Posted on: November 23, 2020 |
When a recession hits, the economy contracts. This is a circular process; consumers make fewer purchases, businesses make fewer sales, employ fewer people, and the process repeats. However, even during this process, some businesses and industries are not affected by recessions in the same way, or at the same rate. Industries that react very little to recessions, or those that actually perform better during a recession, are considered recession-proof. Let’s take a look at what makes a recession-proof industry, and why this occurs.
What Makes a Recession-Proof Industry?
Recession-proof businesses operate on at least one of two basic principles. Some of the most stable or successful industries operate on both of them.
- The product or service provided offers a lower-cost alternative to another product or service.
- The product or service provided is a need which cannot reasonably be eliminated.
Let’s take a closer look at these two factors that make recession-proof industries.
In a situation where consumers must spend less money—either because it’s difficult to find work, their income isn’t increasing, or because other costs are increasing—consumers will look for low-cost alternatives in order to save. This is why businesses and industries that offer a low-cost competitive advantage actually tend to perform better in a recession.
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During the 2008 Great Recession, for example, only 25 stocks of the S&P 500 had positive returns, with Dollar General at the top. While there are other influencing factors as well, Dollar General performed well during this time in large part because these stores provide low-cost options that are also staple items, such as food, soap, and basic clothing.
From an individual product perspective, few items are as well-known as Campbell’s Soup when it comes to the power to weather a recession. Campbell’s Soup performed well during the 2008 recession, as it has done during the 28 recessions across its 139-year existence. Like Dollar General, Campbell’s Soup also benefits from both recession-proof principles; food is a staple and a can of soup is about as low-cost as it gets.
Repair Shops and Consignment Stores
In a recession, buying new often isn’t an option. The low-cost alternative to this is either to repair an existing item, or replace it with a used item. This makes thrift shops, pawn stores, and repair shops recession-proof businesses, which often perform better during recessions. Auto repair shops thrive in recessions since repairing a big-ticket item like a car is much more feasible than buying a new one when money is tight. Large resale marketplaces like Ebay provide a versatile array of goods at discount prices, which can fill the need for a particular item or also provide some distraction and entertainment when times get tough.
It’s easy to see why needs make recession-proof industries. Even when times get tough, there are some goods and services that are impossible, or nearly impossible, to live without. In recessions, businesses that satisfy a need remain stable or perform better.
The first needs that come to mind are probably food, water and shelter. However, needs also include medical care and pharmaceuticals, hygienic items like soap and toothpaste, essential services like electricity and trash pickup, and more. As previously mentioned, some businesses combine needs with low-cost alternatives, providing low-cost products that satisfy needs.
During the 2008 recession, medical services accounted for three of the top ten best-performing stocks. This includes hospitals, pharmaceuticals, and medical device manufacturers, among others. Since recessions also cause more stress and can make healthy lifestyles more difficult, the need for medical services during a recession is clear.
Trucking is probably not an immediate need that comes to mind, however this is an essential service that goes on behind the scenes. Every product that makes its way into stores or between manufacturing operations arrives through some form of logistics; trucks, railcars, ships, or planes. Even though demand for goods declines as the economy contracts, logistics services still hold steady.
Packaged Food and Bottled Water
Even in the most dire circumstances, food and water are essential. Recessions can also create anxiety about the future, causing consumers to stock up on nonperishable food and clean water. Affordable items with a long shelf life—like Campbell’s Soup, mentioned above—and bottled water tend to see spikes in demand, especially during unpredictable events. Bottled water sales increased 52% during the initial lockdown period in response to COVID-19, and ice and water vending sales increased 10 and 30%, respectively, compared to the same time last year.
There are some other factors to consider during the recession caused by the COVID-19 pandemic. The need for cleanliness and sanitation has increased soap and sanitizer sales more than would be expected in other recessions. Medical services are likely to increase even more than normal in response to health issues. With many public locations like restaurants and bars closing, sales in grocery stores and liquor stores have also increased dramatically. Still, all of these businesses revolve around the principles that make a recession-proof industry.
Invest in a Recession-Proof Business
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