We’re just a few months into 2020 and headed straight towards a deepening financial crisis. As Diane Swonk, Chief Economist at Grant Thornton says,“We’re speeding towards one. We need to deal with this. This is real now. All the red flags are raised.”
Looking at the U.S. unemployment forecast, the recent weekly jobless rate broke records, rising to 3.3 million on the week ending March 21, a huge contrast from the historically low 3.5% unemployment rate in February.
With a number of companies running out of cash and forced to fire workers, which companies come out as winners? Which ones survive and even thrive in a downturn?
1. Companies that have cash liquidity
During a downturn, companies with an effective working capital management can stave off bankruptcy and avoid being acquired.
This cash also helps in being opportunistic in times of crisis, such as now, and making savvy investments that can result in hefty profits after the crisis is over. That’s exactly what Warren Buffet did with Berkshire’s extra cash lying around. He invested them in Bank of America stocks and came out with billions in profit when the financial crisis was over.
While having cash surplus is always a good idea, companies with sound investments, such as Berkshire’s impressive over $200 billion stock portfolio, can sell off healthy assets in crisis. Companies with efficient inventory management systems that allow them to match demand with supply and manage their extra stock can also be recession-resistant.
2. Companies that reduce risk with diversification
According to a study by Business Development of Canada, the most diversified firms experience by far the fastest growth in revenue and profits. While almost 7 in 10 fully diversified firms achieved high revenue and profit growth over the past three years, fewer than 2 in 10 undiversified firms managed to do the same.
Companies with diversified products and services, investments, customers and clients, sectors, or business geographics (multiple physical stores, online and offline presence, both) have more chances to survive in different economic cycles.
As Chris Haverland, Senior Vice President – Global Asset Allocation Strategist at Wells Fargo Investment Institute explains, “A diversified portfolio’s most important benefit may be that it can help mitigate the effects of unanticipated risks. Unexpected events can happen and such developments typically affect some assets more than others.”
And it was Wells Fargo’s diverse consumer lending system, offering loans to all kinds of businesses, from small operations to real estate and more, which helped them bounce back after the 2008 financial crisis.
3. Innovative companies that foresee the future
Keeping up with the latest trends and adapting products and services accordingly is essential in today’s quickly changing times. Companies that develop an innovation strategy foreseeing the future usually come out roaring as winners in a downturn.
Amazon is a prime example of that, with the hiring of up to 100,000 workers in the current crisis to help them with increasing consumer demands. Their main strategy revolves around innovation. Their Prime subscription service and Amazon Web Service (their B2B cloud service that was launched in 2005, way before iCloud existed) are just a few innovations that make Amazon one of the most successful companies in the world. Amazon’s head of Prime, Greg Greeley says, “The way this company [is], it wouldn’t surprise me if we continue to keep accelerating.”
So who comes out as a winner in recession?
Companies that are constantly on their toes come out as winners by evolving their products and services to keep in line with current and future trends, diversifying their business and tapping into different markets, sectors, product lines, and keeping substantial cash reserves. These fundamentals were true in the past, and will likely prove to be a winning combination this time around as well.