Opportunities in Big Trends

A lot of entrepreneurs are pondering what the “new normal” will look like when we emerge from the health crisis. They’re wondering where the opportunities may be. Just as important, they should think about the risks ahead.

To gain a clearer picture of where we might be headed, I follow trends like these into the future and imagine how they might intersect:

• Demographic shifts: Baby Boomers are downsizing and no longer saving; 
• Globalization: Open borders and efficiency have meant low prices; 
• Consumer trends: The world’s shifted to e-commerce, leaving our stores empty; and
• Fiscal policy: Three decades of cheap borrowing.

 

These trends have a natural breaking point—but it takes a long time for them to be realized. By definition, trends last a long time. And then, at some point, they break or bend.

 

When you look at these global trends through the lens of a Covid-19 era, what types of shifts might we see happen?

 

Lower consumer confidence

Our economy depends on confidence. If you’re not confident that tomorrow will be better than today, you’re going to act differently. You’re going to forego all kinds of things, and you won’t even feel like you’re sacrificing to do it.

When people go through something this traumatic, they don’t think, “You know, I really need a new iPhone this year.” And yet, our economy depends on 35 million people a year buying an iPhone when they don’t need one. Even if there’s a Covid-19 cure tomorrow, are you going to book that trip to Jamaica or that cruise? Are you even going to want to travel far from home?

These types of events affect people’s psyche and change their consumption patterns for a long time.

 

Supply shock

We’re experiencing the pains of the demand shock now. The supply shock will follow.

The crisis is exposing just how fragile our global supply chain is. It’s a highly efficient system that allows companies to produce goods cheaply. But it’s also extremely complex, which makes it vulnerable to breaking down. You can already see examples of where it’s happening (for example: they’re running out of storage space at ports of entry for container ships), and we’ll see much greater impacts over time.

The supply shock will mean some businesses—like “fulfilled by Amazon” companies—simply don’t make sense to do anymore. It also means smaller companies throughout the chain will confront new challenges.

 

Globalization to localization

Globalization is one of the biggest areas that will see long-term impacts from this crisis. Globalization has been extended as far as it can be—like a rubber band getting stretched—and Covid-19 is a catalyst causing it to snap back. We’ll see a shift to localization.

Businesses will decide it’s not worth the risk to make the same choices they made in the past. They’ll adjust, and consumers will, too.

Companies will do away with complex supply chains that have little redundancy and are susceptible to failure and build ones that are simpler and easier for them to control. They’ll still manufacture in China, but it’ll be simpler, more redundant, and closer within their control.

 

Rising prices?

 

A lot of people don’t understand the role small businesses serve in a market. They are the players that move quickly and solve complexities at the edges of a market. They’re like nimble “fixers” dispersed among giant players like manufacturers and global consumer goods companies. It’s a complicated web that worked pretty well before Covid-19. Now, it no longer works.

 

In the future these problems will be more expensive to fix, as we move to a simpler and more localized system. Things will be less efficient, which will cause prices to go up in many areas.

There are counter-currents to this, too. For example, housing and rental values will go down.

 

Opportunities 

Entrepreneurs will find opportunities among this crisis. The food industry offers an interesting window for how small businesses might approach it.

Food is one of the hardest things to manage in a supply chain because it’s perishable. In talking with a local rancher here in Colorado, I’ve learned that locally grown, organic products like grass-fed beef are much more resilient than what comes out of industrial farming.

Industrial farmers depend on a byproduct of soybean oil to feed their cows—which was fine when the U.S. produced 70% of the world’s soybean oil. As supply chains get disrupted, though, those companies may find it very hard to feed their cattle. Whereas, there’s an ample supply of local grass.

So, strangely enough, the cheapest forms of food may prove to be very expensive in this new supply chain.

I’m interested in this business because I see the opportunity for entrepreneurs to step in and fill a void this crisis will leave. Local producers could pivot to acting more like a service than providing a commodity—provide more food stability for customers. 

Most of the entrepreneurial hustle in this country has always centered on services—and I don’t see that changing. 

 

Effectual reasoning

Entrepreneurs don’t succeed by using a top down approach.  Instead, they work with the limited resources they have and iterate.  Given the significant changes taking place right now, Entrepreneurs will need to employ this skill to figure out how to survive. 

[There’s a great paper called What Makes Entrepreneurs Entrepreneurial where the author goes deep into the key role effectual reasoning plays]

You can see examples of this with distilleries that converted to producing hand sanitizer. That’s effectual reasoning in action: They don't know how it will end up, but this is the thing that they can do now and it will lead to other things.

You can see it with restaurants, which are leaning on relationships they’ve developed with customers to explore where their opportunities are in this new landscape. Companies that never made the effort to collect customer names and emails when times were good regret it now. Those that did are in a better position. Restaurant operators should think beyond supply the commodity of food and explore how they can serve their customers differently. Can they create experiences for people in their homes?

This type of mindset will be required of all entrepreneurs as we emerge out of the immediate health crisis and feel the long-term effects of the economic slowdown.

Nobody should expect things to go completely back to the way they were before.  

Full show notes: https://smith.substack.com/