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Some Thoughts On Starting a Business Based on the Economic Rebound

By: Steve Johnson

6/15/2009 - 18 Comments

What economic rebound you might say?  It’s true, there is no economic rebound in sight and it’s unlikely that we are going to see a rebound anytime soon.

But commerce will continue.  People are going to continue to buy things that they need and want.  Some businesses will see tremendous growth.  For example, the garden seed business is booming with up to a 75% increase this year as people look to grow more of their own food.

The economy may never be the same as trends are changing very quickly.  The question is what businesses will be growing for the next 5 to 10 years.  That is the market that you want to start a business in.

Recessions are a great time to start a business because much of the leverage of larger businesses is removed as consumers change their buying habits.  Recessions create opportunities that were not available before the recession began.

Three Types of Reactions

As consumers start to settle into the reality that the recession will last longer than they can hold their breath, they will have to decide how they are going to live.  Consumers have three options. 

  1. Return to live like before the recession and assume the economy will recover
  2. Reduce expenses without changing their lifestyle or suppliers
  3. Completely change lifestyle and find new suppliers to meet new needs.

Three Types of Businesses

Based on these three types of reactions to the recession, there are three types of businesses that will benefit. 

1. Old Businesses Based on Over Consumption

If you think that the recession will be short lived and consumers will soon return to their old ways, then a good investment or a good business to start would be in a market that has drastically declined.  For example, you could purchase a automobile dealer for a very good price right now and when the economy turns around, you will be in a good position to grow your business.

The biggest problem with old businesses is that many of them are based on consumers having a lot of credit. Of course the objective of the government stimulus package was to hand out money to get us all spending again so that these businesses don't fail. 

Without credit, many products cannot be purchased because very few people have any savings.  Also, many products that were hot items during the boom years are in abundance (like cars, furniture, houses, etc.)

2. Old Businesses Based on Customer Habits and Loyalty

Some businesses will find that consumer habits and customer loyalty will save their business – that is if your product is continuously needed.   Even some luxury products could manage to survive if their customer loyalty is strong enough.  But, the longer the recession lingers, the further your customers will be stretched and the social pressure to break their habits will eventually overcome the social pressure to maintain their habits. 

For example, if someone bought a new BWM every two years, their family and friends will be looking for them to continue this habit. If they don’t purchase a new BWM when two years are passed, then their neighbors, friends and family will start thinking something is up and the social pressure will be on this person to make the purchase or face everyone’s questions about why their didn’t. 

Eventually, if the recession lingers, this persons’ co-workers will all change their habits to buy a cheaper vehicle and that will remove the social pressure of this person to purchase a BWM and lead to a change in their habit.

The businesses that are in this situation need to realize the window that they are operating in and they should either start investing in other lines of business or find a buyer for their business before the market collapses when customers change their habits.  

3. New Businesses

This is the exciting one.  As the recession deepens, more and more customers will begin to completely change their lifestyle and find new suppliers of new products to meet their new needs.

This is what has happen in the garden seed business, as mentioned above.  Any business that can grow during a massive recession, based on new consumer demand has the potential to explode when the economy rebounds.  And the longer the recession the better, because the longer that consumers change their ways the more likely they will become habits. 

Creating a new business takes a lot of vision for what will happen 3-5 years from now so that the most accurate decisions about investments into the business can be made today to prepare the business for the growth that is coming, while avoiding the pitfalls along the way. 

One of the biggest challenges are going to be trying not to compete with the government, because any industry that competes with the government is setup to fail. As the government grows into the lender of last resort for houses and cars, bankers are not going to be able to compete with the government.

This is why the health care insurance industry is terrified of the Obama health care plan, which includes a proposal  for a government health care insurance provider.  A government health care insurance provider would have a competitive advantage backed by the ability to set prices and operate at a loss and print money to make up the difference.  No private health care insurance provider will be able to compete with these advantages.

With this in mind, stay away from anything the government is getting into, like health care, green energy, education, automobiles, etc. 

The government involvement in all of these industries will eventually lead to a government sponsored monopoly (like Freddie Mac and Fannie Mae of the mortgage lending industry) - as competitors are run out of business.

This is a great time to start a business. The big question is what is the real consumer demand?  What are consumers going to want to buy for the next 5 years?  If the recession lingers, then a safe bet is to build a business model based on todays consumer demands and assume consumers will continue to turn from their old spending habits towards new markets.

The strategy is to be there waiting for them.

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