By Hunter Williams
This article was first published in BRINK News on March 30, 2020.
With financial-market indexes plummeting, oil prices imploding and COVID-19 on the loose in major economies, it’s time to start worrying seriously about recession.
Last year, businesses in the United States breathed a sigh of relief after the Trump administration seemed to come to a tentative truce with China over tariffs and a yield curve inversion — normally a recessionary signal— proved temporary. The New Year dawned with no sign of recession of the horizon.
Then, in mid-January the world learned about a rapidly spreading coronavirus in Wuhan, China. In a matter of weeks, the second-largest economy in the world, which supplies almost one-fifth of global production, had seemingly come to a near-standstill in a desperate attempt to contain the virus. A few weeks later and the virus had spread to more than 100 countries. Today there are more than 560,000 confirmed cases and more than 25,000 dead.
Now, Saudi Arabia and Russia are arguing over oil production quotas and crude prices dropped 30 percent in one day. The financial markets, which had been at historic highs, are now posting historic declines. If you haven’t pulled out your business contingency plan yet, one has to wonder if you’re waiting for a plague of locusts.
Ready or not
Recessions can be make-or-break moments for most retailers, consumer products companies, and service companies like those in travel and hospitality. With the spread of COVID-19, a spooked stock market, oil market chaos, and election-year political uncertainty, there’s one question every executive needs to start asking: Is my business ready?
To be prepared, a company must be able to mitigate as many risks as possible and identify as many opportunities that might let the business emerge from the recession stronger and more efficient. In a sample of consumer business studied by Oliver Wyman, those that aggressively tried to transform their business during the Great Recession of 2007 to 2009 saw four percent stronger growth in earnings before interest and taxes (EBIT) versus those that took a more passive approach.
Leaders should prioritize actions their companies can take today to get recession-ready amid COVID-19 and emerge on the other side poised for growth.
How might the recession in 2020 or 2021? First, it w not likely be a repeat of the last downturn, which was, of course, precipitated by a meltdown of the financial sector. And after a bailout and housecleaning, the financial sector is considered by many to be in much better shape. That said, many of the tools U.S. officials used to combat economic malaise last time, such as lowering interest rates and increasing government spending, are less available given today’s current low rates and the nation’s trillion-dollar federal deficit. With a weaker capacity for fiscal or monetary stimulus, businesses may need to rely on their own preparations and strategies.
To meet a new recession, a first step for every company is to assess and quantify the risks faced and make an effort to get management aligned on the company’s exposures. There are many factors to consider in assessing a company’s degree of exposure. For instance, companies selling discretionary products are likely to get harder hit in a bad economy than consumer staples.
Other factors that affect a company’s risk profile include the size of its market share and how recently the company conducted its last cost-cutting exercise. A high degree of financial leverage and a lack of diversification are other risk factors. Finally, the ability to cushion the impact of a recession will be more limited for companies with a high ratio of fixed versus variable costs.
With an assessment of your exposure in mind, you should next consider mapping and prioritizing your company’s risks and stress-testing the impact of recession on your current strategy. What “Plan Bs” should you have at hand?
For instance, one problem that will plague many retailers and consumer goods companies is supply chain disruption. China has become a key provider of components as well as finished goods in almost all industries. Early on in the crisis, a South Korean car manufacturer had to reduce production because of component shortages, and others around the world have followed suit. If your business is particularly dependent on supply from one company or even one country, it may be time to start diversifying. Can you find suppliers that are a truck ride away rather than a plane flight? Do alternatives exist to certain inputs?
Another aspect of supply chain involves inventory. Although most businesses operate with just-in-time inventory, this is a situation where having more than usual on hand may pay off as you ride out the crisis.
Prioritize actions your company can take today to get recession ready, addressing both the top and bottom lines. For instance, top-line strategies might address pricing optimization, boosting customer loyalty, or better portfolio management. Bottom-line strategies might involve renegotiating supplier contracts, zero-based thinking, designing to cost, or reviews of financing or insurance expenses. Finally, companies need to review their enterprise risk management and crisis response.
As painful as recessions can be, there are always opportunities embedded in them for those companies that are well-prepared. For example, if a company has extra resources, there may be a chance to do some opportunistic M&A. Those who hold their own during a recession will emerge on the other side poised for growth.