Is it wise to start a business during a recession?
If you want to start a business, don’t let an economic downturn or a recession put your plans on hold. It sounds counterintuitive: An economic downturn can actually be an excellent time to start a business. But it’s true. The psychology of fear that recessions cause as well as declining competition can even give you a chance you may not otherwise have. But assessing the current landscape and choosing the right business is even more essential. Recession-proof businesses exist — you just need to find them.
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What is a recession?
Let’s level-set: A recession is a period of economic decline that can last anywhere from a couple of months to years. People spend less money, and because of that, there’s less manufacturing and trade of goods.
The important thing to know is that when recessions do happen, people stop spending money. Human psychology takes hold, and fear sets in, which can make things even worse. And even industries not impacted by recession will feel the effects.
How does a recession affect businesses?
As you’d expect, a recession affects nonessential goods but can also affect energy and transportation industries and service-oriented businesses like sales. You won’t sell much if no one has money to buy your products!
When cash flow stops, businesses turn to cash reserves, selling off stock, issuing bonds, or using their capital assets as collateral to secure loans. Yet loans also become harder to secure, stock prices can decline, and the real estate market sometimes goes stale, making property investments less profitable.
When businesses can’t make up for lost profits and have no other investments or cash reserves, product changes, hiring freezes, furloughs, and employee layoffs often come next, negatively affecting everyone, from the consumer to the stockholder. A recession-proof business, however, will be prepared, by paying off debt, being ready to pivot, or avoiding deadly sins like giving in to fear.
Is there such a thing as a recession proof business?
Absolutely. Some businesses will weather the storm, and others will thrive in a recession. Those that are run with purpose, vision and great leadership will be in a better place to survive, as will those that are financially prepared. There are also certain industries that may do better than others during an economic winter.
This is where the concept of elasticity of demand comes into play. Businesses with elastic demand for their products – that is, demand goes down when the price goes up – are more vulnerable to recession. Recession-proof businesses usually produce inelastic goods, where demand stays the same even if the price goes up.
What are some examples of businesses that thrive in recession?
Due to the elasticity of demand, recession-proof industries are usually in essential services, like health care, senior services, grocery stores, and maintenance, such as plumbing and electrical. In our technology-driven world, streaming services, video games, computer equipment, cybersecurity, and IT support are among the best businesses in a down economy.
During a recession, nonessential goods are the first thing people jettison. Businesses like restaurants, fashion retailers, and other consumer goods will likely take a hit. It’s possible to enter these industries during tough times, but if you’re wondering which industry is recession-proof, you’re more risk-averse than you think. No business idea is guaranteed, but it’s wise to avoid these industries and choose one with a high possibility of thriving.
For examples of recession-proof businesses, look no further than household names like General Electric, IBM, General Motors, Disney, Hyatt, Trader Joe’s, FedEx, and Microsoft, all of which arose during adverse market conditions. Others like Salesforce, Google, and Facebook launched immediately before an economic winter, and these companies survived recessions to become some of society’s most prominent business names.
12 recession proof industries
When it comes to recession-proof businesses, you have plenty of options within the industries listed below. Some of these recession-proof industries will even surprise you.
Not surprisingly, grocery stores are one of the top industries not impacted by recession. People always need to eat, and during a recession, they typically also cut back on eating out in restaurants and ordering takeout, which tends to makes grocery sales skyrocket even more.
2. Health care
Like groceries, people need health care to live. That demand doesn’t decline when the economy does. Healthcare is always inelastic, meaning the demand for it doesn’t change based on its price. Demand for healthcare may even rise during a recession as people seek help with mental health.
Whatever the state of the economy, humans seek pleasure and avoid pain, so it’s a shock to no one that candy is a recession-proof business. Snickers and Three Musketeers launched during the Great Depression, and during the 2008 recession, Cadbury reported record earnings.
4. Beer, wine and liquor
Alcohol sales are another “guilty pleasure” industry that tends to be profitable during recessions. When larger purchases like electronics, vacations and new cars are out of reach, people tend to console themselves with alcohol. It isn’t a healthy habit, but it is one of the best-performing businesses in a recession.
5. Discount retailers
While fashion, jewelry and other nonessential goods are generally not recession-proof businesses, there’s an exception for discounters. Dollar Tree, Walmart and Ross Stores had some of the highest-returning stock during the 2008 recession.
6. Children’s goods
Baby products are almost entirely recession-proof: Parents can’t exactly pinch pennies on diapers, formula and clothes for a fast-growing baby. Even kids’ clothes and toys are recession-resistant. Parents will cut back in other areas so they can still provide for their kids or even spoil them a little bit.
7. Pet industry
America loves its pets. If a beloved cat or dog falls ill, we’re not likely to scrimp on veterinary care. It doesn’t stop there. Americans are still estimated to spend $1.5 billion more on pet food and treats in 2020 than they did in 2019. Pets are big business, and those businesses are recession-proof. Pets are essential to their owners’ lives and create many recession-proof businesses.
8. Financial advisors and accountants
When we enter a bear market, everyone starts worrying about their financial future. Individuals want to ensure their investments are stable or even invest in new opportunities. Businesses rely on advice from their accountants to help them survive tough times. These are valuable skills in any economy, but especially a down one.
9. Cybersecurity and tech support
The current recession has driven activity online – we’re shopping, working, communicating and streaming more online than ever before. Recession-proof businesses always adapt to current trends, and those with the skills to stop cybercriminals and help newly remote office workers are discovering opportunities.
Even when the economy is slow, things are going to break. The recession won’t slow rain on the roof, water in the pipes and the need for auto maintenance. That’s why plumbers, electricians, mechanics, roofers and all-around handymen are likely to do well in a recession.
11. Debt collection
It’s a sad truth of recessions: When the economy tanks, many people can’t pay their bills. They get behind on car payments, medical bills and the electric bill. Debt collection may not be your passion, but it is certainly a recession-proof business.
12. Freight operations
Businesses that thrive in recession tend to have products or services that people need no matter what or that make them happy in hard times. Freight and logistics delivers both the necessities and the comforts, making it consistently recession-proof.
Don’t let a recession hold you back from starting your business
While some argue against starting a business during a recession, the reality is that many recession-proof industries make it an opportune time to do so. With some effort and thorough research, you can identify which recession-resistant business will be most suitable for you. However, it’s also crucial to consider your mental, emotional, and financial preparedness for doing business during an economic downturn. Once you have a clear understanding of your capabilities and have taken the necessary steps to prepare for the challenges ahead, you’ll increase your chances of success, regardless of the state of the economy.
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