Some similarities between the “Great Recession” of 2008 and the expected economic downturn following the COVID-19 pandemic are the effect on small businesses and the feeling of uncertainty. Some key differences between the two events are that the post-COVID-19 downturn is happening in a more polarized world, is happening due to totally external factors and is happening in the opposite manner to the 2008 crisis. Two companies that successfully navigated the Great Recession are Starbucks and Netflix.
Similarities and Differences Between COVID-19 and Great Recession
Small Businesses Being the Worst Affected
- Small businesses were severely impacted during the Great Recession, showing disproportionately higher job losses. The SBA found that small businesses in the US posted 62% of job losses, despite only accounting for 45% of total employment.
- Early data from the COVID-19 fallout is pointing to a similar trend, which is why Congress rushed to pass small business aid in its first COVID-19 relief package.
- Younger, smaller businesses were the most vulnerable in 2008, and experts predict this will be similar during COVID-19, logically starting with the service industry.
- A prevailing theme of both the Great Recession and COVID-19 was/is the feeling of uncertainty.
- For 2008, that sentiment came from the “hidden” subprime risks that came from apparently secure and sound assets. This lead to the risk being non-quantifiable and difficult to measure, leaving people confused and unsure how to mitigate it.
- With COVID-19, the uncertainty comes from not only not knowing just how deep of an impact the virus will have but of any endpoint. The IMF’s index of global uncertainty from pandemics pegs COVID-19 as the highest levels ever since it started measuring in 1996. SARS ranked around 50 points in 2002-03, whereas COVID-19 has topped 150.
More Polarized World
- Dealing with the COVID-19 fallout is predicted to be more difficult than the Great Recession, as the economy is starting from a less strong position. Global debt is far higher, $184 trillion, and this is before any country stimulus packages are accounted for.
- Additionally, countries around the world are more polarized than they were in 2008 with additional pressures like climate change.
- Furthermore, COVID-19 has affected trade far differently than the Great Recession. It has closed borders and reduced trade at a time when it is needed to stimulate the economy.
- The Great Recession spawned several political shifts to populist leaders, and giving the global environment, COVID-19 could have an even deeper political fallout.
Caused by External Factors
- The 2008 financial crisis was caused by internal factors and flaws in the system. This is fundamentally different from COVID-19, which is a completely external factor.
- Therefore, experts predict it could be shorter and shallower than the Great Recession, as once the external factor is removed, it should be followed by a period of strong growth.
- However, this also means the downturn can be managed differently, with potentially more control over the process and outcome. If it is managed properly, there is a better chance of coming out of it faster and with less damage.
- Arguably, the effects of COVID-19 have happened in an inverse fashion to events from 2008.
- During then, the shocks came from inside US financial system, which then had an effect on production and general economic activity. Therefore, it could be described as a shift of the demand curve first, which then affected the supply curve.
- The effects from COVID-19 first affected supply and production, resulting in a leftwards shift of the supply curve initially, with the predicted result of a demand-side shock to follow.
Case Studies of Successful Navigation Through Great Recession
- Starbucks was not immune to the 2008 financial crisis, as the global coffee company closed 600 under-performing stores in 2008 and a further 300 in 2009.
- Luckily, the company was under the helm of a new CEO, Howard Schultz, who pushed innovative ideas to steer the company through the recession. For example, he initiated a technology-driven strategy which encouraged internal innovation.
- They took the concept of idea-sharing even further and launched “My Starbucks Idea”, which invited members of the public to offer their opinions on everything from store layout, music, products and CSR.
- This initiative helped build a loyal fan base of customers, which helped it whether the economic downturn.
- By 2011, the company had successfully navigated the recession, posting $10 billion in revenue and employing over 150,000. The company’s market cap grew to around $83 billion by the time Schulz left in 2017, up from less than $10 billion when he took over in 2008.
- Netflix took advantage of an industry that was already at death’s door (video rental stores) and managed to thrive.
- As customers looked for ways to save money, Netflix launched its video streaming segment and saw 3 million new subscribers in 2009. Analysts have also found that while consumers do look to cut back on subscriptions and expenses during recessions, the entertainment industry generally fairs well. During the Great Depression, for example, the movie industry remained healthy.
- Netflix’s price point kept any barriers to new subscribers quite low. Its streaming service cost less than the price of purchasing one DVD or renting two, therefore keeping the perceived value for money extremely high.
- For a while, the function went alongside their disc-delivery service, but by later 2009, the company was looking into stopping this to increase profit margins further.
- As consumers looked to cut back on their expenses, Netflix was well-poised to capture this segment by offering instant streaming video.
- Additionally, it formed strategic partnerships during this time, such as partnering with Microsoft for platform delivery over Xbox systems. These initiatives not only opened up the customer base, but also helped keep margins healthy.