The Challenge Ahead
‘The R word’ in the stock market is often considered a dirty word, but the reality is that it’s a healthy and normal part of the market cycle. Since 1857, they’ve occurred about once every 3.75 years, so for new long term investors, they’re nothing to worry about.
Of course, recessions can be a challenging time for companies both small and large, as they usually lead to a slowdown in consumer spending, and in general business activity.
However, some companies are better able to weather the economic downturn than others. In this article, we will explore 10 of the factors that can make a company more likely to survive a recession.
1. Financial Strength
One of the most important factors that can make a company more likely to survive a recession is financial strength. Companies with strong financial positions, such as low debt levels and high cash reserves, are more likely to weather an economic downturn. When times are tough, they have the resources to withstand a decrease in revenue and maintain operations while they wait for the market to recover.
This can often mean the competition is eliminated, meaning that only the best companies are around once the dust settles. Although this is clearly harmful for those losing jobs, it ensures that companies with clearly unsustainable operations are removed before they can grow to a harmful level of debt or impact, as Elon Musk has noted many times.
2. Diverse Revenue Streams
Diversified revenue streams can be a major contributor to making a company more likely to survive a recession. Companies with diversified revenue streams, such as those that operate in multiple industries or geographic regions, are less likely to be heavily impacted by a recession in a particular market. This is because if one market or industry is struggling, the company has other sources of income to fall back on.
Having a range of products also helps with this. Rather than relying on the world to keep buying iPhones, Apple have been able to expand their offering to the world of fitness, media, streaming, and a whole host more.
When combining this with the reality that companies are so much more global than they were in the past, a company with the ability to pivot and re-strategise based on the economic conditions of each country is far more capable of navigating a recession with minimal disruption.
3. Cost-Efficiency
Cost-efficiency is another important consideration for whether a company can to survive a recession. Companies that are able to keep their costs low, such as by automating processes or outsourcing certain tasks, may be better able to weather a recession. This is because they have less overhead and can continue to operate with less revenue.
The ability to control pricing is also essential, especially in the situation where rising inflation can significantly add pressure to the profit margin of a business. By raising prices in line with the cost of goods in a supply chain, a company can continue to operate regardless of the external factors.
4. Brand Recognition
Having a recognisable and strong brand is another factor that can make a company more likely to withstand a recession. Companies with strong brands are more likely to be able to maintain or even grow their market share during a recession. This is because they have built a loyal customer base that will continue to support them even during tough economic times. During a recession, the companies we love the most are likely to be the last ones we abandon, even if they aren’t essential.
Think about a recent purchase you made, for example a new phone. Is the prospect of a recession going to lead to you buying a cheaper brand of phone, or will you instead choose a less new model of your favourite?
5. Adaptability
Companies that are able to adapt to changing market conditions, such as by pivoting their business models or entering new markets, are more likely to survive a recession. This is because they are able to evolve and continue to generate revenue even when the market is struggling.
The latest version we saw of this was Tesla deciding to reduce prices to accommodate potential reductions in demand across Asia, Europe and North America. By having the ability to adapt, they could drastically increase demand, and continue to make profit, albeit less per vehicle, effectively wiping out the competition at the same time.
6. Resilience
Companies that have a history of resilience, meaning that they have been able to survive past economic downturns, are more likely to be able to survive a recession. This is because they have already been through difficult times and have a proven track record of being able to bounce back.
When we talk about a recession in today’s terms, we usually think it means a global economic shift, but can often be more localised. A shallow recession in the US in 2023 may well happen, but it doesn’t mean we need to experience the same level of severity we saw in 2008 as global markets collapsed in unison.
Companies have raised their standards since then, bringing in a host of best practices to monitor debt, control potential issues, and manage risk. By understanding these risks, and transparently demonstrating how they’re being mitigated, businesses are in a much more resilient state compared to 2008.
7. Innovation
Innovation is a variable that is of the utmost importance during all economic conditions. Companies that have a culture of innovation, meaning that they are constantly finding new ways to generate revenue or cut costs, are more likely to accelerate growth, find better ways of delivering their product, and exciting customers. This is because they are always looking for ways to improve and adapt, and they are not afraid to try new things.
8. Market Position
Another factor that can make a company more likely to survive a recession is a stable market position. Companies that have a stable market position, meaning that they have a strong market share and a loyal customer base, are more likely to survive a recession. This is because they have a solid foundation to fall back on, and they can continue to generate revenue even when the market is struggling.
The reality is that the largest companies are usually the most well owned, meaning that the stocks can hold up for longer during strain in the market, as institutions and ETFs tend not to panic sell as retail investors worry about the state of the market.
9. Supply Chains
Resilience and flexibility in supply chains is another important factor that can make a company more likely to survive recessions, or any disruption, such as the 2021 blockage of the Suez Canal, or Covid-19 lockdowns in China.
Companies that have a diversified and resilient supply chain are more likely to survive a recession, as they are less impacted by disruptions. This is because they have multiple sources for materials and goods, and they are not dependent on one supplier.
The companies which struggled most during the events of 2021 and 2022 were evidently those which only had a single source of their most essential components, such as microchips. With a secondary source, a company could quickly switch to their backup plan, and continue to operate as their competition struggled.
10. Cash Flow
At the end of the day, investing and operating a business is all about making money, so having strong cash flow is another key factor that can make a company more likely to survive a recession.
Companies that have a strong cash flow, meaning that they are able to generate cash consistently, are more likely to survive, and attract investment, as they have enough cash to weather the downturn. This is because they are able to continue to operate and invest in their business even when the market is struggling.
Having a substantial cash war-chest to use for stock buybacks, to withstand the storm in the market, or to expand into undervalued markets is essential for companies in a recession. For investors, seeing a company with a large amount of cash is always reassuring, since the company could likely survive with no income for several years.
Conclusion
It's worth noting that no company is completely immune to a recession and that the specific factors that make a company more likely to survive a recession will depend on the context of the recession, the industry, and the company itself.
However, by understanding these factors and focusing on them, companies can increase their chances of surviving a recession and coming out even stronger on the other side.
Which companies have you got your eye on in 2023, and do you think we’re likely to experience a recession?