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Smart Moves to Make Now Ahead of a Recession

Seize the day and think of a recession as the best time to pass competitors.

著者：Tom Holland and Jeff Katzin

First published on 5月 21, 2019
min read


This article originally appeared on CFO.com. While predicting when a recession will hit is nearly impossible, it’s certainly not far-fetched that one could arrive relatively soon, given that the economic expansion is now into its second decade. For CFOs and other corporate leaders, however, the exact timing and duration of a recession matters less than their willingness and readiness to seize the moment now, when they have more options. Well-prepared companies, Bain & Co. research shows, emerged as winners during and after past recessions. These companies managed a strong defense and offense in parallel, reining in costs while simultaneously reinvesting in growth areas. Going into the global financial crisis that exploded in 2008, the eventual winners and losers in a group of almost 3,900 companies worldwide that we analyzed experienced double-digit earnings growth, on average. As soon as the storm hit, their performance diverged sharply. The winners grew at a 17% compound annual growth rate (CAGR) during the downturn, compared with 0% among the losers. After the downturn, the winners’ earnings grew at an average 13% CAGR, while the losers stalled at 1%. Moreover, recessions can swing future market capitalization by billions of dollars. For two companies with a similar enterprise value in 2007, we found that the average winner’s value grew three times that of the average loser by 2017. Playing offense almost always trumps simply hunkering down. Think of a recession as a sharp curve on an auto race course. It’s the best place to pass competitors but requires more skill driving on a straightaway. The best drivers brake just ahead of the curve (they take out excess costs), turn hard toward the apex of the curve (identify the short list of projects that will form the next business model), and accelerate hard out of the curve (spend and hire before markets have rebounded). What specifically distinguishes eventual winners? Our research teased out several moves by companies that outperformed peers. Restructure costs before the downturn hits, without cutting muscle at the core. All companies must manage costs in a recession. Yet some accomplished this by ratcheting down spending on lower-value processes and reducing the volume and complexity of work. They viewed cost management as a way to refuel the engine for the next stage in the business cycle. Discount retailer Costco illustrates this strategic approach to looking for the best places to simplify and bank savings. Early in the financial crisis, Costco streamlined stores, limiting the number of product variations in each category, especially branded products, in order to get higher wholesale purchase discounts. The company now sells about 3,700 stock-keeping units (SKUs), compared with 60,000 SKUs for competitors on average. Along with fewer SKUs, Costco revised its category mix, shifting from hard goods to more consumer staples. The discounter also set about fine-tuning its supply chain to reduce storage costs. It centralized prescription fill centers, cutting those costs by half. And it relied more on cross-docking centers, to reduce shipment time to under 24 hours, which in turn cut inventory costs. These early cost-containment moves allowed Costco to post steady growth in revenues and earnings through and beyond the recession. Put the financial house in order. Recessions can wreak havoc on balance sheets. The winners managed the balance sheet as strategically as they did the P&L. They tightly managed cash, working capital, and capex, all to create “fuel” to invest through the cycle. Many companies also divested noncore assets to further invest in the core business or explored new ownership models in typically capital-intensive industries. John Deere, the farm and industrial equipment manufacturer, managed working capital more actively from 2006 on, to increase free cash flow and build resilience against demand volatility. Deere worked with dealers to reduce receivables, and improved production processes to reduce work-in-progress inventory levels. It took advantage of cheap capital to lock in long-term financing, and redesigned its capex strategy to focus on higher-return investments in line with the strategic vision. That increased the company’s return on invested capital to 40% in 2008, up from negative 5% previously. Play offense by reinvesting selectively for commercial growth. The strongest companies coming out of the last recession went on offense early, while many of their peers focused on survival. Among the tactics used to boost commercial growth were optimizing the marketing mix to do more with the same or less, and improving the customer experience, making it more simple and personalized. South Korean conglomerate Samsung took an offensive tack before and during the past recession. In 2009, it doubled down on R&D investment, while competitors aggressively cut costs in that area. The number of patents the company filed in the United States increased four-fold, and it constructed four types of R&D centers, each with a defined product focus and investment horizon. Samsung maintained marketing investments, bringing in senior marketing execs from other consumer companies such as L’Oreal. A marketing strategy that rebranded Samsung as an innovative company helped to position the first Galaxy smartphone, released in 2009, against competitors such as Apple. That year, Samsung ranked No. 19 on Interbrand’s list of most valuable brands globally. The company now ranks No. 6. Samsung also divested and streamlined noncore, low-performing subsidiaries in order to reinvest capital back into its core businesses. While revenue growth has fluctuated since then, Samsung has strong cash flow to make bold bets in new technologies. Pursue a proactive M&A pipeline. For the well-positioned, the last recession presented a window to use M&A to reshape the portfolio of businesses. Acquirers bought new product lines, customer segments, or capabilities at lower prices. With another recession on the horizon, planning those investments now helps to avoid paying a higher cost of capital later. On the tail of the current economic cycle, scope deals have accelerated dramatically over the past three years and now represent 51% of all strategic deals. That trend will likely continue or even accelerate in a downturn, as companies use acquisitions to secure businesses that add capabilities to do old things in new ways. Medtronic, for example, bought Mazor Robotics for its robotic guidance systems, to assist human surgeons performing spinal surgery. Richemont, which owns an impressive roster of luxury brands, can go directly to its consumers since acquiring YOOX Net-A-Porter, an e-commerce platform. Scope transactions like those reflect how they can enhance capabilities and open up new markets—keys to growth in a downturn. The magnitude and shape of a cost transformation will vary depending on a company’s starting position, but the approach should keep costs out while the company puts pedal to the metal coming out of the curve. Tom Holland and Jeff Katzin are partners with Bain & Company.

This article originally appeared on CFO.com.

While predicting when a recession will hit is nearly impossible, it’s certainly not far-fetched that one could arrive relatively soon, given that the economic expansion is now into its second decade.

For CFOs and other corporate leaders, however, the exact timing and duration of a recession matters less than their willingness and readiness to seize the moment now, when they have more options.

Well-prepared companies, Bain & Co. research shows, emerged as winners during and after past recessions. These companies managed a strong defense and offense in parallel, reining in costs while simultaneously reinvesting in growth areas.

Going into the global financial crisis that exploded in 2008, the eventual winners and losers in a group of almost 3,900 companies worldwide that we analyzed experienced double-digit earnings growth, on average.

As soon as the storm hit, their performance diverged sharply. The winners grew at a 17% compound annual growth rate (CAGR) during the downturn, compared with 0% among the losers. After the downturn, the winners’ earnings grew at an average 13% CAGR, while the losers stalled at 1%.

Moreover, recessions can swing future market capitalization by billions of dollars. For two companies with a similar enterprise value in 2007, we found that the average winner’s value grew three times that of the average loser by 2017.

Playing offense almost always trumps simply hunkering down. Think of a recession as a sharp curve on an auto race course. It’s the best place to pass competitors but requires more skill driving on a straightaway.

The best drivers brake just ahead of the curve (they take out excess costs), turn hard toward the apex of the curve (identify the short list of projects that will form the next business model), and accelerate hard out of the curve (spend and hire before markets have rebounded).

What specifically distinguishes eventual winners? Our research teased out several moves by companies that outperformed peers.

Restructure costs before the downturn hits, without cutting muscle at the core. All companies must manage costs in a recession. Yet some accomplished this by ratcheting down spending on lower-value processes and reducing the volume and complexity of work. They viewed cost management as a way to refuel the engine for the next stage in the business cycle.

Discount retailer Costco illustrates this strategic approach to looking for the best places to simplify and bank savings. Early in the financial crisis, Costco streamlined stores, limiting the number of product variations in each category, especially branded products, in order to get higher wholesale purchase discounts.

The company now sells about 3,700 stock-keeping units (SKUs), compared with 60,000 SKUs for competitors on average. Along with fewer SKUs, Costco revised its category mix, shifting from hard goods to more consumer staples.

The discounter also set about fine-tuning its supply chain to reduce storage costs. It centralized prescription fill centers, cutting those costs by half. And it relied more on cross-docking centers, to reduce shipment time to under 24 hours, which in turn cut inventory costs.

These early cost-containment moves allowed Costco to post steady growth in revenues and earnings through and beyond the recession.

Put the financial house in order. Recessions can wreak havoc on balance sheets. The winners managed the balance sheet as strategically as they did the P&L. They tightly managed cash, working capital, and capex, all to create “fuel” to invest through the cycle.

Many companies also divested noncore assets to further invest in the core business or explored new ownership models in typically capital-intensive industries.

John Deere, the farm and industrial equipment manufacturer, managed working capital more actively from 2006 on, to increase free cash flow and build resilience against demand volatility.

Deere worked with dealers to reduce receivables, and improved production processes to reduce work-in-progress inventory levels. It took advantage of cheap capital to lock in long-term financing, and redesigned its capex strategy to focus on higher-return investments in line with the strategic vision.

That increased the company’s return on invested capital to 40% in 2008, up from negative 5% previously.

Play offense by reinvesting selectively for commercial growth. The strongest companies coming out of the last recession went on offense early, while many of their peers focused on survival. Among the tactics used to boost commercial growth were optimizing the marketing mix to do more with the same or less, and improving the customer experience, making it more simple and personalized.

South Korean conglomerate Samsung took an offensive tack before and during the past recession. In 2009, it doubled down on R&D investment, while competitors aggressively cut costs in that area. The number of patents the company filed in the United States increased four-fold, and it constructed four types of R&D centers, each with a defined product focus and investment horizon.

Samsung maintained marketing investments, bringing in senior marketing execs from other consumer companies such as L’Oreal. A marketing strategy that rebranded Samsung as an innovative company helped to position the first Galaxy smartphone, released in 2009, against competitors such as Apple.

That year, Samsung ranked No. 19 on Interbrand’s list of most valuable brands globally. The company now ranks No. 6.

Samsung also divested and streamlined noncore, low-performing subsidiaries in order to reinvest capital back into its core businesses. While revenue growth has fluctuated since then, Samsung has strong cash flow to make bold bets in new technologies.

Pursue a proactive M&A pipeline. For the well-positioned, the last recession presented a window to use M&A to reshape the portfolio of businesses. Acquirers bought new product lines, customer segments, or capabilities at lower prices.

With another recession on the horizon, planning those investments now helps to avoid paying a higher cost of capital later.

On the tail of the current economic cycle, scope deals have accelerated dramatically over the past three years and now represent 51% of all strategic deals. That trend will likely continue or even accelerate in a downturn, as companies use acquisitions to secure businesses that add capabilities to do old things in new ways.

Medtronic, for example, bought Mazor Robotics for its robotic guidance systems, to assist human surgeons performing spinal surgery. Richemont, which owns an impressive roster of luxury brands, can go directly to its consumers since acquiring YOOX Net-A-Porter, an e-commerce platform.

Scope transactions like those reflect how they can enhance capabilities and open up new markets—keys to growth in a downturn.

The magnitude and shape of a cost transformation will vary depending on a company’s starting position, but the approach should keep costs out while the company puts pedal to the metal coming out of the curve.

Tom Holland and Jeff Katzin are partners with Bain & Company.