Some of the hottest discussion topics right now are whether there will be a recession soon, and if so, when, and what can we expect from it? Recently I’ve discussed why I believe entrepreneurs should start a business regardless of the economy and I shared the 10 benefits you can expect from starting your business during a recession.
If your objective is to choose the most profitable franchise, if you have sufficient cash reserves, and if you have a moderate risk tolerance, then you may want to choose a franchise based only on long-term growth prospects.
However, if you want a profitable franchise, if you have moderate cash reserves, and if you want something low risk, then you might be interested in knowing what businesses perform best during a recession.
If this sounds like you, then this article is for you! I’m not going to talk about purpose, vision and leadership. I’m going to focus on the trends and the hard stats behind the sectors of our economy that do exceptionally well during recessions.
A recession-proof business will outperform the broader market during an economic downturn. In many cases, a recession-proof company will grow during a recession because economic conditions drive demand for the goods and services they provide.
Some people use the term recession-proof, but I prefer recession-resistant. I don’t want to imply that any business is invulnerable. However, we can study businesses that have demonstrated resilience during past recessions to predict which types of companies are likely to succeed in future downturns.
A recession-resistant business provides products and services that people need regardless of the economy. These include actual necessities, like groceries and healthcare, as well as products that people treat like necessities, like alcohol and children’s goods.
As people spend less on some products and services, they’ll often switch to lower cost substitutes. This substitution effect increases demand for certain products and services during a recession.
A business is positioned to perform well during a recession if it offers value-oriented products and services that people cannot easily live without.
To understand how a franchise will perform during a recession, it’s helpful to understand how different types of businesses perform during periods of cost-cutting, unemployment, and stock market declines.
After you understand each industry, you’ll be better positioned to evaluate information about individual franchises or business opportunities.
Executives often turn to business consultants to optimize spending, manage employees, improve logistics, and address challenges that require special expertise. Likewise, executives are also increasingly turning to business coaches to enhance their performance, boost their employees’ productivity, and reduce turnover.
The US consulting services industry generates $64 billion a year. Tech solutions are disrupting this market by offering analytics and insights on demand for a fraction of the price that many companies are accustomed to paying. Many young entrepreneurs are structuring their businesses to use automated tools for dashboards, data visualization, cash flow management, and business intelligence. Consulting has historically done well in recessions, growing every single year in the 1970s and 1990s. The industry experienced contractions in 2002, 2009 and 2011, but for the most part has shown consistent annual growth.
The business coaching industry generates $14.2 billion a year and has grown 2.8% annually from 2017 to 2022. While 2.8% may not sound like a lot, that’s faster growth than the US economy as a whole, which has grown 2.0% annually over the same 5-year period.
Corporations tend to invest in business coaching to increase their workers’ skill sets. With corporate profits growing 4.3% annually in the last 5 years, corporations are well positioned to continue buying services from business consultants and coaches.
The biggest challenge facing the consulting and coaching industries today is the large number of unsophisticated consultants and untrained coaches who are failing to help their clients achieve results, damaging the industry’s reputation.
Nonetheless, the business consulting and coaching industry is still strong. The industry benefits from multiple groups who are increasingly common in our economy: self-employed remote workers looking to grow their businesses, professionals looking to stay competitive in a rapidly evolving work environment, and people who have reached financial freedom but choose to remain productive rather than retiring.
Electricians, locksmiths, plumbers, roofers, auto repair people, and mechanics all provide essential services that people need regardless of how the economy is doing. Demand for repair services often increases during a recession as more people look to repair what they have rather than buying new.
The strengths of the repair industry are exemplified by AutoZone and Tractor Supply Co, which registered 10%+ year-over-year profit increases in 2008-2009, and Sherwin-Williams, which registered a small dip in 2008 but recovered quickly in 2009.
It’s important to distinguish repairs from home improvements. Customers may put off unnecessary home improvements like reflooring a house, but they will prioritize necessary home repairs like fixing a broken HVAC system.
As the population ages, senior care is in higher demand every year. Since many seniors prefer to live at home, there’s a particular need for in-home senior care.
Health and senior services are among the top 6 recession proof industries according to Franchise Business Review. The US Bureau of Labor Statistics projects the “home health and personal care aids industry” will grow by 25% between 2021 to 2031, adding 924,000 jobs. That’s significantly faster than other industries.
Home health businesses don’t require inventory; they're also easier to run than ever before with new communication technologies. Most importantly, senior care represents a “need” rather than a “want” to most seniors and their families. This bodes well for how the industry will do if household budgets contract during a recession.
Cleaning franchises protect franchisees with specialized cleaning services, tiered pricing, a reliable brand, and a large base of customers. All of these conditions help cleaning services weather recessions.
But did you know that cleaning service profits can increase during recessions?
Cleaning services generally serve three markets: middle-class residential, upper-class residential, and business clients.
Middle class households that buy maid services may pause service if they feel pressured to cut back spending, especially if they’re concerned about losing their jobs. A cleaning service can mitigate cancellations by offering payment plans or discounts, but companies are still likely to lose customers in this market.
Fortunately, most cleaning companies have more clients in the other two markets, where demand either stays constant or increases during a recession.
Well-off customers view cleaning services as a necessary expense, not a luxury. People in this market usually have ample savings, income streams, and work opportunities. For them, it’s more profitable to focus on high-paying work than to spend time cleaning their own homes. Thus, this market remains fairly stable regardless of the economy.
Business clients are the bread and butter of most cleaning services. Many companies need to maintain a certain level of cleanliness to fulfill legal obligations and customers’ expectations. Hospitals, stores, day care, senior care, salons, gyms, and restaurants are just some of the industries that require regular cleaning.
The pandemic has led many companies to prioritize sanitation, and the easiest way to do that is with help from a professional cleaning company. When a business reviews its budget, there’s not a whole lot of flexibility when it comes to sanitation.
During a recession, a business might request a lower service tier, leading a cleaning company to provide fewer cleans or use cheaper cleaning products. On the other hand, a recession can also increase revenue. During past recessions, many businesses laid off their custodial staff and hired commercial cleaning companies to replace them.
Grocery stores function as the ultimate necessity. People cannot cut food out of their budget the way they can trim vacations or dining out. For this reason, business is stable for grocery stores during recessions.
According to the US Department of Agriculture, during the Great Recession, spending dropped just 1.3% from 2006 to 2009.
Recessions have two significant effects on consumer spending at grocery stores.
During recessions, people cut back on eating out. In fact, spending at restaurants declined 18% between 2006 and 2010. Not surprisingly, when consumers eat out less, they buy more from their local grocery stores.
On the flip side, consumers strapped for cash can still find ways to slim their grocery bills. During the Great Recession, customers took advantage of sales, promotions, and coupons. They visited more warehouse stores and supercenters. They bought healthier food so they could eat less while still getting essential nutrition. They also bought lower cost substitutes. For example, consumers bought more store brands, and they bought food that involved less preparation and packaging.
On the spectrum of recession-resistant business, grocery stores rank near the top.
The National Bureau of Economic Research found that demand for healthcare increases during economic downturns.
A recession can boost healthcare demand in some regards. For example, people often seek help with mental health, or they end up paying more for treatment because they missed getting preventative care while they were out of a job. For these reasons, economists consider demand for healthcare to be inelastic.
People generally need healthcare regardless of their income. However, there’s an important exception where a recession can still impact healthcare demand. In the US, when people lose jobs, they usually lose their health insurance tied to their jobs, and this changes how often they’re able to seek healthcare. For this reason, McKinsey & Company says that the second year after a recession hits “is really the impact year” when people will slow down or stop their visits to healthcare providers.
As people take up jobs at new companies that offer healthcare, employees resume receiving care. Because of this lag, the economic recovery for a healthcare company often takes longer than the broader economy.
Healthcare companies can prepare for a recession by expanding their proportion of Medicare patients, investing in technology to quicken their workflow, and optimizing their collections strategy to maximize payments. Additionally, it’s a good idea to make pricing transparent to appeal to value-oriented consumers who are paying out of pocket.
With some preparation and a little adaptation, healthcare companies are well positioned to grow during economic downturns.
Delicious treats give people a reprieve from monotony and stress. It’s probably not a shock then that history shows candy bars and snacks sell well during recessions.
There’s a scientific basis for why people crave comfort food amid economic turbulence. Stress triggers hormones that decrease people’s feelings of fullness, thus increasing their desire to snack.
Fruits, potato chips, cheese, crackers, chocolate, vegetables, nuts, tortilla chips, popcorn and cookies are among the most popular snacks by sales volume.
Does any of this counter your intuition?
A recent survey showed that 64% of consumers say they’d cut back on snacks and candy “if money was tight.”
People have been complaining a fair bit about how inflation is hitting their wallets. And yet, the snacks and candy industry is up 9% in 2022. Clearly, there’s a difference between what we say and what we do!
Alcohol should be a luxury purchase, but people don’t always treat it that way. When times are tough, people still partake in drinks even while forgoing new cars, home improvements, and expensive electronics.
Alcohol sales grew during the 2008-09 recession. There are a couple reasons that helped people prioritize drinking: Alcohol brands carry prestige and brand loyalty. Additionally, alcohol usually makes up a small portion of people’s overall spending, making it easier for people to make allowances for it.
There are signs that alcohol may not sell as well as in past recessions. Generation Z in particular shows less interest in alcohol than previous generations. However, the industry has responded with hard seltzers and ready-to-drink cocktails that have proven popular. Since 2019, beer and wine sales grew just 1.2% and 3.7% respectively, but spirits are enjoying 6% annual sales growth.
If you want a recession proof retail business, avoid jewelry, fashion, and nonessentials. Focus instead on value retailers.
In 2008, Walmart brought in a 20% 1-year return, Ross brought in 18%, and Dollar Tree brought in a massive 61% return!
The 2008 financial crisis spurred the growth of Dollar General and Family Dollar, while retailers aimed more at the middle class, like Sears and Macy’s, closed stores to address declining profits.
Small discount stores have multiple appeals for business owners.
Discount stores take advantage of the popularity of e-commerce. Dollar General, for example, now allows customers to buy online and pick-up in store.
Discount stores are relatively inexpensive to open, often just $250,000. While there’s an abundance of retailers targeting the middle class, value-oriented retail is a less saturated market. The low startup cost and low market saturation make it easier for an entrepreneur to launch a discount store today than other types of retail outlets.
Sadly, discount stores benefit from a growing lower class that is more value sensitive. While average incomes have increased over the last 10 years, there’s a substantial portion of people whose wages have stagnated as inflation ramped up.
While a discount store may give you a fantastic return on your investment during a recession, the store will likely provide solid returns during the recovery and market expansion as well.
Parents need to provide for their kids, and many enjoy spoiling them too. Even as parents cut back in other areas, they’ll generally continue buying diapers, formulas, clothes, toys, and other kids products.
As the US went into lockdown and the economy dropped into recession, sales on children’s products soared. Toy sales increased 18% in 2020, 20% in 2021, and 2% in the first half of 2022.
2% might seem disappointing – that’s a big drop from the days of 20% increases. But bear a few things in mind. Firstly, Christmas hasn’t come yet. Second, pandemic restrictions, at-home school, and work-from-home life presented an unusual case for buying products to teach and entertain kids. Third, it would have been understandable if demand receded after such a massive customer buying spree, but instead demand has remained durable. That’s a good sign for the industry.
Americans alone spend $75 billion annually on their pets.
This year, Petco’s CEO said, “Whether economies are up or down, the pet market tends to be pretty recession-proof.”
Petco received a significant bump in sales from pandemic pet purchases. However, the company has continued growing in 2021 and 2022, with higher revenue and profits each year.
Only in the most dire of situations will people give up their pets. Pet food and toys will continue to sell, since they’re important to customers and they make up a small portion of customers’ discretionary spending.
Pet stores tend to be small employers. 83% employ four people or fewer, and 60% don’t employ anyone other than the owner.
Pet franchises can be started for around $25,000, making them attractive to entrepreneurs looking for a low barrier to entry. To differentiate a store, experts recommend specializing in a niche not commonly found at the big box pet stores, like organic dog food.
Offering personalized services like one-on-one training or pet-care classes can also help you stand out. Finally, if you start a store, focus on building relationships in your community. Many customers like to visit pet stores where the staff can provide personalized recommendations for their animals.
In uncertain times, people turn to their accountants and financial advisors to manage risk, deal with debt, maximize opportunities for gain, and make strategic cuts when necessary.
Financial professional services also deliver great returns in “good years”. Businesses always need to keep up with their books, and everyone needs to file their taxes annually.
Even though it’s possible to save by using TurboTax or other do-it-yourself software, it’s easy to miss useful tax deductions with this approach. Thus, demand for accountants remains strong consistently because customers are consistently better off with their services than without them.
Businesses rely on cybersecurity and technical support to manage supply chains, maintain e-commerce websites, and allow their staff to work effectively online. Businesses that serve these interests are well positioned to survive any recession.
Tech franchises specialize in different fields including fixing broken devices, supporting IT needs of small and medium sized businesses, hardware and software procurement, backup and disaster recovery, digital documentation, cloud services, software consulting, network security, and even STEM summer camps for kids.
IT companies are in demand because they reduce risk and boost productivity for businesses. With a strong IT vendor, businesses can stop distractions and delays due to IT issues and instead focus on their core competencies.
An unfortunate part of recessions is that people get behind on their medical bills, car payments, electric bills and other bills.
The accounts receivable management (ARM) industry has had mixed outcomes in past recessions.
People default on their debts more often, and this creates demand for debt collectors.
However, people also tend to reduce spending and repay their existing balances during recessions. In addition, companies sometimes decide to forgive debts rather than risk negative publicity. Both of these factors reduce demand for debt collection during recessions. Despite this, debt collection is still a stable business that does relatively well compared to other industries during downturns.
There’s a franchise for almost everything, including freight delivery. People need goods delivered regardless of the economy, so freight franchises are among the safest of investments.
In 2008, freight companies and companies that make products for the freight industry showed positive returns including Old Dominion Freight, Westinghouse Air Brake Technologies, and C.H. Robinson Worldwide.
The average trucking company has a net profit margin of 3-6%, and the average full-time owner-operator of a trucking business earns $100k-140k.
There are 100+ recession resistant franchise opportunities that fit into the categories we’ve discussed. Franchise operators have achieved remarkable results with many of them… and not so great results with others.
As a franchise consultant, I help franchise candidates find the optimal franchise for their financial goals and lifestyle. Some franchises will let you get started for just $25k, while others require $100k or more. Some franchises are almost impossible to get a meeting with their representatives, and others are clamoring to get anyone to sign up.
I can help you navigate the massive array of franchise options. I can provide you with data that will help you quickly discard the bad options and focus your attention on franchises that have strong potential for you. Franchise candidates say that this service has helped them save years of time, and get started much quicker than they would have otherwise.
If this sounds interesting to you, I want to be upfront that your investment in my service is… $0.
I don’t charge franchise candidates for consultations. Instead I receive commissions from the franchises where I place high quality candidates.
I’m certain I can find a fantastic franchise that will work brilliantly for you – one that will survive or thrive during the next recession (whenever it may occur). I’m certain that during our conversation, no matter the decision you make about whether or when to start your franchise, you’ll gain valuable insights that will save you weeks of time and hours of research.
Book a free virtual coffee with me today, and let’s find the perfect recession-resistant franchise for you.