Top 11 Start-up Industries
By IBISWorld Industry Analyst Brian Bueno
As seen in the ABA Journal
The US unemployment rate remains stubbornly high at 8.5%, and policymakers have sought to expand access to capital in efforts to encourage business investment and job creation. In September 2010, the Obama administration passed the Small Business Jobs Act, which aims to provide lending support and other resources to entrepreneurs and small business owners to drive economic recovery and create jobs. As a result, an increasing share of Americans has started their own businesses over recent years. According to the Kauffman Foundation, a leading source of new-business creation trends in the United States, 0.34% of American adults created a business per month in 2010, representing the highest level of entrepreneurship over the past 15 years. Although more than half of small businesses fail within their first five years, according to the US Small Business Administration, successful new businesses have the potential to grow into multi-million dollar international firms or create new industries altogether.
IBISWorld forecasts the number of US businesses with one or more employees to increase at an average annual rate of 1.6% over the five years to 2016, to total 8.21 million. While the US manufacturing sector is projected to shrink, robust demand in the business service and technology sectors is anticipated to spur business creation. Startups have seen incredible growth over recent years, and the trend is expected to continue over the next five years. Based on contribution to the US economy, barriers to entry, technology change, average firm size and projected business growth, IBISWorld has identified 11 industries in three sectors that are hot for startups.
Consumer goods and services
Despite high unemployment and relatively low consumer sentiment, consumer spending has been one of the bright spots of the US economy following the recession. Consumer spending grew 2.0% in 2010 and an estimated 2.3% in 2011, regaining the ground it lost in 2008 and 2009. Although this growth is below the long-term average, it represents an improvement over recent declines and a far cry from the impending double-dip proclaimed by pundits. With job growth expected to incur steadily over the five years to 2016, coupled with normalizing credit conditions, consumer spending is projected to grow at a stronger average yearly rate of 2.6%. More specifically, the creation of additional jobs will translate into a greater number of dollars in consumer wallets, enabling them to ramp up purchases.
Street Vendors and Ethnic Supermarkets
Consumer demand is expected to create various opportunities for new businesses. The potential for new and successful startups is particularly high in two food service and retail industries identified by IBISWorld – Street Vendors and Ethnic Supermarkets. These industries experienced tremendous growth over recent years and will continue to expand with changing consumer tastes and demographic trends.
The Ethnic Supermarkets industry is comprised of retailers that sell culturally diverse foods for consumption at home. Demand for the industry's products is driven by the growing Hispanic and Asian populations in the United States; together these markets represent 98.3% of industry sales. According to data from the US Census, each population has grown more than 40.0% over the past 10 years. This growth has created an environment in which ethnocentric food retailers have thrived. As the Asian and Hispanic populations continue to grow domestically, demand for cultural foods will increase further over the five years to 2016. This trend will push the number of industry firms up at an average rate of 3.0% to total 17,247 in 2016. In 2012 alone, an estimated 365 new ethnic supermarkets will sprout across the United States. Although most of these are expected to develop in the West and Southwest regions, opportunities and pent up demand remain in other US regions that have rapidly growing ethnic populations.
Another success story for small businesses is the Street Vendors industry, which is projected to achieve average annual revenue growth of 3.7% over the five years to 2016, to total $1.7 billion. During the past few years, the industry surged ahead because of new consumer demand for unique and gourmet food trucks. This trend occurred as the fast food and food service industries experienced a major slowdown due to changing consumer tastes and a struggling economy. With an average of 4 employees per establishment and moderate capital intensity, the food truck industry is ripe for startup activity. In 2012, the number of food trucks businesses is projected to jump by 192, or 5.8%, to total 3,525. There are substantial opportunities for sustained growth in major metropolitan areas that can support the surge in interest the industry has experienced during the last few years.
Wineries and Craft Beer
Beverage industries, new and old, have also been growing rapidly over recent years, and IBISWorld expects substantial startups in the sector over the five-year outlook period. Old industries include the Wineries and Craft Beer Production industries, while new industries have sprung up for what some have dubbed “new age beverages,” such as energy and relaxation drinks.
The overall US Wineries industry is growing as a share of the US economy as more Americans, particularly in the millennial generation, are venturing into wine consumption. Additionally, existing drinkers are developing a stronger preference for wines, reflected in rising per capita consumption, which passed 2.54 gallons per year in 2010 (latest data available). Adding to this trend of growth has been the growing acceptance of American wines in international markets. Prior to the 1970s, experts frowned upon American wines, but these wines are earning increasing acceptance and improved reputation, which is boosting winery development.
Over the next five years, the number of wineries in the United States is forecast to increase at an average annual rate of 2.3% to 9,097. In 2012 alone, more than 280 wineries are expected to open in the United States. Despite substantial startup costs and moderate capital intensity, growing demand, medium barriers to entry and moderate concentration among the large wine companies creates opportunities for new entrants, especially in the inexpensive side of the wine market where it is easier to compete.
Entirely new beverage industries have developed over recent years that display substantial potential for startups. For example, the Relaxation Drink Production industry came about to fulfill the opposite demand trend from energy drinks, producing beverages marketed for their relaxation or sleep-promoting properties. The industry developed as recently as 2005 and many of the major brands were developed in the late 2000s, achieving outstanding growth since. IBISWorld estimates industry revenue grew at an average annual rate of 68.7% over the five years to 2011, totaling $73.7 million. Rapid industry growth-to-date indicates that the market is not yet saturated. Company growth is forecast to average 10.2% annually for the next five years to settle around 117 enterprises in 2016. However, startup companies will need to attract the attention of potential buyers and win national contracts in order to monetize their success and compete against established brands, such as Dream Water.
Business support and consulting
Startup activity will continue to be prevalent in the business support and consulting sector as US firms seek productivity improvements and search for cost reductions. However, every business support service has its specific demand driver. For instance, the Human Resources and Benefits Administration industry is set for rapid annual enterprise growth of 4.1% on average over the next five years as companies seek out new hires, along with an improving economic picture and the trend of outsourced human resources duties continues. More businesses are outsourcing administrative tasks in order to focus on their core competencies and potentially achieve cost savings. The industry has low barriers to entry, with many firms being non-employing operations and the average firm comprised of 3 persons. Therefore, it is ideal for startups; in 2012 alone, an estimated 8,877 new firms will enter the industry.
The Corporate Wellness Services industry has experienced strong growth over recent years and is expected to be a hotbed of startup activity in years to come. Corporate wellness services provide workplace programs to help corporations improve the health of their employees. As healthcare costs rose and discounts were implemented for employees participating in wellness programs, more corporations demanded services from corporate wellness providers. Demand is projected to grow because firms will also want to increase their employees' productivity. For example, research shows that obese workers tend to be less productive and miss more days of work on average. So in order to improve the overall health of employees, more firms will hire industry services. From 2011 to 2016, the number of industry firms is expected to increase at an average annual rate of 8.7% to 10,406 companies. Most companies have one to two employees, and with very low concentration among the industry’s top firms, entrance for those with expertise and certification will be especially attractive. In 2012 alone, more than 560 firms are expected to enter the industry.
Consulting is a growing sector of the US economy, and consulting firms are increasingly specializing in niche skill sets in response to rapid technological developments. Strong demand for a broad range of economic consulting services is projected over the long term due to the growing complexity of the global economy, market competition and increased reliance on quantitative methods for analyzing and forecasting business, sales and other economic trends. In November 2011, National Public Radio (NPR) featured a story highlighting strong and growing demand for analysts to make sense of “big data” – the troves of data companies keep about things like consumers and financial transactions. Analysts, in turn, will continue to create their own enterprises to help companies make sense of information and tell them how to improve their businesses. Furthermore, according to the Bureau of Labor Statistics, consulting industries are projected to have one of the highest employment growths over the ten years to 2016. The Scientific and Economic Consulting industry, with an average of two employees per establishment, is expected to record annualized revenue growth of 3.8% over the five years to 2016 to total $28.6 billion.
Technology and software
Social Network Game Development
The technology sector has been the source of some of the most successful startup companies over the past two decades and one of the greatest contributors to new businesses worldwide. As technologies continue to evolve, new opportunities will arise, spurring innovation, new business and entirely new industries. For instance, the birth and growth of social network websites spawned the Social Network Game Development industry in 2007, which has experienced tremendous growth since. The industry created (or was created by) companies like Zynga, which went from a $700,000 business to a public company achieving revenue of more than $1.3 billion in four short years. This same industry continues to foster opportunities for growth, particularly as games continue to shift to smartphone applications. Over the five years to 2011, industry revenue is projected to grow an average of 24.4% annually, and new firms with new ideas capable of capturing audiences may run into the same fortune as major company Zynga. More than 250 social network game development companies are expected to enter the industry in 2012.
The Online Survey Software industry is also relatively new and offers well-run firms that generate high profit with little labor and capital input. Online market research and surveys are much less expensive than their traditional counterparts, which has benefited the industry. Many companies have reduced their use of marketing, market research and advertising firms. Instead, these firms have utilized the services of online survey software companies as a low-cost way to engage their existing and potential customers at a fraction of the cost. Thus, demand is growing and low barriers to entry and minimal skill requirements allow firms to actively enter the industry. In the five years to 2016, more changes in media consumption habits will occur, with operators shifting toward customizing surveys for social and mobile media. These factors will provide a platform for industry growth and entry.
Others
Other industries, such as the Internet Publishing and Broadcasting industry and the E-Commerce and Online Auctions industry, have established themselves well in the US economy since the dot-com boom, although opportunities for entry and financial success remain abundant. This is particularly true as adoption of smartphone technologies and applications continues to expand. The success of music-publishing firms, such as Spotify, highlights the potential for new businesses in the tech sector. Little labor input, low barriers to entry and limitless options for website or application development make the sector ideal for startups. However, niche segments that combine social media with content appear to show the most promise, similar to the rapid expansion in social network game development. In addition, e-commerce remains in a growing life cycle stage for the foreseeable future. Social commerce, in particular, is a growing trend within the industry. Social commerce combines the elements of social media and e-commerce, allowing shoppers to interact while searching for products online. In 2012, nearly 2,000 US-based e-commerce firms are expected to enter the industry.
To download full research reports for the industries discussed in this article, click on the report title below.
Street Vendors, Ethnic Supermarkets, Wineries, Craft Beer Production, Relaxation Drink Production, Corporate Wellness Services, Scientific & Economic Consulting, Social Network Game Development, Online Survey Software, Internet Publishing & Broadcasting, E-Commerce & Online Auctions
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