Don't look down

Even if a downturn is coming, it doesn't have to derail your business. James Taylor explains.

Last Updated: 09 Oct 2013

Unless you've spent the past six months on a desert island where sub-prime CDOs are just a distant nightmare, you're probably sick of hearing gloomy predictions about the UK economy. We can't open a newspaper these days without some disconsolate doom-monger telling us that the global financial crisis is about to send us plunging into recession (or something close to it). And we all know what the dreaded 'r' word entails, don't we? Consumers stop spending money. Banks refuse to lend money. Corporate profits fall. Companies go bust. People lose their jobs. Confidence plummets. And then the whole wretched cycle begins again.

But before you start pulling down the shutters and heading off to China, remember this: even in the deepest, darkest economic depressions of the past century (and things don't look anything like that bad yet), great companies were launching products, attracting new customers, growing sales and generally making money. For example, some of our greatest consumer innovations came into the world when economic times were tough. In 2001, just weeks after 9/11, Apple launched the iPod, while 20 years earlier, in the US recession of 1981, IBM put out the first PC. And 50 years before that, during the Great Depression, Procter & Gamble introduced its distinctive brand-management strategy. All three innovations went on to make their companies billions.

And plenty of businesses will flourish this time around too. Clearly, some will do well because they're in recession-proof industries, like healthcare (Jordan might cut down on the number of her cosmetic procedures, but we'll still need to have our ingrowing toenails treated and our broken limbs put in plaster). Others, like debt-collectors, will flourish precisely because everyone else is doing badly. And there are some less obvious sectors that don't seem to follow the cycle, even though you'd expect them to: for example, John McLaren, chairman of corporate finance boutique The Barchester Group, says restaurants tend to do surprisingly well in a recession. 'People realise they can't afford that car or that house - but they're still spending day-to-day, so they go out and have a meal instead.'

Equally, some businesses will be affected by the downturn - and yet will continue to flourish. The best-managed may even welcome a slowdown, because it will flush out weedier rivals and clear the competitive field. 'Companies that are relatively strong can get stronger in recessionary times,' says Paul Strzelecki, managing director of debt-equity finance specialist Yorkville Advisors. 'Weaker competitors who have been distorting the market will fall by the wayside.'

Those with cash in the bank will thrive, while the less well managed companies that have borrowed more heavily will start collapsing under the weight of their debts. A good example is HSBC. Because it has been one of the few banks to have lent prudently, it can now offer mortgages well below the going rate, in order to pick up market share from its ailing rivals. And with asset prices getting cheaper, it might also be a good time to buy that company you've been eyeing up. 'People with an acquisitive business model are actually in good shape at the moment - providing people like me will lend them the money,' says Strzelecki.

In fact, those with the money and the will to make big decisions now could end up stealing a march on their competitors. Mark Mulcahey, UK MD of consultancy Arthur D Little, says lots of firms are putting off major spending decisions. 'People are being told: we don't know which way this will go, so don't spend any money until we do. They're justifying it on the grounds that they'll get a better price in six months - but in reality they're just a bit scared of making the wrong call.'

He compares it to the recession of the Major years. 'In the early '90s, people decided not to decide,' he says. 'After all, nobody ever got fired for saying: not yet.'

But this is a big mistake, according to Strzelecki. 'Some companies will say: let's batten down the hatches, keep costs under control and not do anything dangerous. These are companies that generally don't do well. The time to invest in new technologies is during the bad times.'

Others will prosper because they recognise that people don't stop spending money in a recession; they just spend it differently - perhaps by switching to a cheaper alternative or buying fewer, better-quality items. Says McLaren: 'The top end does surprisingly well and there's always a market at the bottom - it's the guy in the middle that gets squeezed.'

Either way, the priority is to work out what your customers really want. Says Mulcahey: 'Companies that can be clever and innovative in the product or service they deliver will keep their customers.'

But you need to understand the needs of your consumers better, adds Strzelecki. 'People don't stop buying; they just take more care in what they buy. So this is a time to hone your marketing message and your pricing structure.' (See last month's article on pricing.)

Often, the marketing budget is the first to go when times are tough. But advertisers can help you get close to your customers at a time when there's less noise in the market. 'There's an argument that it's actually good to invest more in your advertising during a downturn,' says Strzelecki. 'The ad agencies are the people who really understand how to reach consumers.' This could help you grab market share, leaving you ahead of the curve when the market picks up.

A downturn will also create new opportunities for products and services - particularly if they save people money in the short term. For example, if there's a slowdown on the high street, it might mean that online retailers can profit. If fewer people can afford to move house, perhaps the home-improvement market will get a boost. Or the rise in oil prices could put a premium on fuel-efficient devices. 'There's a big opportunity for something like smart metering, which is relatively cheap to the buyer and can yield genuine returns very quickly,' suggests Mulcahey.

As the head of Virgin's UK operations, Gordon McCallum has more to lose than most if consumers stop spending money. But he reckons it hasn't happened so far. 'We don't see anything nearly as dramatic as the media seem to be portraying it. There's a lot of arm-waving going on, but in terms of the basics of people leading their lives - shopping, gym, TV, holidays, travel, transport - we've just not seen it.'

In fact, he says, some of the group's businesses are doing 'outstandingly well' - notably Virgin Trains, thanks to rising fuel prices and climate-change pressure (although some passengers might beg to differ).

McCallum says Virgin Media is also doing fine, which demonstrates another important point: people want to be cheerful. We get sick of all the doom and gloom, so anything that provides us with an escape or a distraction will always go down well, even if money is tight. That's why cinemas keep selling tickets, even though it's cheaper to rent DVDs, and why sports clubs still fill stadiums.

MTV was launched during the US recession of 1981 - its success came about because of the pervading gloom, not despite it. 'If you can develop and be innovative around a product or service that's bright and cheerful and makes people feel good, that can be a very positive thing to have in a gloomy economic environment,' says Mulcahey.

And it's not just established companies that can benefit. On the face of it, this would seem a rotten time to start a business. But entrepreneurs tend to be adept at spotting opportunities where others see problems - and some will tell you that this is actually the very best time to start up, because it forces you into good habits. Charlie Osmond co-founded research and recruitment consultancy FreshMinds in the aftermath of the crash in 2000. 'Starting a business at that time made us very disciplined about managing cashflow, and it made us very careful about how we chose to allocate our most important resources - particularly our time and money. Both have stayed with us ever since.'

The message is clear: don't be intimidated by the downturn, even if it does turn into the UK's first recession in more than 15 years. See it as an opportunity, and your business can come out of it in an even stronger position than it's in now.


Not everyone is dreading a slowdown. For pawnbrokers, the coming months could be their busiest period for years - after a decade of spending, many of us have been left with big credit-card debts and lots of stuff we don't really need.

One of the best-known operators these days is Cash Converters, originally an Australian business, that has built a network of about 130 (mostly franchised) stores in the UK over the past 15 years. The chain allows customers to get their hands on easy cash by selling or pawning household items - while charging eye-watering rates of interest if they want the option to buy them back later. And like many in the industry, it now makes a large proportion of its money (about 50%) from financial services - notably cheque-cashing, money transfer and salary advances. All for a hefty fee, of course.

As reference to the Bible shows, it isn't exactly a new model. But the growth of Cash Converters is testament to its success in bringing the trade out of dingy back street shops into bright and (relatively) cheerful high street stores - while investing in TV advertising to prove it. 'On TV, we can show people what the inside of our stores looks like,' explains chief executive Mark Lemmon. 'It breaks down the prejudice that is still there among a diminishing part of the population.'

An online trawl proves that this prejudice persists. Some complain about its offer prices; others about its rates of interest; others about the typical clientele. But Lemmon insists that the stigma is disappearing. 'Our brand has been growing strongly, so more people are aware of us and they're less reluctant to use our service as a way of raising cash.'

And over the coming months, more will surely follow. 'With signs of economic downturn, more people are being more economical with their money and looking for alternative ways to raise cash,' says Lemmon. 'We buy and sell, so people can discard unwanted goods or turn them back into cash. It's the perfect way to manage your finances more securely.'

And if people can't afford to buy back their items, at least they don't go further into debt, he points out. 'The worst that can happen is that they lose their goods.'

Indeed, it's hard to imagine how things could look better for Cash Converters. With shoppers tightening their belts, its low-priced items should sell well. As credit-card firms tighten their lending criteria, there'll be less access to cheap debt - so more people will need to free up cash. And online auction sites like eBay have made it more acceptable to trade second-hand goods. As a recession-proof model, this takes some beating.

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