How will Coronavirus affect the Economy and Local Businesses?
Is this a good time to start a business?
The ongoing pandemic has delivered a huge blow to the global economy. Businesses – large and small – have seen much of their markets wiped out overnight.
Many will not make it out of this crisis. This includes market leaders, long-tailers and everyone in-between.
As tough as this realty is for incumbents, it is a big opportunity for new entrants in any market and in particular on markets that have traditionally been over-saturated and highly competitive.
When a market is highly competitive, that is a sign of a real need that people are willing to pay for to satisfy and it is also a sign that the cost of entry for businesses is relatively low.
These markets are great because the needs are clear and the formulas are well understood. New entrants can just focus on optimization and differentiation rather than market exploration, market fit or size – which constitute the no.1 reason why startups actually fail.
Any other time, the problem with entering these markets is simply market saturation – there is too much competition, which makes it super tough and expensive to enter.
Not now. Here is why:
This is how a typical market looks like: 2-3 market leaders “own” 50%-75% of the market and the remaining market is shared between challengers and niche players. These percentages vary with how fragmented or consolidated the market is. Here is an example of a highly competitive market before Coronavirus:
If you were planning a startup on this market, you would have to either
- Find a new niche and grow it mostly into the territory of others (essentially converting clients from competitors to you) OR;
- Enter an existing niche and challenge the leaders there;
Both of these strategies are hard and their chances of success depend on access to cash to spend.
Let’s work with a simple example. Imagine all the restaurants on a busy street corner in your favorite city. Chances are that before the pandemic there were 2-3 large established restaurants, a bunch of specialty ones across the usual categories (Mexican, Thai, Sushi), a few niche ones (vegan, novelty) and then a log tail of takeaways, greasy spoons, novelty and the usual succession of new places that close after a few weeks. The chart above, basically.
Incumbents are hurting
Now, due to Coronavirus, a lot of the incumbents are hurting. Many of them will not make it out of this crisis. This is just the hard reality.
However, the needs that people have – the problems that these businesses have been successfully addressing – are not going away.
The value that people used to seek from these businesses (and their willingness to pay for that value) remains relevant – people are still seeking value. Put simply: there’s money on the table.
In our simple restaurant example, after the pandemic, chances are that a few of these places will have been forced to shut down. Yet, the total number of people in the area would have stayed the same, along with their aggregate need to socialize and eat/ drink/ party.
Let’s make the very conservative assumption that businesses will take an average hit of 15% and that 15% of the existing businesses will go bust. Here is how the same market will look like after Corona:
The Formula is also changing
But surely, you will say. There are changes happening at the level of these needs – people’s needs are changing so this market may be simply gone. This, actually, is a feature, not a bug. A sign of opportunity, and if you are insurgent startup you better hope the consumer change is fundamental.
Here is why.
If the pie remains the same size just with less businesses to service it, the surviving incumbents will continue to have an advantage over insurgents– they have the infrastructure, the brand and basically they are there and ready to expand. A lot easier for them to extend their reach than for you – an insurgent – to enter and establish fast.
However, these incumbents are geared and optimized for the old business model. If the consumer needs and expectations remain the same, these incumbents have the advantage. However, if the needs and expectations change, they are at a tremendous disadvantage.
First-principles new entrants who enter the market with an offering built for the new realities will have the advantage.
In our little restaurant example, the insurgents could be restaurants that are geared for delivery and that keep their cost base low by having no shop-front – just a kitchen on a back street where the rent is low and a smart digital strategy to make sure they show in searches and in delivery apps (Ghost restaurants).
Or, perhaps, these could be restaurants that cater to an emerging clientele that cares about the environment or the origin of the produce or the governance of this restaurant (Changemakers).
If that happens, and this new business model becomes established, another interesting thing will happen. Even consumers that would normally be satisfied with the old model may shift their behavior and expectations as part of market inertia.
In our example, people who did not care that much about the origin of their food may start caring as this is becoming a sign of social status and the new standard.
Here is how the market might look like if consumer needs and expectations are changing:
So if you are on the fence about starting a business in a market that has been hit hard by Coronavirus, perhaps you should go for it.
This is as good a time to start a first-principle business as we’ll ever get in this generation.