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Due to the increasingly expanding COVID-19 Novel Coronavirus crisis, the U.S. economy is rapidly heading for a recession. We won’t know the total financial impact or which industries were able to weather the recession until it’s over. As a point of reference, we can look at the most recent recession and the stock market debacle that resulted.
The Great Recession of 2008 wreaked havoc on the stock market with the S&P 500 index losing 38.5% of its value – the most devastating drop since 1931. However, while the vast majority of stocks plummeted in 2008, there were several industries that thrived despite the economic downturn. Given this year’s coronavirus- induced stock market plunge, it’s worth looking back to see which industries showed resilience in the wake of a financial crisis. What’s the likelihood that these same industries can stand up to the economic decline brought on by the disastrous COVID-19 pandemic?
During the 2008 recession, Dollar Tree stock outperformed all other S&P 500 stocks, climbing more than 60% that year. Think about it; when consumers are cash-strapped, a store full of $1 items is appealing. The company’s decision to turn its attention from party favors to groceries and household supplies turned out to be the right move in 2008. CEO Bob Sasser recognized the new product mix as being recession-proof. Accepting food stamps or Bridge Cards was also a wise decision as it helped Dollar Tree outperform the market by close to 100 percentage points. As of 2020, Dollar Tree also owns Family Dollar and is expected to be insulated from experiencing the effects of the current economic downturn.
As the chart above demonstrates, “Discount Stores” was the only industry to appear twice in the top 10 best-performing stocks of 2008. Coming in at #6, Walmart also benefited from the dramatically weakened economy with revenue growth of 7.2% and an 8% increase in dividends in the worst year for the economy since 1931. Walmart is also outperforming the stock market during 2020’s coronavirus pandemic.
The discount stores industry’s performance is logical since consumers generally have a reduction in income during recessions. When experiencing declines in income, consumers will either buy fewer items or shop for cheaper items. Since essentials like food and fundamental household supplies can’t be cut from consumers’ budgets, they’ll have to turn to cheaper alternatives to save money. Because of this, discount retailers typically do well in a recession. Discount stores also do well as consumers bustle to stockpile food and essential household items in the wake of an impending crisis. Consumers want to make their dollars stretch further and will head to stores that allow them to do so.
In 2008, three healthcare-related companies appeared in S&P 500’s top ten: Vertex Pharmaceuticals Inc., Amgen Inc., and Edwards Lifesciences Corp. These three companies are all healthcare-related even if they don’t share the same exact classification. In fact, of the top 34 companies that experienced positive returns during the 2008 recession, seven were healthcare-related.
Biotech behemoth Amgen Inc. made the top ten by insulating itself from the 2008 recession through providing critical cancer, anemia and other medications that consumers rely on. Amgen experienced product revenue growth of 3% in 2008 which was a respectable accomplishment at a time when consumers were in panic mode. Taking advantage of the depressed market, Amgen also made the wise choice to buy back millions of company shares at around a quarter of the stock’s current price. At the time of this writing, Amgen stock was outperforming the wider market.
In good times and in tough times, consumers need health care and medication to survive so the reason for the health care industry stocks’ favorable performance during recessions is obvious. Consumers aren’t likely to eliminate health care from their budgets even if their income declines. The demand for health care is considered to be inelastic which means it’s not affected by price or a consumer’s income.
Although many health care companies thrive in a recession environment, those that carry heavy debt loads and insufficient cash flow (i.e. biotech startups) will face an uphill battle. These companies are ill-equipped to absorb losses and service their debt simultaneously.
In third place, tax return preparation giant H&R Block Inc. provides a rather recession-resistant service. No matter the economic climate, taxes are an inevitable part of life. In 2008, Block was paying out an average dividend of 4% to common shareholders when blue-chip companies like General Electric were poised to reduce or eliminate dividends.
In early 2020, Block appeared resilient and was enjoying a 4.6% dividend, free cash flow, and its fourth straight year of dividend growth. Block is expected to weather the next recession.
Just like health care, consumers need food to survive and can’t be too flexible when spending on it. In addition to discount stores such as Dollar Tree and Walmart, other companies that make or sell food made the S&P 500 in 2008. They include General Mills, Inc. (manufacturer of packaged foods), grocer Kroger Co., McDonald’s Corp., and Darden Restaurants, Inc. (owners of Olive Garden and other relaxed dining restaurant chains). These companies thrived during the recession due to being relatively inexpensive food options. As income declines, consumers tend to purchase inexpensive foods like cereal and turn to less expensive restaurants when dining out.
Goods need to be moved from one location to another regardless of whether there’s a recession. While the frequency of discretionary travel (i.e. vacations) drops during recessions, the need to get products to store shelves is still there so freight companies often prosper during recessions. Companies like Old Dominion Freight, Westinghouse Air Brake Technologies, and C.H. Robinson Worldwide all made the S&P 500 in 2008. These companies either move freight and products or manufacture equipment that helps move freight.
In tough economic times, consumers are more likely to repair what they already own rather than replace broken or non-working items. They’re also more likely to perform routine repairs and maintenance themselves. This explains the strong 2008 performance of companies like automotive parts and accessories retailer AutoZone Inc. and home and garden improvement retailers Tractor Supply Co. and Sherwin-Williams Co. During a recession, consumers are more likely to repair their cars (rather than buy new ones) and perform routine maintenance such as oil changes. They’re also likely to do home improvement tasks like painting and landscaping themselves.
As consumers increasingly turned to cost-conscious shopping habits in 2008, discount clothing retailers like Ross Stores saw both record sales and earnings. Ross even expanded during the Great Recession, with its store count increasing from 890 to 956. Combining same-store sales growth and tighter inventory management, Ross was able to outperform the market by 56 percentage points. However, the coronavirus crisis has put a different kind of pressure on retailers causing Ross Stores’ stock to underperform due in part to the company’s early panic selling.
As consumers dramatically reined in their spending in 2008, toy and entertainment companies like Hasbro were, surprisingly perhaps, thriving. In 2008, Hasbro experienced revenue growth for a fourth consecutive year and earnings growth for an eighth consecutive year. Thanks to franchises like Star Wars, Iron Man, The Incredible Hulk, Transformers, and Spider-Man, Hasbro’s stock flourished in a tumultuous market. This shows that entertainment is often a respite for consumers during tough economic times. During the recent economic downturn of 2020, however, Hasbro hasn’t been as fortunate. The company’s stock is being battered as much as others.
The positive outcomes from the 2008 recession and data from a 2010 Harvard study show that companies can not only survive a recession but thrive afterward.
In May 2019, it was predicted that the U.S. would be hit with a recession in a matter of months. According to Bain & Company, we were overdue for a recession. The U.S. had experienced 10 years of economic expansion and by historical standards, a recession was on the horizon. The signs that Bain & Company was onto something appeared in the form of overleverage in the corporate sector, geopolitical uncertainty—including the China-US trade war, and economic instability in some European countries.
Here we are, months later, in the throes of a deep recession but it’s not for the reasons that Bain predicted. The COVID-19 coronavirus is to blame. COVID-19 has impacted the global economy and caused entire countries to cease economic activity with the exception of essential products and services. The virus continues to ravage population counts and healthcare systems in the U.S. and around the world.
The health component of the current recession makes it different from any other recession we’ve encountered in recent history. The potential for further waves of the outbreak after the initial peak of infection and deaths makes it difficult to predict the total devastation – both from health and economic perspectives – that could result from this pandemic.
No matter the impetus for a recession, there’s one thing that businesses want to know: “Can we survive this recession and potentially thrive afterward?” Astute business owners and corporate heads will look for answers even in a chaotic economic climate.
Fortunately, there are answers to this question and recommendations that will help companies stay above water during an economic downturn. These recommendations take the recessions of the past several decades into consideration. They look at how companies have succeeded during and after previous recessions.
Many businesses perform poorly during a recession; no surprise there. The 2010 Harvard study found that 17% of 4,700 public companies went bankrupt, went private or were acquired during the recessions of 1980, 1990, and 2000. However, another striking statistic emerged from the study: 9% of public companies not only recovered in the three years following the recessions. They flourished and outperformed their competitors in sales growth and profit by at least 10%.
Bain & Company’s subsequent research (which focused on the 2008 recession) also found that the top 10% of public companies enjoyed steadily climbing earnings during the recession and afterward. Over the 10 years from 2007 to 2017, these companies grew by 14% while the remaining 90% of companies experienced little to no growth during that period. A third study by McKinsey & Company found similar results.
What was the difference between those companies that outperformed versus those that did not? According to Bain’s analysis of the 2008 recession, it boiled down to preparation. Of the companies that experienced stagnation after the Great Recession, only a few had contingency plans in place. When the recession hit, they went into survival mode, becoming defensive and making deep cuts. Unfortunately, these strategies didn’t help them effectively weather the recession.
What, then, are the best ways to avoid the fate that befell these stricken companies? Preparation is at the top of the list. Before a recession hits, it’s important that companies have a solid grasp of the right steps to take. This will help them avoid being caught off guard when the next recession eventually occurs.
Although there are events that can signal the imminence of a recession, the exact timing and duration aren’t as important as being ready for it. By being prepared for a financial crisis, business owners and corporate heads can avoid being forced to react hastily in its wake. Bain & Company’s research illustrated how well-prepared companies emerged strong during and after past recessions. These companies simultaneously employed a strong defense and offense by reining in costs while reinvesting in growth.
As mentioned earlier, companies that carry heavy debt loads are especially vulnerable during a recession. A 2017 study by Xavier Giroud of the MIT Sloan School of Management and Holger Mueller of the NYU Stern School of Business found that the majority of businesses that fail due to decreasing demand are heavily leveraged. In other words, they have too much debt and while trying to service it they run out of money. The more debt your company has, the more cash you’ll need to make your principal and interest payments. By depleting cash reserves or putting them in jeopardy, you risk defaulting on loans.
To keep up with payments, debt-riddled companies will aggressively cut costs which usually results in massive layoffs. This impedes the company’s productivity and ability to fund growth and take advantage of opportunities.
Going into a recession with debt isn’t always a bad thing. For example, companies owned by private equity firms often require their portfolio companies to take on debt. However, these firms performed better during the Great Recession than non-private-equity-owned firms that were similarly leveraged. Private equity-backed firms came out ahead because their owners helped them raise capital when they needed it.
To avoid being overleveraged going into a recession, companies should consider issuing equity to reduce debt obligations and lessen the likelihood of default. If you think a recession is coming, consider deleveraging by shedding assets in a way that doesn’t affect core business operations.
Research by McKinsey & Company showed that companies that dramatically reduced their debt from 2007 to 2011 emerged from the Great Recession stronger than those companies that did not.
A 2017 study by Harvard Business Review found that the decisions a company makes during and after a recession are only part of the equation when it comes to how the decisions affect performance. The company’s performance also depends on who is making key decisions. The research found that when key decisions are made further down the hierarchy, companies are better able to adapt to changes such as those that occur during a recession. During the Great Recession, these decentralized companies performed better than those who were more centralized.
In a time of confusion and turmoil, decentralized companies were able to more effectively adjust their product lines in response to changes in demand. This suggests that companies would be wise to review their current company structures or organizational charts to weigh the benefits of decentralized versus centralized decision making.
Bain & Company’s findings reinforced the need for financial discipline in a recession. Companies should aggressively manage costs by reducing spending on processes that yield lower value and decreasing the volume and complexity of tasks. The companies that did this during the Great Recession viewed cost management as a way to go into the next stage of the business cycle fueled for growth.
According to Bain’s findings, the companies that successfully weathered the Great Recession were diligent about financial management. They kept a close eye on financial statements including the balance sheet and P&L or income statement. They maintained a firm hold on cash management, tightly managing cash flow, working capital and capital expenditures (CapEx) to ensure funds would be available for reinvesting in the company. Many of these companies also shed non-essential assets and used the proceeds to further invest in their core business.
It’s not always easy for companies to manage their finances with this degree of discipline. In fact, Bain’s research showed that less than 15% of CFOs in North American and European companies regularly review the balance sheets of individual units within the companies. This can lead to inaccuracies on the P&L which cause management to make capital investments at the wrong time, retain extraneous or unproductive fixed assets, and maintain more cash than necessary in working capital accounts.
In an economic downturn, layoffs are inevitable. This is magnified with the COVID-19 pandemic as many companies are being forced to either lay off or terminate employees given that only essential businesses are being allowed to operate in many countries and states. However, layoffs often cost companies more in the long run. The cost of hiring and training new employees to replace laid-off workers can be high. Morale and productivity can also suffer at a time when companies can least afford it.
The companies that emerged from the Great Recession unscathed relied less on layoffs and more on operational improvements. For example, Honeywell laid off nearly 20% of its workforce during the 2000 recession and faced a difficult recovery period as a result. During the Great Recession, the company took a different approach. Instead of laying off employees, Honeywell furloughed employees for one to five weeks, providing partial compensation or unpaid leaves depending on local government mandates.
By employing this strategy, the company emerged from the 2008 recession stronger than it had in 2000 even though the 2008 economic downturn was much more catastrophic. They were able to save an estimated 20,000 jobs and enjoy improved sales, net income, and cash flow.
There are other strategies companies can use in place of layoffs. Temporary furloughs, reduced hours, and performance pay can keep labor costs under control without a significant decrease in productivity. Companies should avoid strategies like across-the-board pay cuts that have the potential to damage morale and drive away their most productive employees.
There’s no questioning technology’s ability to improve efficiency, reduce costs, and increase agility. Digital technologies offer innovative ways to expedite and simplify business processes. During a recession, technology can provide these benefits at a time when they’re needed most. According to Bain, deploying new technologies coupled with cost management tools such as supply chain reinvention, complexity reduction and zero-based budgeting (a method of budgeting in which all expenses must be justified for each new period) can help companies thrive during and after a recession.
Another case for prioritizing digital transformation before or during a recession is how it improves analytics that can aid management in better understanding the business, how it’s being affected by the recession, and where operational improvements can be made. Digital technologies allow companies to have more flexibility regarding product changes, volume changes and other factors related to a company’s supply chain. To manage the cost of adopting technology during an economic downturn, companies should focus on self-funding transformation projects that offer a swift return on investment (ROI) like task automation or data-driven decision making.
Because lower demand typically drives down the cost of technology, investing in technologies during a recession is a sound business decision. When the economy is strong and demand is high, companies have an incentive to produce as much as they can. If resources are diverted to invest in new technologies at that time, companies may miss out on potential sales. On the other hand, when demand is low and fewer people are willing to buy production needn’t be at full capacity. This frees up funds from the operating budget, allowing for funding of IT initiatives without undermining sales. Therefore, adopting technology during a recession costs less in a sense.
Research on the Great Depression has also focused on the advantages of reinvesting into a company for commercial growth. The companies that emerged from this downturn in the best positions went on the offense and employed some of the following tactics to increase commercial growth. Unfortunately, many of their peers went into survival mode and waited for the economy to rebound.
As the COVID-19 pandemic has shown us, some companies are in a much better position to quickly adapt to this disastrous landscape because they’re well-prepared to serve customers digitally and allow employees to work remotely.
By using digital tools and channels, companies have access to more cost-effective and customer-focused opportunities that allow them to achieve growth goals even during a recession. Data analytics is one of those digital tools as it can help companies identify profitable opportunities and customer segments. Segmentation can help companies set pricing at different levels depending on the characteristics of each segmented group. Data analytics also aids companies in quickly adapting to recession conditions.
The companies that came out ahead after the last recession used a mergers and acquisitions (M&A) strategy to restructure their portfolios by divesting or investing. These companies took advantage of the lower prices that resulted from decreased demand and invested in new product lines, customer segments or systems. They also divested from businesses or product lines that no longer coincided with the company’s plans for the future.
One company that effectively employed an M&A strategy during the last recession was Stanley Hand Tools. In 2009, Stanley acquired Black & Decker, a larger company, at a time when Black & Decker had experienced a 22% drop in revenue and a 41% drop in EBIT (Earnings Before Interest and Taxes). Since operating the merged companies as Stanley Black & Decker, they’ve realized strong revenue growth. Stanley’s due diligence and quick action are credited for the company’s successful merger.
With the impending COVID-19 recession, vulnerable industries, businesses, and product lines are already being recognized as possible candidates for divestment. The recession is also spotlighting many opportunities for investment in product lines, customer segments, and systems that have shown considerable strength and demonstrated value during the pandemic.
Whether your M&A strategy includes investing or divesting (or a combination of the two), you could come out ahead after the recession by using this strategy to position your company for long-term success.
Not every company enters a recession from the same starting point, so the development of a sound plan depends on the assessment of a company’s current strategic and financial positions. Specific steps or actions will vary by industry, however, all companies will fall into one of four basic positions. These positions will determine how cost programs are shaped and the additional strategies to be pursued. The positions range from investing for leadership based on an exceptional strategic and financial position to getting a weak company ready for sale.
Depending on a company’s position entering a recession, here are recommended action steps to take for the four basic positions:
Strategic Position considers the following: Market share, Product portfolio vs. competitors, Customer loyalty, and Industry exposure to recession or disruption
Financial Position considers the following: Margins/unit cost position, Recession sensitivity, and Balance sheet/liquidity
To increase your company’s odds of thriving during and after a recession, here are several offensive moves to consider. The objective of these steps is to help you create a stronger business that can weather this and future recessions.
The above strategies and list of recommended actions aren’t exhaustive. Keeping a company afloat during an economic downturn, while simultaneously investing for future growth, is a massive topic. However, we hope these strategies have you thinking about how you’ll protect your business so you can not only survive but even thrive during the current and future recessions. The strategies provided in this article should give you a sense of the types of activities you should be engaging in to recession-proof your business.
As you’re planning your M&A strategy, it’s important to remember that each recession is different so the stocks that do well during them will also be different. For example, the current widespread COVID-19 crisis is causing a lot of biotech companies to grow. The Great Recession of 2008 was the result of a financial crisis so financial firms were hit hard during that recession. In 2020, energy companies are suffering due to the current oil price war. As you’re building your investment portfolio, it’s also important to note that the stocks and industries that prosper during a recession may not experience that same success once the economy rebounds. Do your due diligence and be prepared to adjust your investment strategy when the economy recovers.
Your investment strategy should also take into account the goods and services people and businesses can easily live without and which are essential. The essential businesses are a good place to start looking when preparing to invest during a recession. Also, consider the types of businesses people may patronize more if they experience a drop in income.
If you’re unsure about how to prepare your company for an economic downturn, seek the advice of a professional who specializes in resilience planning or business strategy.
As COVID-19 continues to destroy lives and livelihoods, take the necessary steps to strengthen your business so you can be in a position to help your community and country rebuild.
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