Fernando MonteiroRecession-Proof Businesses
February 23rd 2010 15:02
We escaped a technical recession in 2008 in Australia, but nothing can secure us from falling into one, good or bad, in the foreseeable future. Yet, some businesses will continue to do well in boom or recession – what are these businesses?
In a nutshell, the businesses that will do well in a recession are the ones associated with consumer’s non-discretionary spending. The reader might ask: but just what is non-discretionary spending? Well, discretionary spending is that part of our income that we are free to spend, if we spend at all, in whatever we fancy. Non-discretionary spending is the part of our income that we cannot avoid spending, such as in food, transportation, clothes to a certain extent, home and car insurance and medical expenses. Others are possible and the reader, using some imagination, could easily identify a few.
In fact, if the reader, sadly, loses his or her job, the first expenses to go are probably going to the pub for a beer. Also, plans to go on holydays overseas might be cancelled. Perhaps going to the movies might also be avoided together with going to the restaurant for a tasty meal. The same about buying that new shiny suit, and so on. It should be noticed that, not just people becoming unemployed substantiate this situation: people keeping a job will also do some cost-cutting as a precautionary measure.
But the expenses that will not be avoided will be, in a short list, telephone expenses, since you will be calling for jobs. Also supermarket food shopping since you will have to eat, and bus or train tickets to go for job interviews. You might be able to cut to a certain point on home and car insurance but will no be able to avoid it altogether. The same with newspaper, internet and doctor and pharmacy expenses.
Consider some of the businesses that do well in recessionary times: Woolworths and Coles have been doing extremely well. Off course, you cannot avoid going there to buy some food to take home and cook. And, it should be noticed, in our country, when we do not have an income from work we get social a security payment to substitute, so we always keep some purchasing power.
The businesses losing in this context will be the restaurant, though the fast food outlet, such as Asian food or something like Domino’s Pizza or Pizza Heaven, will do well due to the discounted prices they practice. As a matter of fact, in the last financial year Domino’s, the only stock market listed pizza maker, did better than ever before.
With regards to retail spending, the stimulus package that our federal government implemented last year, and which practically gave AU$900 to all to spend freely, resulted in this sector doing extremely well last year, being Westfield shopping centres the main winner of such spending.
Home and car insurance is something you can cut to a certain extent, but will not be able to cut in totality. So, insurance businesses associated with casualty insurance, such as the brands NRMA, AAMI and GIO, to mention just a few, will do well in recession. As a matter of fact, all major insurers such as IAG, Suncorp Metway and QBE did very well in the past year.
With regards to transportation, bus and train companies providing public transportation will certainly see demand for their services increasing. But not just these – companies that provide transportation of goods to supermarket chains, such as Toll Holdings and others, did well. So did companies that provide services associated with that kind of transportation, such as the Chep pooling pallets from Brambles.
On the negative list we have, at the top, airways. In fact, Qantas has been doing extremely tough, just recently posting a 72 per cent reduction in net profits. When they get hit with lower passenger numbers, their salary and fuel bills look too great to bear. The aeronautics business is a cyclical one, anyway, and susceptible to many interferences. But, once good economic times return they will resume high profitability status also.
Another business that would surely lose with recession is the home building industry. The government, this recession we did not have, implemented a first home buyers scheme that provided for AU$24,000 free, to each new home buyer. This had the effect of keeping construction going almost as usual and, as an example, Leighton Holdings did extremely well, and also kept home prices at about the level they were in the beginning of the avoided recession. But, in principle, and disregarding interventionist policies from governments, the home building business should suffer in recession.
Associated with building is banking, at least in what it matters to lending to buy a home. Housing booms should come to a grinding halt in any recession and with that bank lending for home purchasing. Yet, the Commonwealth Bank of Australia, our largest home lender, did extremely well for last year and roars ahead, certainly due to the above mentioned home grant from the government. But in a recession, not just home lending, but also personal lending and even depositing should become scarce.
A business that is extremely susceptible of any recession is newspaper publishing and, in fact, the Fairfax business posted great losses the year before. Newspapers, though they charge for each printed item, and sometimes for the online version, depend primarily on the level of advertisement going on. Fairfax, with the rebound in economic activity and advertising levels, it is looking much better now. Associated with newspaper and advertising are the internet websites for job seeking, such as Seek.com.au and My Career.com.au, whose fate has followed the newspaper’s one.
In any economic situation there will always be business that do well and others that struggle. To the investor and more critically, to the contrarian investor, knowing which ones are which, and acting on opportunity is crucial. I hope this article opened some windows on the reader’s mind to the subject.
In a nutshell, the businesses that will do well in a recession are the ones associated with consumer’s non-discretionary spending. The reader might ask: but just what is non-discretionary spending? Well, discretionary spending is that part of our income that we are free to spend, if we spend at all, in whatever we fancy. Non-discretionary spending is the part of our income that we cannot avoid spending, such as in food, transportation, clothes to a certain extent, home and car insurance and medical expenses. Others are possible and the reader, using some imagination, could easily identify a few.
In fact, if the reader, sadly, loses his or her job, the first expenses to go are probably going to the pub for a beer. Also, plans to go on holydays overseas might be cancelled. Perhaps going to the movies might also be avoided together with going to the restaurant for a tasty meal. The same about buying that new shiny suit, and so on. It should be noticed that, not just people becoming unemployed substantiate this situation: people keeping a job will also do some cost-cutting as a precautionary measure.
But the expenses that will not be avoided will be, in a short list, telephone expenses, since you will be calling for jobs. Also supermarket food shopping since you will have to eat, and bus or train tickets to go for job interviews. You might be able to cut to a certain point on home and car insurance but will no be able to avoid it altogether. The same with newspaper, internet and doctor and pharmacy expenses.
Consider some of the businesses that do well in recessionary times: Woolworths and Coles have been doing extremely well. Off course, you cannot avoid going there to buy some food to take home and cook. And, it should be noticed, in our country, when we do not have an income from work we get social a security payment to substitute, so we always keep some purchasing power.
The businesses losing in this context will be the restaurant, though the fast food outlet, such as Asian food or something like Domino’s Pizza or Pizza Heaven, will do well due to the discounted prices they practice. As a matter of fact, in the last financial year Domino’s, the only stock market listed pizza maker, did better than ever before.
With regards to retail spending, the stimulus package that our federal government implemented last year, and which practically gave AU$900 to all to spend freely, resulted in this sector doing extremely well last year, being Westfield shopping centres the main winner of such spending.
Home and car insurance is something you can cut to a certain extent, but will not be able to cut in totality. So, insurance businesses associated with casualty insurance, such as the brands NRMA, AAMI and GIO, to mention just a few, will do well in recession. As a matter of fact, all major insurers such as IAG, Suncorp Metway and QBE did very well in the past year.
With regards to transportation, bus and train companies providing public transportation will certainly see demand for their services increasing. But not just these – companies that provide transportation of goods to supermarket chains, such as Toll Holdings and others, did well. So did companies that provide services associated with that kind of transportation, such as the Chep pooling pallets from Brambles.
On the negative list we have, at the top, airways. In fact, Qantas has been doing extremely tough, just recently posting a 72 per cent reduction in net profits. When they get hit with lower passenger numbers, their salary and fuel bills look too great to bear. The aeronautics business is a cyclical one, anyway, and susceptible to many interferences. But, once good economic times return they will resume high profitability status also.
Another business that would surely lose with recession is the home building industry. The government, this recession we did not have, implemented a first home buyers scheme that provided for AU$24,000 free, to each new home buyer. This had the effect of keeping construction going almost as usual and, as an example, Leighton Holdings did extremely well, and also kept home prices at about the level they were in the beginning of the avoided recession. But, in principle, and disregarding interventionist policies from governments, the home building business should suffer in recession.
Associated with building is banking, at least in what it matters to lending to buy a home. Housing booms should come to a grinding halt in any recession and with that bank lending for home purchasing. Yet, the Commonwealth Bank of Australia, our largest home lender, did extremely well for last year and roars ahead, certainly due to the above mentioned home grant from the government. But in a recession, not just home lending, but also personal lending and even depositing should become scarce.
A business that is extremely susceptible of any recession is newspaper publishing and, in fact, the Fairfax business posted great losses the year before. Newspapers, though they charge for each printed item, and sometimes for the online version, depend primarily on the level of advertisement going on. Fairfax, with the rebound in economic activity and advertising levels, it is looking much better now. Associated with newspaper and advertising are the internet websites for job seeking, such as Seek.com.au and My Career.com.au, whose fate has followed the newspaper’s one.
In any economic situation there will always be business that do well and others that struggle. To the investor and more critically, to the contrarian investor, knowing which ones are which, and acting on opportunity is crucial. I hope this article opened some windows on the reader’s mind to the subject.
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