How business survival strategies compare during recessions versus COVID-19
Published 8:00 pm Monday, February 13, 2023
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How business survival strategies compare during recessions versus COVID-19
Only some companies that survived the COVID-19 crisis can use the same blueprint for the next economic downturn.
To compare business strategies for surviving the recent COVID-19 crisis and a typical recession, altLINE analyzed research from the World Bank, data from the Federal Reserve, and news reports.
A recession is usually defined as two back-to-back fiscal quarters in which the total amount of all goods and services declines. The COVID-19 pandemic began with a deep but brief recession in the U.S. economy, unlike any that preceded it in modern history. The ultimate effect was like flipping a light switch off for a couple of weeks and then turning it back on again.
As local officials announced restrictions on which types of businesses could stay in operation, many businesses feared the worst from the unknown virus. Companies and workers in sectors including travel, hospitality, entertainment, and events were hit especially hard with an abrupt halt to most social and in-person activities.
As uncertainty reigned, the U.S. GDP actually increased 12% in the two years spanning the fourth quarter (Q4) of 2019 through Q4 2021, a huge economic win compared with the 1918 influenza pandemic. During the two years following that influenza outbreak, experts estimate, global economies contracted 6%.
But a recession, much like the impact of COVID-19, is also “a high-pressure exercise in change management,” as Harvard Business Review contributing editor Walter Frick observed. And that supreme uncertainty enveloping COVID-19 was felt not only by employers but their employees, too.
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Businesses that survived the COVID-19 crisis in 2020 were more productive firms
The firms that survived the introduction of COVID-19 had one statistically significant key factor—their employees were more productive, according to a study from the World Bank.
The authors concluded that the strong correlation between sales per worker annually and the death of firms suggested a market “cleansing” of inefficient companies.
By the summer of 2021, tumultuous pandemic conditions forced at least 3.5% of businesses to close their doors permanently worldwide, according to conservative estimates from the World Bank study. In some developed countries, that estimate varied. Italy is estimated to have lost at least 8% of its businesses by that time. The country was an epicenter of disease early on in the pandemic.
Some countries suffered even more devastating losses on the upper end of World Bank estimates. In Mongolia, estimates suggest some 1 in 5 businesses went under.
In the past, productivity was not necessarily cited as an end-all-be-all factor in surviving typical recessions. Since a recession tends to be accompanied by decreased demand for goods and services, fewer people and work hours are needed to produce enough goods to meet demand.
But in 2020, the federal government rapidly issued increased unemployment assistance and thousands of dollars in stimulus that allowed consumers to continue spending money regardless of whether they remained employed.
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Firms pivoted entire business models overnight
Some businesses were prepared to meet the demand—large ones, at least. Amazon had built the largest private logistics network in modern U.S. history, allowing consumers to have nearly anything they wanted delivered to their homes.
Public data shows that businesses that suffered the most under COVID-19 were in the service industry—restaurants, hotels, and live event companies that were forced to close under safer-at-home regulations. Even after rules loosened though, many continued to see steep declines as wary customers stayed away.
Convincing customers to come back wasn’t due to lack of trying, though. Event venues shelled out for accreditations like the GBAC-STAR to tout they had adequate public health practices in place for visitors. Like a scene ripped straight from Hollywood, it became commonplace to see hotels using electrostatic sprayers to decontaminate rooms, and plexiglass shields were erected at front desks, cash registers, and restaurant dining rooms across the country.
But these companies, especially small ones, also launched new products, adapting to the changing needs of a country stricken by a pandemic. Hotels rented out rooms as office space for local white-collar workers dismissed from large office buildings and business travel obligations. Restaurants rolled out curbside pickup with online ordering.
Traditionally, any recession can threaten existing business models since consumer demand shifts in affected industries. But the pressure builds more gradually and has often led companies to focus on cutting costs throughout a downturn to survive.
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Businesses historically have more time to react to a recession as opposed to a public health crisis
There have been 13 recessions in the U.S. economy since World War II, and no two have looked the same. They do, however, share characteristics, according to leading economic research. And while recession indicators can appear in just one fiscal quarter, conditions typically decline more slowly than in 2020.
A recent study of economic indicators accompanying recessions from the Federal Reserve Bank of St. Louis shows just how steep the dropoff in incomes, payroll employment, production, and retail sales was after COVID-19 compared to past downturns. Employment levels plummeted by 15% as more than 20 million people lost their jobs between February 2020 and April 2020, according to the Bureau of Labor Statistics. The staggering job loss broke the prior record set during the Great Recession (2007-2009), when 6% of jobs were lost.
In a typical recession, businesses often begin taking action to preserve cash as indicators first start to show, whereas the sudden onset of the pandemic caught many businesses by surprise. For example, the retail and hospitality industries were disproportionately affected by social distancing health restrictions. With little time to prepare for the impact, the hard-hit sector shed more than 8 million workers from payrolls in March 2020 and April 2020 alone.
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COVID-19 forced companies to invest, whereas typical recessions require spending cuts
The U.S. government may not have adequately prepared for the public health crisis, having had its pandemic infrastructure that was built upon decades of Democratic and Republican administrations gutted by the Trump administration, but the private industry was ready.
Commercially available technologies had arrived at an opportune time by 2020. Video conference calling had been steadily gaining ground in board rooms and businesses across the country, thanks to companies that emerged in the aftermath of recessions such as Skype (launched in 2003) and Zoom (launched in 2011). Internet connectivity has only increased in availability since 2008, and workplaces are more connected than ever with real-time collaborative applications like Slack and Microsoft Teams.
Companies that had been slow to evolve digitally suddenly saw an opportunity to lean into internet-connected services that allowed the public to isolate themselves while still working, eating, shopping, and socializing. Financial, artificial intelligence, and health care-focused tech companies staffed up en masse.
Software and IT infrastructure writ large saw widespread investment as companies pulled back on investing in the construction of buildings, according to a Deloitte analysis of Bureau of Economic Analysis data.
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Lobbying strength can sway survivability for industries no matter the crisis
Businesses banded together in the early days of the COVID-19 crisis and the Great Recession to flex their influence over lawmakers with an ultimatum: If you let us die, the jobs die, too.
Bailouts for the automotive manufacturing industry in 2008 and 2009 saved 1.5 million American jobs and the companies that employed them.
On the contrary, the live events industry that crawled out of the COVID-19 wreckage in late 2020 provides a case study of what can happen when those channels with the government aren’t already open. The industry had difficulty appealing to lawmakers for more targeted relief.
Prior to the financial crisis of 2008, businesses in the service sector had remained more resilient through recessions compared to manufacturing sector firms, according to a 2010 study from the Federal Reserve Bank of Richmond. Where a downturn in consumer spending might have meant large firms could trim costs to survive in past recessions, COVID-19’s impact was prolonged and came with different barriers to doing business than simply reduced propensities to spend.
A coalition of businesses, including Live Nation and SAG-AFTRA, banded together to launch the #SaveLiveEvents campaign, encouraging Americans to lobby representatives for more assistance for events industry workers and small venues.
This story originally appeared on altLINE and was produced and
distributed in partnership with Stacker Studio.