There's opportunity in this recession

A Schumpeterian view of closing businesses.

by Stephen Jones
Last Updated: 10 Jul 2020

The business pages do not make for easy reading. 

This week John Lewis and Boots added their name to the rapidly-growing list of firms making job cuts, including Rolls Royce, Pret a Manger, easyJet and Jaguar Land Rover. 

COVID-19 is a tidal wave. Many businesses that were already treading water will sink, and the job losses will be tragic. Looking to the horizon and the gloomy predictions of a long recession, it would be easy for the survivors to batten down the hatches, cut investment and focus only on keeping the business afloat for the next five years. 

But there’s a risk to being too pessimistic, at least for businesses with strong fundamentals. The recession and post-COVID world will bring opportunities as their weaker rivals pull back or go under - opportunities they could easily miss if they're too cautious.

Recessions can have a positive impact on the economy in the long term. By enabling companies to jettison underperforming businesses, or by clearing the deadwood, unproductive firms out of the way entirely, it makes space for more innovative and entrepreneurial competitors to emerge. The Austrian economist Joseph Schumpeter famously termed this process creative destruction. 

Indeed, the best way to help the economy (and make the recovery easier) is “either to let zombie companies resurrect themselves through the bankruptcy process or just return to the grave,” write the University of Zurich’s Robert Earle and the IMD’s Jung Park and Karl Schmedders in The Conversation

Of course neither John Lewis nor Boots (which is owned by Walgreen Boots Alliance) should really be classed as a zombie company, but neither was without its problems before the coronavirus pandemic. 

All eight John Lewis stores that are closing were already, in the company’s own words, “financially challenged”. Boots meanwhile has been reviewing its structure since January after a sales dip, and had already announced a swathe of job losses and store closures in June 2019. 

Other coronavirus casualties - for example Laura Ashley, which collapsed into administration in March, and the bailed-out regional airline Flybe - have had long running struggles that far outdate the pandemic. More will no doubt come out of the woodwork in the coming months. 

There is one word of caution though for the high-performing business seeking opportunity in the crisis. Just as there were arguments that quantitative easing after the global financial crisis dampened the recovery, there are also similar concerns that the current government’s response to the pandemic could have the same impact now. (Though from a moral standpoint few of us would wish Rishi Sunak to have taken a harder line.)

If indeed those concerns are valid, then having a long tail of insolvent, debt-ridden and potentially unproductive firms will only make the recovery slower and the business opportunities sparser. 

In any case, whatever opportunities that do emerge will require swift, decisive action from the businesses able to exploit them. Anyone expecting easy wins should think twice.

 


Image credit:  SOPA Images / Contributor via Getty.

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