19 Jun

A Recession is Coming….Threat or Opportunity?

While no one can accurately predict one, the signs of an impending recession seem to be mounting.

Earlier this month, the Federal Reserve updated its probability of a recession based on the Treasury Spread. The current inverted yield curve, which has been used as one leading indicator, has moved the probability of recession up sharply in the last year towards 30%.[1]

Another indicator: Nearly half, or 48%, of chief financial officers in the U.S. are predicting a recession by mid-2020, according to the Duke University/CFO Global Business Outlook survey, which is conducted quarterly. And more than two-thirds, 69%, are predicting a downturn by the end of next year.[2]

Other signs are looming such as lower GDP growth in China relative to what it was before 2010, the dramatic increase in alternative lenders in the U.S. economy called ‘shadow banking’, [3] and an expected interest rate cut by the Fed today. “The last time it [The Fed] entered a cutting cycle was September 2007. At that juncture, the subprime mortgage crisis had displayed clear signs of accelerating.“  [4]

Regardless of whether a downturn occurs within the next two years, a recession represents CHANGE. And when CHANGE occurs, be it technological, societal or economic in this case, there will be winners and losers. Those with the right outlook and a plan to leverage data and analytics will likely come out on top.  

How will your business respond?

The way in which different business organizations responded during the 2007 – 2009 ‘great recession’ has been studied by several researchers to identify winners and losers, and the strategic decisions that separated them.

In one study published in HBR, McKinsey clustered companies into ‘Resilients’ and ‘Nonresilients’. The Resilients returned between 6% and 8% more in returns to shareholders than industry peers did. Their performance dipped less overall during the downturn, and they were able to significantly widen their leads in their respective industries during economic recovery.  

As might be expected, these companies placed a high emphasis on controlling operating costs. In addition, resilient companies also focused on maintaining loyalty among high-value customers that were central to the company’s post-recession recovery. They were also smart at pricing. Using data and analysis about customers and their competition, the Resilients were forgoing revenues they could have earned through pricing changes. By contrast, industry peers were more likely to try and maintain revenue at any cost, applying price reductions haphazardly to products and services and sending mixed marketing messages. (See our recent post on using external data to excel at pricing)

One of our own clients illustrates the ability to grow, rather than retract, during an economic downturn.

The company is in the commercial printing industry – highly capital intensive and under constant pricing pressure from large corporate customers. In 2008 to 2009, the management team decided to explore growth through potential acquisitions of smaller players that may not be able to withstand the downturn. Rather than investing the time and money to approach companies directly, however, they asked for our assistance to identify potential targets and prioritize them based on certain attributes such as customer base, core assets, technology stack and capabilities. Armed with this insight, their legal and finance teams made formal introductions with confidence and very quickly made several acquisitions. The resulting market share gain (and some new digital capabilities gained in the process) moved our client into a leadership position in the industry.  

How they do it

Downturns bring a conundrum for business leaders. While the short-term demands caution, cutbacks and capital preservation, the long-term presents opportunities for growth. How do the winners excel?

  • Rather than cutting back, a key aspect of their success is continued investment in research, data and analysis to make smart decisions and focus their attention and investments where they have the greatest impact. Research, hypothesis testing and refinement save them from investing in marginal areas while directing investment to the most promising.

As a result, these organizations leap-frog their industry peers into new positions of growth with the eventual recovery. Will yours be one of the winners?

[1] https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf

[2] https://www.cbsnews.com/news/nearly-half-of-u-s-financial-chiefs-expect-economic-recession-within-a-year/

[3] http://www.startribune.com/risky-borrowing-is-making-a-comeback-but-banks-are-on-the-sideline/511160862/

[4] https://www.cnbc.com/2019/06/19/the-federal-reserve-is-likely-to-say-rate-cuts-are-coming-satisfying-markets.html