Business Coffee Break

The recession of 1923 to 24 plunged the United States into an economic quicksand that destroyed more than 10,000 businesses. Yet this was precisely the time that a man who lived by the creed ‘if you can dream it, you can do it’ risked everything to launch a small cartoon studio called Disney Brothers.

About 15 years later, doomsayers told two young electrical engineers they were sure to fail when they started their tiny electrical machine business during the Great Depression with $538 and one product. Undeterred, Bill Hewlett and Dave Packard got to work in a rented garage.

Fast forward to 1975. Oil prices are soaring, bankruptcies reach record levels and one-fifth of the US population becomes eligible for food stamps. As economists declare a recession, two childhood friends make the first sale of their computer programming language and Microsoft is born.

Despite today’s financial turmoil – which The Washington Post reports “may be the greatest destruction of wealth the world has ever seen” – maverick business people like Walt Disney, Dave Packard and Bill Gates are once again ignoring the squawks of the Chicken Littles and giving life to their dreams. And not just through blind faith. History reveals that difficult economic periods are great times to launch new businesses. Sixteen of the 30 companies that comprise the Dow Jones Industrial Average started during recessions.

True entrepreneurs like to zig when everyone else is zagging. They believe a recession is more a state of mind than an economic reality. For Professor Ian Harper, specialist adviser at Access Economics and chairman of the Australian Fair Pay Commission, it’s both. When the economy slows, he says, there is less money around and it becomes harder for businesses to sustain high overheads.

“As large businesses faced with high fixed costs try to reduce their variable costs, they reduce their activity, creating space for small businesses to move into,” he says.

“As the tide goes out the small guys can still swim but the big guys get beached. Recessions create opportunities for small businesses primarily because they operate with low overheads.”

Back to basics

Why is an economic downturn a great time to start a business? Firstly, it’s cheap. Commercial rents, equipment, supply and labour costs tend to fall, making it easier to minimise start-up costs.

Entrepreneurs with sound ideas are more likely to raise funds from risk-averse lenders. Less activity during an economic squeeze allows an entrepreneur more time to concentrate on getting the basics of the business right before launch. It’s also an opportunity to experience the business at a measured pace before orders start flooding in. This includes having management and accounting systems in place, solid marketing materials and a well- designed website.

Established competitors with high overheads may suffer, giving new entrants an opportunity to poach equipment, staff and business. Downturns usually wipe out badly run businesses, leaving opportunities for those that operate efficiently.

New business ideas are always welcome, providing they offer a break with the past. Many dynamic new businesses are created in hard times. For example, budget airlines were launched amid tough trading conditions and a demand for more value. There is always space for ideas that cut costs.

Long-time McKinsey management consultant Matthew Brown says the people who made fortunes in the Great Depression had a different mindset.

“The Great Depression millionaires knew there was always money to be made,” Brown says. “Prior to the fall they reduced their expenses and saved. When everything crashed, they knew people still needed to buy things; that money would still change hands. So they moved in. And it’s happening again now.

“While many will suffer during this downturn, there will be others who make a tremendous amount of money. They have been positioning themselves all along to take advantage of this downturn.”

Harper says in a recession, small businesses must be willing to consider alternative markets for their product or service and alternative ways to get there.

“In these circumstances, small businesses have to be aware that the opportunities are likely to be among their fellow small businesses,” he says. “And the beauty of the internet is that it links small businesses together in ways that are far more effective than the traditional hierarchy in large organisations.

“Your instinct might say that small businesses are going to do it tough in a recession, but the exact opposite could be true. You have to be resourceful, imaginative and well-connected to be able to unearth opportunities in difficult economic times.”

Follow the money

One general guide to success is how segments of the market have performed in past recessions. According to Standard & Poor’s, in the 11 recessions since World War II, there have been few places for investors to hide. However, three industries posted positive returns: tobacco, household products and alcoholic beverages.

Mick Stevens would add another industry to the recession-resistant list: gambling. The former horseracing analyst for one of Australia’s biggest bookmakers decided to strike out on his own 12 months ago during the initial stages of the sharemarket’s wobbles.

Stevens reckoned there was a ready and growing audience for his expertise among investors who were happy to swap the risk of the stock exchange for that of the racetrack. For a daily, weekly, monthly or annual fee, Stevens sells his analysis and knowledge of thoroughbred racing, which is delivered via SMS, email or secure log-in to his web site. And business is brisk.

“Many of my clients are racing people but many others are refugee investors from the sharemarket,” says Stevens. “They understand that a horse race is just another type of market driven by a herd mentality and ripe for exploitation. Like any stock picker, we seek the best value and we bet accordingly.”

Similar thinking leads some entrepreneurs to seek those who have enough money to be recession-proof or target areas where people always spend.

The rich are not only getting richer, they are also becoming more plentiful. According to the World Wealth Report 2008 from Merrill Lynch and Capgemini, the number of high-net-worth individuals (those with more than US$1 million) increased 6% while the number of ultra-high-net-worth individuals (those with more than US$30 million) increased by 8.8%.

One person’s trash...

Pre-loved merchandise has come a long way from the greasy pawn shops of yesteryear and becomes particularly appealing in tougher economic times when people get more conscious about their spending.

Shaughla Ahmad recognised this trend some years ago and co-founded Swap My Style, a company that runs events where women swap clothes, shoes and accessories with like-minded bargain hunters. Swap My Style generates revenue through ticket sales to events, advertising in its email newsletter and fees from partners who offer free services at its events, such as manicures and makeovers.

“We tend to look for extra value and Swap My Style allows people to do that,” Ahmad says. “They can swap a $700 dress they’ve worn twice for a great pair of shoes. We help people update their wardrobes efficiently.
“For us it’s been all about learning to be lean – knowing how to reduce overheads. Going online has played a big role because it has allowed us to build an audience through viral marketing, social networking campaigns and advertising on other websites to link back to ours. Online technology has had a huge impact on our company.”

Technology as saviour

Professor Harper says any small business still shy of technology needs to unlearn that attitude – and fast.

“When the economy turns, the platform you build now to extend your business will repay the investment many times over when the economy is healthy again,” Harper says. “You are not only building to weather the downturn but also to capitalise on the upturn. The technology is available, reliable and affordable enough now because it is internet-based.

“But the real beauty of digital technology is that it is scalable in both directions. You can run your little business and have a web presence, a payment technology and an online catalogue. In other words, you can perform exactly like a big business.”

Proctor & Gamble squashed its competition during the Great Depression by analysing every part of its business. P&G was one of the biggest advertisers of the time and rather than cut back its marketing, it sought ways to be different. Instead of running traditional print ads, P&G investigated a new technology called radio. Radio had something unique – a sense of community. People gathered around the radio and influenced each other through discussion.

But instead of simply running ads on radio programs, P&G created its own programs. These were the world’s first soap operas: ‘Ma Perkins, brought to you by Oxydol’. They were entertaining and just what people wanted during a depression – an escape from the hard times. People associated entertainment and joy with the P&G product. It was so successful, P&G created more than 20 other soap operas.

“Today’s equivalent technologies would be podcasting, vodcasting or blogging,” says McKinsey’s Brown. “For example, how can you incorporate a social networks such as Facebook into your business? Just because you’ve done something in the past and it has been successful doesn’t mean that is the most successful you can be.

“Online businesses are recession resistant because online shoppers are wealthier than the average consumer, less affected by economic challenges and more optimistic. Every day more people are shopping online to save time, avoid crowds and be able to buy at any time.”

Recession-proof?

No business is immune from hard times. As buyers have less money they move down the quality scale for the home brand. So a business is safe only if it can access the lower quality product and not be stuck with stores of unwanted high-quality inventory. Personal services such as undertaking or grooming will always be in demand but people may seek cheaper versions. Hairdressers will still cut hair but they may not sell as many perms or waves.

“The other thing to remember is that governments continue to spend through a recession, so small businesses need to adjust their thinking and realise that in their mix of clients it would be good to have one or two from the public sector,” says Harper.

“But you’d have to look long and hard to find an industry – outside government – whose conditions are totally unaffected by recession.

“It’s not so much industries or sectors that are recession-proof, but lines of products or services. Food, personal services, telecommunications, transport – demand for these things will continue but the type of product or service that is sold, becomes lower margin. People won’t spend a lot of money on frills.”

Just do it

It is a truism of business – as it is of life – that among wreckage there is opportunity. In a recession, being small is a weapon, not an excuse. Remember, recessions do not destroy wealth. They transfer wealth. And the best business minds always ensure they are on the happy end of that equation.

True entrepreneurs know that spending doesn’t cease in tough times: it just becomes more focused.

“Change your mindset,” says McKinsey’s Brown. “It’s partly about being creative but more about recognising opportunities. It’s easy to buy into all the doom and gloom but smart people simply refuse to participate in recessions. They simply recognise an opportunity to gain market share. They find out where the money is flowing because money is always flowing somewhere.”

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15 businesses to start in a recession

1. Hair salons. People continue to have grooming needs and hair salons that cater to families are among the most popular.
   
2. Residential and commercial cleaning. People with busy lives are less likely to go without having someone clean their homes or businesses. These services will become more of a need as lives become more hectic and people find they have to work harder to maintain their incomes.
3. Professional organiser. Most people want to simplify their lives but don’t; it’s a chore that keeps moving to the bottom of their to-do list. There’s a prime opportunity for people to get others organised by helping with their shopping or errands such as car registration and insurance.
4. Home improvement. Downturns usually mean people renovate the existing homes rather than buy new ones. Home improvement companies continue to thrive, no matter what the economy does.
5. Mobile storage. Since people are less likely to buy newer and bigger homes, they may need a place to store their goods. Mobile storage units conveniently satisfy a temporary to semi-permanent need for storage.
   
6. Temporary staffing agencies. Many companies have less confidence hiring full-time staff during difficult times. As a result, they are more likely to use temps to help them respond to economic hiccups.
7. IT services. Companies providing technology services – like installation, security and repairs – to homes and businesses are always in demand.
   
8. House or pet sitting. No specialist skills needed, just trustworthiness, reliability and common sense. Be sure to have personal references and reliable transport. If you love animals, pet sitting is an easy add-on.
9. Cosmetics. Cosmetics is a virtually recession-proof business; it’s an inexpensive way for people to feel good about themselves.
10. Second-hand goods. Tough times bring out the value hunters so the resale industry generally increases activity during slow economic times. People love a bargain.
11. eBay seller. There really are people who make a decent living buying things at garage sales and flea markets and selling them on eBay. Stick to products you know, package your goods carefully and provide impeccable customer service.
    
12. Secretarial services. Many small businesses and individuals have a need for typing, transcribing and proofreading. You’ll need a computer, printer and e-mail – and the necessary skills.
13. Tutoring. Parents want the best for their children and pay well for tutoring, university test preparation and specialty training. Growing dissatisfaction with education systems has created unprecedented growth in homeschooling and tutoring for students of all ages.
14. Care for seniors. Non-medical, in-home care for seniors offers great demographics, important work and economy of scale.
    
15. Marriage. The wedding industry deals in the business of love and people will always be looking for love. Offering a service with a niche presents an easy solution to tap into this industry.

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Five more to consider...

As well as the 15 business ideas we recommended, here are another five we felt – for one reason or another – you might think twice about starting.

1. Ironing service. Doing other people’s chores may not be cool but it’s lucrative. The killer app could be a pick-up and drop-off service for lazybones in your vicinity.
2. Pet poo picker-upper. People love their dogs but hate cleaning pooch poo. And while few things are more confronting than a yard full of muck, fewer things are more welcoming than the sight of the person who visits weekly to take it all away – for a price.
3. Smash and grab. There’s money in other people’s frustration. We know of one person in San Diego charging real money for people to vent by smashing plates, glasses and even photos of former loved ones.
4. Sell the kids. If he or she is cute enough, establish a website offering Junior as a canvas for corporate logos. Exploitative? Tell the American Moms earning real money from whacking ads on their kids’ clothes.
5. Mobster. As we’ve mentioned, the most recession-proof products include alcohol, tobacco, illegal drugs, gambling, weapons and the very personal end of personal services. People splurge on these when things are going well, but also turn to them for comfort in bad times. If a life of crime doesn’t appeal, try a vice investment strategy – just buy shares in all the companies an ethical investor wouldn’t touch.