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Recession-Proof Businesses and Franchises For 2024 & Beyond
Written by: Parth Parth
Last Updated by
Brenda Bagnoli: January 23, 2023
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Recession Proof Businesses
Inflation, CPI, High-Interest Rates, Economic Downturn, and Recession are words all over the news these days as we live through the third economic downturn of the millennia. It feels like the cycle that the pandemic started will never end
However, not all is bad – this might be an excellent time to start a business. We know reading that feels counterintuitive to what we know about recessions, but this is not a traditional recession.
Read more to find out about the recession proof businesses
Contents
What is inflation?
Let’s start by laying down the foundations for the current economic situation in the United States. Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual price change for everyday goods and services such as food, furniture, apparel, transportation, and toys.
As an example, $1 might have bought two movie tickets in 1950, but these days you need closer to $10 to buy a single movie ticket. The purchasing power of one dollar has decreased.
That said, inflation is not a bad thing. It is a good tool used by countries and central banks that encourages consumer spending and keeps the wheels of the economic train chugging along. The problems only start to arise when inflation is coupled with other factors like supply chain shortages (another phrase you’ve been hearing a lot? We’ll discuss it shortly too!)
How is inflation caused?
As mentioned, usually governments and central banks set monetary and fiscal policies to leverage the economy so a healthy inflation rate is maintained. There is no standard rate for all countries as different economic systems might perform optimally at different rates of inflation depending on multiple factors.
Inflation, especially the kind causing problems right now can also be the result of other factors like rising consumer demand. It can also be caused by shocks to the supply chain like limited oil production or the destruction of a mine producing rare earth metals which are everywhere (think microchip shortage).
How does inflation affect spending?
Inflation drives up prices for people which is not optimal as you usually do not account for unforeseen inflation in things like job contracts, pay rises, etc. It can be especially hard for families that live on small budgets as the prices of necessary commodities like gas, food, and electricity also go up.
Rapid inflation typically spells trouble for stocks. Financial assets, in general, have historically fared badly during inflation booms, while tangible assets like houses usually fare better.
So why are we seeing such high inflation right now?
Listing out, the biggest factors right now are the Russian Invasion of Ukraine, Strained Supply Chains that began in COVID, and limited oil production.
According to the Bureau of Labor Statistics, out of the 8.5% inflation rate, the Russian Invasion is responsible for 3.5%, and the pandemic and its echoes are responsible for 2%. In comparison, other factors are around 2.3%.
One example of the remnants of COVID is that during COVID there was an economic slowdown which led to a reduction in shipping. This reduction caused shortages of components as demand unexpectedly picked up and stayed much higher than expected for the pandemic period. This then led to the shortage of durable goods so even lesser could be manufactured and you see where we are going with this.
What are the supply chain issues affecting business right now?
Our supply chain is built on globalization and “just in time” manufacturing, outsourced labor, and international goods for short-term efficiency. This system does not really account for any failures along the supply chain – almost every step is a chokepoint that can break the entire supply chain if it gets blocked. The beginning of the pandemic led to a large number of layoffs, a reduction in shipping, and a production slowdown. But as countries reacted to the pandemic through some form of covid relief – direct checks, PPP, grants – it increased consumer demand. Another huge reason for high customer demand was that economists and other experts expected a low level of economic demand because that is how it has been historically, but this time people had the money to buy goods – and they did so using online channels when physical stores were closed.
As the world started to reopen from the pandemic, high demand met a strained supply chain. Labor shortages, component shortages, and shortages of durable goods all led to strained supply chains. Increased demand met with strained supply has led to increased prices for basic goods and services.
The increased price of moving shipping containers: Because during the pandemic containers were scarce and demand for shipping intense, the cost of moving cargo skyrocketed. Ports also could not cope with the sky-high amounts of cargo they had coming in which led to container ships just sitting at the ports waiting to be unloaded, making the container shortage worse. Before the pandemic, sending a container from Shanghai to Los Angeles cost around $2,000. By early 2021, the same journey was costing as much as $25,000. Many containers were also getting bumped off ships and forced to wait, adding to delays throughout the supply chain. Even huge companies like Target and Home Depot had to wait weeks and even months to get their finished factory wares onto ships and farther longer to get them to the destination ports and their final destination then.
What is in short supply?
Just about anything that is produced or manufactured – from chemicals to electronics to running shoes. Shortages lead to more shortages. A paint manufacturer that needs 27 chemicals to make its products may be able to buy all but one, but that one – perhaps stuck on a container ship off Southern California – may be enough to halt production.
How much of this is because of the pandemic?
The pandemic definitely caused this, making supply and demand extremely volatile, shifting faster than the supply chain could absorb. That said, this was coming for some time. Ports had been clogged more and more for some time and “just in time” manufacturing was a risky model to start with. As such, the pandemic came on top of thin inventories that were thinning as COVID came and accelerated everything up.
A dollar that a car company spends to store computer chips in a warehouse as a hedge against supply chain troubles is a dollar that it cannot use on something else, including bonuses for executives or dividends for shareholders. Monopolistic tendencies also help explain shortages. Beef is scarce and prices are high, but this is largely because meatpackers have consolidated and eliminated capacity as a way to bolster prices and profitability. Choke points like this exist throughout supply chains in most supply chains.
What about the oil prices crisis?
The United States is the world’s largest producer of oil and processed petroleum products. In recent years, it has become a major exporter, sending large quantities to Latin America and Europe. But the United States also buys a lot of oil from other countries. It is the second-largest importer in the world after China. That’s partly because American refineries are often set up to process types of oil that are different from those produced in the United States.
What are the Federal Government and the Federal Reserve doing about it?
Recently, the Federal Reserve has started raising interest rates to curb inflation and the last hike was the biggest one since 1994. As central bankers drive their interest rate target higher, it will make buying a home or expanding a business more expensive, restraining spending and slowing the broader economy. This will lead to a drop in prices and help you find cheaper labor and cheaper products in general for your business in the future.
However, this recession is expected to be shallower than the past three for several reasons: the lack of credit bubbles; strength in the corporate, bank, and household balance sheets; a strong labor market; and low inventories in vulnerable industries like housing and autos.
It might feel like these interest rates are very high. After all, the interest rate is being risen from 0% to 1.75%. However, those rates are not very high. Have a look at the interest rate target graph below where we can see that interest rates have been as high as 20% which is more than 10x higher than the current rate.
What makes this recession different from what happened in 2008?
There are several factors that differentiate this recession from what happened in 2008 which was really a structural problem based on the housing bubble. In this recession, we are seeing strong banking regulations, good household balance sheets, and strength in corporate banks. All of these things were not present in 2008 which, in addition to the housing bubble, made things really bad for Americans and the rest of the world.
What does all of this mean for someone who wants to start a new business?
This recession is going to be helpful because we do need to bring down the costs of houses and goods. If you are worried about a recession, this is the time to buy and invest in tangible assets especially if you are late in your career because those are the people who are let go first in cost reduction efforts.
The S&P 500 recently fell 20% from its recent peak, causing the market to enter a bear territory. Buying in a bear market when things are low gives you a different sense of security and confidence. You don’t freak out with the rest of the world because you see your opportunities open. There’s a strange excitement about downturns because you know you are buying at the right time and are able to enjoy the upside of your wealth increasing dramatically when the market turns. Feel the good side of the recession and the opportunity that comes with it.
Why is this a good time to start a business?
As we saw above, a recession is an awful time for the stock market, as such many investors are pulling their money from stocks and putting it into tangible assets such as franchises! This recession is also going to be short term and we are already seeing very strong signs of economic recovery.
A lot of people and prospective business owners are worried about the fed increasing interest rates but that can be a good thing for your business as the cost of pretty much everything – from labor to initial and intermediate ingredients – is going to come down.
Some of the upcoming franchises during this period are going to be investments in companies that provide services that cannot be put off. Some of these ideas might include automotives for example – a car needs oil or tire changes whether or not there is a recession. A similar argument goes for housing and building services – if your roof is leaky you will fix it today and not when the recession ends. There are other franchises like eldercare and healthcare that have inelastic demand – people will want them regardless of other things going on. You can also try to target luxury goods as people who have the money will keep investing in those goods regardless.
What industries are recession proof?
- Consumer goods and convenience stores are businesses that usually resist a recession. A toothbrush, toothpaste, soap, and, as COVID showed us, toilet paper are undeniably goods that will keep this industry going on even when there is a recession.
These goods have an inelastic demand which means that no matter what happens, people will need them. You cannot live without food and as such, investing in one of these franchises is a good option.
The U.S. Retail Products and Services industry is well-established and depends on a strong distribution channel for all types of retail companies. The market provides several goods such as food, apparel, furniture, jewelry, as well as many others. The retailer’s subsector within the industry employs 1 out of 5 Americans. In addition, independent and privately held retail businesses account for 95% of the whole retail industry. The Retail industry directly employs 29 million people and supports over 42 million jobs. It accounts for 5.5% of gross domestic product (GDP) and generates around $5.3 trillion in sales.
For these industries, you can start franchises of businesses like 7-Eleven.
- Home repair and cleaning are also some of those things you just cannot put off. As we said earlier, if your roof is leaky, you WILL fix it no matter what. You do not want a puddle in your room ruining your expensive carpet.
This industry is wide, you can look at franchises or businesses in the painting industry or the pressure washing industry.
There is a rising demand for cleaning and maintenance services in the U.S. as construction activities, investment in real estate, and the number of working women increased. The Cleaning and Maintenance industry offers commercial and residential services such as window cleaning, floor cleaning, and care, carpet and upholstery cleaning, maid services, janitorial services, landscaping, vacuuming, snow plowing, and more.
The Cleaning industry supports over 3.3 million jobs, of which 2 million are supported by the Janitorial Services industry alone. The janitorial sector has over 845,000 businesses and market size of $58 billion.
- Senior and Health Care caters to franchises like ones that provide at home and end of age care services to the elderly and help you when you fall sick. Humans will fall sick and need care and this industry supports those who will need the services.
The senior care industry has been doing very well in recent years in response to the increasing number of senior citizens with the maturation of the baby boomer generation. As that population reaches age 65, the senior population is estimated to exceed 83 million, which is almost double the approximate number in 2012 and around 20% of the total US population. Almost 10,000 people on average will turn 65 every day for the next 20 years. The senior care industry is growing to meet the demand. Starting in 2018, the American senior care business industry revenue has been growing at an annual rate of 3.3%, and it is expected to continue along this trajectory. The current market size for the franchise sector of this business is around 11 billion, and it employs around 400,000 workers throughout around 11,000 businesses in the U.S. The entire senior care industry is estimated to be worth around 400 billion in the U.S. right now.
- Automotives and related products is another industry on our list. Automobiles are expensive and you would rather go for a $200 oil change than buy a new car for more than 10 or even 20 times as much. In this industry, you could look at oil change services like Jiffy Lube or gas station franchises.
The U.S. has one of the largest car industries in the world. Auto manufacturing deeply depends on thousands of suppliers, materials, retail, and vehicle maintenance. Thus, it is an industry that delivers economic benefits and creates jobs in many different sectors in all 50 states. The Auto industry supports a total of 9.9 million American jobs, about 5.1% of private-sector employment. In addition, it is an industry that provides great global trade benefits: $99 billion in exports of cars and parts were shipped from U.S. ports in 2017.
The U.S. Automotive industry accounts for 2.7% of gross domestic product (GDP), or $545.4 billion. Of that, $327 billion was auto manufacturing and $218 billion was vehicle retail sales.
- Health & Beauty industry is divided into different segments: hair care, skincare, cosmetics, perfumes, deodorants, oral hygiene, and others. In addition, the industry covers a diverse array of personal products, beauty appliances, services, and related functions such as packaging and supply chain. American women spend on average $3,000 on cosmetics per year while men spend over the same amount on health and beauty products.
The industry generates around $90 billion in revenue. The beauty services sector employs over 670,000 in the U.S.
The fact of the matter is that the people that can spend on luxury goods will spend on luxury goods, even in a recession. This industry targets the demographic consisting of people with more wealth who have spent on this industry historically, too.
Conclusion
This is an excellent time to start a business. An economic downturn means you can get into the market for cheaper than you would be able to in a normal time. You can also try to buy a franchise that is up for resale. We say that because you might be able to get a quality franchise for a low price.
We, at Vetted Biz, feel that this is an opportune time to start a business.
Credit is cheap right now and prices for ongoing costs are expected to fall in the future. Make sure to check out our listings to find a franchise for you or have a look at our Entrepreneur Quiz to find out more about what businesses we think would be a good match for you.
