While some industries thrive no matter the economic climate, others have a particularly hard time during a recession. Here are five types of businesses to avoid opening during a recession.
1. High-end retail
Retailers that sell luxury goods or services are not a good choice to start during a recession because people cut back on spending and focus on paying for essentials.
Chuck Catania, the chief communications officer at architecture firm Modulus, discourages “launching businesses that offer goods and lifestyle brands that target [the] high-end market in an inflation-driven recession."
“At the broadest level, the worst kind of business to start during a recession is a luxury product (defined as a 'want' and not a 'need') introduced by an independent/unrecognized brand. Introducing a high-ticket item when people are concerned about their finances has a high level of risk. In addition, you will have to spend more on marketing and advertising because as an unrecognized brand, it's going to take a while for the SEO on your website to kick in," Catania says.
2. Upscale restaurants and bars
For the same reason, that high-end retail stores are risky to start during an economic downturn, high-end restaurants and bars are also considered unwise.
Forrest McCall, the founder of Making Money and Traveling, a website about remote work opportunities, concurs that a restaurant is one of the worst new businesses to start during a recession. According to McCall, a restaurant “can be extremely difficult to grow in a recessionary environment because of lower consumer spending. During a recession, as unemployment rises, consumers have less disposable income to spend, making managing the restaurant (and retail) business difficult."
The restaurant business has historically high failure rates, and a recession will further reduce your chance of success.
3. Manufacturing
A manufacturing operation requires a large capital investment to get up and running,
Not only is it more difficult to get financing for a capital-intensive enterprise, but unless you have customer contracts waiting to be signed, getting into a manufacturing business during a recession should be a no-go.
4. Construction companies
Construction fared poorly in both the Great Recession, with the collapse of the housing market, and during the early months of the COVID-19 pandemic. It's also seeing a higher layoff and discharge rate at the moment than most other industries.
5. Home services
One of the first ways consumers reduce spending during an economic downturn is by cutting out nonessential services around the house, such as lawn care and house cleaning. “Though it isn't a big-ticket item for the homeowner, [picking up dog waste] also isn't that big of a job," Stacey Marmolejo, the founder of Franchise Prep Academy, says. She says that while “it's unlikely consumers will cut this out of their budget in the initial wave, if they are personally affected by the recession, it's an easy budget cut."
One thing is for sure: Recessions are hard to predict, and consumer reactions to them even more so.
For these reasons, businesses that provide must-haves, like affordable food, transportation, and communication services, are a much better bet than products and services that cater to a small portion of the market, such as high-end goods and services.
