What to buy in a recession

For most companies, recessions cause a short-term dip in earnings and perhaps even dividends, but recessions are also an opportunity for the strong to take market share from the weak – by John Kingham

 
That’s because recessions cause more damage to weak companies, with many of them failing during the recession or shortly after, at which point their customers switch to a stronger competitor.

Fashion brands and retailers are very economically sensitive, so Next, BHS, Debenhams, Topman and Topshop have all been good examples of this dynamic over the past decade or so.

On the one hand, Next (which is in my personal portfolio and the UK Dividend Stocks Portfolio) is an example of an exceptionally well-run business, combining a robust balance sheet with a long-term outlook focused on adapting to a changing world. This combination of robustness and adaptability has helped Next sail through recent recessions and downturns while successfully transitioning from a leading store-based retailer to a leading online retailer.

On the other hand, BHS, Debenhams, Topman and Topshop all suffered from owners that were interested in extracting as much cash as possible as quickly as possible, and in the process these companies were saddled with huge debts, demotivated staff and outdated infrastructure.

Each of these poorly run businesses has struggled since the 2008-2009 financial crisis and the pandemic finished them off. Their failure benefitted Next, as it was able to hoover up customers who had been let down by these underinvested and unsatisfactory businesses.

A similar story played out in November with the demise of Made.com, a once-leading homewares retailer.

Made.com was valued at £775m in mid-2021, but strategic errors during the pandemic led to its collapse in November. Shortly after Made.com went bust, Next hoovered up the brand for £3.4m and will probably hoover up many of its customers as well.

As one somewhat unsavoury saying puts it: The weak are meat and the strong do eat.
 
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