Your Staff
If this is a scary time for you, imagine how difficult it is for your staff who likely have less information and less control over the situation. Talk to your staff candidly about how your business is going to proceed during the recession. If you can lay out credible plans, it will likely calm nerves—oftentimes, any plan is more comforting than no plan at all.
Include your staff in the planning as well. They might be more understanding of budget cuts if they can see with their own eyes that it is necessary, as the Small Business Administration suggests. If you need to make cuts, begin by reducing hours rather than pay rates—employees would resent getting paid less for the same amount of work.
Supporting your staff will also help prevent defections from employees who think they need a lifeboat. The middle of a recession is no time to be replacing a valued, experienced staff member.
A recession is a difficult time for any business. But small business owners should be aware that they have many options and strategies to try to keep their organizations going during a downturn. With hard work and luck, you will come out on the other side, perhaps stronger than before.