Business Management
5 min read

How to launch a hospitality business in an economic downturn

EHL Insights
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8 tips on how to successfully start a hospitality business during an economic downturn, taking inspiration from past success stories and original thinking.

Financial turmoil: A perfect opportunity for start-ups

If you’ve been toying with the idea of starting a hospitality business, but have been put off by the economic downturn as a result of the ongoing COVID-19 pandemic, fret not. There’s hope. In fact, despite the global uncertainty and the unstable financial and political climate, now might actually be one of the best times to launch your business.

 

Here’s why:

  1. Volatile markets create chaos and give rise to new problems. This means consumers are looking for new and innovative solutions, which presents the ideal opportunity for start-ups aiming to make a name for themselves.
  2. Consumers and businesses are looking to save money. Most start-ups are nimble, eager and able to undercut their competitors, allowing them to win over new customers without too much effort.
  3. Startups are more resilient. In times of financial uncertainty, both giant corporations and small businesses suffer the consequences, and need to scale back or shut down to recuperate their losses. Start-ups, however, are much more resilient to financial instability as they have minimal overheads and aren’t expecting to make significant profits in the short term in either case.
  4. The job-seekers' market is booming. Layoffs are an undeniable consequence of financial turmoil, leaving a lot of highly qualified people unemployed and looking for work. These individuals are willing to take a risk and accept flexible arrangements which will make it easier to find talented people to join your crew.
  5. Interest rates are lower and supplies are cheaper. From overhead costs like office space, supplies and salaries to interest rates, a lot of products and services are cheaper during a financial crisis – allowing you to save on your costs and maximize your investment.
  6. Investors are looking for new opportunities. When the economy is on the brink of collapse, many investors are looking to move their money out of the futile stock market and fund tangible businesses. If you can present a solid business case, chances are you’ll have no trouble finding new investors.

 

Businesses born in a time of recession

While it may seem surprising, some of today’s most innovative and most successful companies were born in times of recession. If history has taught us anything, it’s that innovation, creativity and success flourish in times of chaos:

  • Airbnb was created when the world was in the middle of the 2007/08 financial crash. Struggling to pay their rent, two Californian friends – Brian Chesky and Joe Gebbia – had the simple idea of renting out an air mattress in their San Francisco living room. When the recession hit, they saw an opportunity to expand their business idea. Airbnb quickly took over the short-term living market and is now valued at £25 billion.
  • Groupon was created by young Chicago-based entrepreneur Andrew Mason during the 2007-08 financial crisis. His idea of offering users discounts on local businesses and scholarships not only helped companies promote their services, but also helped retailers cope with the significant hit to the industry. It quickly became a new form of online retail and the company is now valued at £2.5 billion.
  • Microsoft was founded during the mid-1970 oil crisis by two college drop-outs, Bill Gates and Paul Allen. Their simple idea of developing a user-friendly operating software for home and office computing revolutionized the world. Microsoft beat the odds in a bad economy and rose to become one of the world’s most valuable companies, with an estimated net worth of £100 billion.

More examples of recession start-up success stories.

 

8 Tips for starting your hospitality business with limited capital

So you’re convinced that now’s a good time to get your business of the ground, but you’re not quite sure how to get started. Here are a few things to keep in mind:

1. Find a fresh and innovative concept 

Offer your customers something that they currently can’t find on the marketplace. Do your research and find the gap in what your competitors are offering. If the idea already exists, give it a fresh twist. Position your hospitality concept as something new and original that will offer your customers a unique experience unlike anything they’ve seen before.

 

2. Offer competitive pricing

While undercutting your competitors isn’t a solid long-term strategy, you’ll want to make sure your pricing is competitive. Most startups benefit from low overhead costs and extra flexibility, so take advantage of this by sharing your cost savings with your customers. As the economy recovers (along with buyers’ spending power), you can always increase your prices and offer new value-added services that your (now loyal) clientele would happily pay for.

 

3. Don’t stress about the competition

If there was ever a perfect time to enter a competitive marketplace, now would be it. Both large and small hospitality businesses are struggling to survive, which levels the playing field for everyone. Do your research and try to understand where your competitors have gone wrong, and what improvements you could incorporate into your business model. By learning from their mistakes, you can better position your offering and cater to your target market’s unmet needs.

 

4. Take advantage of vendor, supplier and venue discounts

In an unstable economic climate, a lot of vendors, partners and suppliers are looking to sell off their products and services at a much lower cost. This makes for the perfect opportunity to shop for your business and save on your equipment and supplies. The same goes for your venue. Whether you’re planning on buying or leasing your premises, make sure to negotiate a fair price and try to lock down a long-term contract at a competitive rate.

 

5. Shop around for the lowest interest rates

In times of financial uncertainty, most banks and credit card companies will drop their interest rates to help encourage spending. For start-ups, that means loans are easier to come by and credit cards may come with higher limits. That said, in order to get approved for a loan, banks will want to see a solid business plan, with sales forecasts ranging from 3 to 5 years. Make sure your proposal is thorough and shows that you’re thinking about the long-term.

 

6. Choose your location wisely

They often say that location is one of the most critical factors to success, so choose your location wisely. While cost, accessibility to potential customers, restrictive ordinances and proximity to other businesses all play a role – you’ll also want to consider the short and long-term outlook for your neighborhood. Evaluate how the current climate has impacted local businesses and what the neighborhood might look like in 6 months, as well as in 2, 5 and 10 years’ time.

 

7. Build an excellent team

As we all know, finding and retaining good employees is one of the biggest challenges hospitality businesses face. But given the industry’s booming unemployment rate, now is a great time to find talent. Make sure that your new hires are a good fit for your business and that they share your vision for the future. Look for candidates with sufficient experience and a successful track-record, and make sure to run a background check. Once you’ve built your team, make sure to invest in training and retention programs to avoid losing time and money with high turnover rates.

 

8. Plan big, start small

In order to mitigate your risk, start out small and add to your business as you go along. Make a clear plan of how much investment you need for your one-time start-up costs (licenses, permits, equipment, property leases, legal fees, insurance, branding, inventory, etc.), as well as what you’ll need to keep your business running for at least 12 months (rent, utilities, supplies, salaries, etc.). Then, test and launch your idea on a small scale; adapt and add to it as your business grows. But always keep your end goal in sight, so that you know what you’re working towards as you go along.

 

Conclusion

While there are many benefits to starting a business during a financial slowdown, it won’t necessarily be an easy task. But with careful planning, determination and smart, strategic decision-making, there’s no reason why your vision can’t succeed. Out of every crisis comes opportunity.

Want more? Read Dr. Carlos Martin-Rios' article on Service Innovation in times of economic downturn.

Want to have a deeper understanding of the hospitality industry? Look at EHL's Hotel Management Online Courses. Discover

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