Making the most of the downturn

The U.S. economy—and perhaps the global economy—is slowing. Every month it seems more likely that a recession is inevitable. Whether or not the emerging downturn will meet all the criteria to be declared a recession, we do know that a downturn is underway. And we also know that in every downturn, some companies come out on top. By preparing in advance and taking action early, these companies not only preserve profits, but also grow revenue, profit, and shareholder value.

What will companies do this time to make the most of the downturn? That depends a lot on what kind of downturn companies prepare for. Will it be a quick V-shape dip and recovery, as in 2020? Or will it be a prolonged, U-shape recession, as in 2008-09?

This downturn is unfolding in ways we haven’t seen before. Inflation is raging and consumer confidence has hit an all-time low, but job growth remains strong, and the U.S. has the lowest unemployment rate in decades. Overall, consumption remains healthy. Demand for air travel—usually one of the first industries to suffer in a slump—is more than airlines can satisfy. Household balance sheets are robust. Supply constraints—both labor and material—remain bigger factors than weak demand. This is unlike 2008, 2001, 1992, 1980, or 1973.

Whatever shape the downturn takes, we know that some companies will make the most of the situation. In our analysis of the “Great Recession” of 2008-09, we learned that the best performing companies in terms of improving revenue and EBITDA margin reaped rewards. Companies in the lowest quartile posted 8.7 percent declines in revenue versus 36.5 percent growth for the top quartile. This led to a 5 percentage-point decline in gross profit margin, and EBIT margin declines of 3.8 percentage points for the poorest performers. The top quartile delivered 1.1 percentage points growth in gross profits, and 0.9 percentage points growth in EBIT margin, on average.

How did the winners win? They not only took the cost actions to preserve margins when sales slowed, but also used the downturn to plot future growth strategies—investing in technology, snapping up new assets and shedding businesses that no longer had sufficient growth potential.

In this paper, we examine what companies should prepare for this time, based on the patterns of previous downturns, the insights of KPMG economists, and our survey of more than 400 top business leaders in July. We look at how companies have outperformed during past recessions and look at how those lessons can be applied now. Finally, we share the insights of KPMG advisors across functions and industries about what to do now.