27 Oct 3 Critical Reasons Why Retailers Must Invest During Recessions
3 Critical Reasons Why Retailers Must Invest During Recessions
Some may say when waters are rough it’s best to drop anchor and hold fast until winds die down – however long that takes. This is also a strategy some retailers use when they stop investing in their businesses in a recession.
But what if the best strategy is really about understanding the direction of the wind and setting the sails to take a different course that keeps retailers advancing to their desired destination?
In challenging economic times, retailers who cut back on investing in the business for fear of going bust could end up doing themselves a disservice both during the recession and afterward.
We see this with the iconic Starbucks. During the financial downturn (2007-2009) Starbucks decided to close some 600 stores and cut back new-shop openings after the company suffered a first-ever year-over-year drop in same-store traffic and sales.
The result: Its share price collapsed by almost 60% from the fall of 2007 to the summer of 2008, and it continued to slide as the economy worsened in the autumn.
Conversely, retailers who continue to strategically invest in their business can experience high ROI. In this way, they not only survive the downturn but position themselves to thrive during the subsequent upturn.
Let’s look at some other unwanted consequences of being too frugal with the budget.
Why tightening the belt too much can be a disaster
It makes sense for companies to watch spending when they anticipate reduced profits and increased operating costs due to inflation, but underspending also creates problems.
Some of those issues include impacting long-term performance, losing reputation, and missing out on once-in-a-lifetime opportunities.
Jeopardizing long-term performance
A lack of investment can stagnate business. This can be evident in two particular areas, product assortment and R&D.
If retailers cut back on products that customers actually want, thinking they can persuade them to buy existing inventory that isn’t in demand with flashy mark-downs, it might only work in the short term.
Initially, customers may find the sales appealing but will soon get frustrated when they can’t get what they really want. Eventually, they’ll spend their dollars with the competitor that provides the products they’re seeking.
Even holding back investing in areas that seem dispensable during a recession (like R&D) can put retailers years behind their competition in the long run.
A Harvard Business Review study of 4700 companies found that progressive companies that deployed a combination of offensive moves (investments in multiple areas, including both marketing and R&D) and defensive moves (specifically focused on operational efficiency), enjoyed a 37% chance of becoming industry leaders following the recession.
In simple terms, cutting too deep left retailers hollow and unable to compete after the downturn ended.
Loss of reputation
Failing to invest strategically in profitable outcomes can hurt not just your bottom line, but also your reputation – which is much harder to recover from.
Investing in the business (in areas like inventory and marketing) during a downturn signals to both customers and investors that they can rely on you to satisfy consumer demand and achieve long-term organic growth.
During the Great Recession (2007-2009), retailer TJ Maxx increased its spending by 15% to target customers outside its core market. The following year, the company reported that 75% of shoppers were first-time customers. They were one of the best-performing retail organizations during the Great Recession.
The flip side of that is also true. Cutting investments in inventory, customer experience, and customer acquisition too deeply may signal that your business is losing ground and getting ready to pack up.
Missing out on good deals
What retailers don’t spend now, they may end up spending with interest tomorrow.
In a downturn, virtually all industries become more desperate for business. This translates to vendors, suppliers, and logistics providers offering more favorable terms and prices to maintain their revenues in a time of volatility.
If retailers fail to invest in assets (e.g. real estate) or technology (e.g. analytics) they need for long-term growth, they’ll miss out on recession “deals.” Unfortunately, when the economy recovers and demand returns, prices may be significantly higher.
Finding these “opportunity buys” while protecting cash flow is a tightrope act. But doing this well is the difference between barely holding on and thriving in a recession.
Why smart investments are critical to thriving in a recession
Targeted, smart investments in a downturn are good because they have historically correlated with above-average performance during and after a recession.
This means playing offense not just defense. Investing, not just cutting.
In fact, a Harvard study shows that companies that employ the right combination of defensive and offensive moves have the highest probability — 37% — of emerging as leaders.
Before making any moves though, taking advantage of a downturn starts with a realistic assessment of a retailer’s strengths and weaknesses in its finances; possibly using a framework similar to the one below.
When strategic investing is done right, retailers can gain a technological edge on their competition, protect their revenue and profits, and even grow while everyone else is shrinking
1. Gaining a competitive edge through technology
During the Covid-19 downturn retailers turned to technology to reimagine their operations.
Leading retailers like Macy’s and The Home Depot invested in technology to optimize inventory placement, meeting customer demand wherever and however, they shopped. They adopted:
- Buy online, pickup in-store (BOPIS)
- Buy online, ship-to-store (BOSS)
- Buy online pickup at curbside (BOPAC)
- Vendor direct sales from its website to expand its merchandise assortment
This shows that when retailers use technology to adapt to evolving customer preferences, they stay relevant and profitable.
Another potential technology that can help retailers thrive in the coming years is AI. At a recent TEC Town Hall event, LinkedIn co-founder Reid Hoffman advised leaders to keep AI on their radar… “You are sacrificing the future if you opt out of AI completely,” Hoffman said.
And this is true of every past recession and downturn – not just the recent pandemic. Retailers that doubled down on technological advantage during tough times are the retailers that reaped the biggest rewards on the upside. Just look at Amazon.
2. Fortifying revenues and profits
As with most things in life, when all is well we sit back and enjoy, resting on our laurels.
The same is true in retailing. When the economy is strong and customers are spending freely, retailers may not be so critical of parts of the business that are not doing well.
However, when lean times are pressing, strengthening what is weak is a must. That means identifying areas of weakness in retailing and fortifying them before, during, and after a recession.
One area that is always challenging – in good or bad times – is demand forecasting. Forecasting future sales demand informs almost all of the decisions a retailer makes throughout the product journey.
Getting this right is even more important in a recession because demand changes quickly. With an accurate demand forecast retailers can maximize profit by
- Ordering the most in-demand assortment mix.
- Not wasting valuable budget being overstocked
- Not losing critical revenue opportunities by being out-of-stock
- Better allocating inventory across all sales channels.
Yes, exposing weaknesses in the business can be scary, but it’s also an opportunity to find and implement solutions that will carry retailers through lean times.
3. Expanding market share
When retailers make smart investments during financial downturns they put themselves in a position to expand their market share (and even open new markets, in some cases).
Take something as simple as inventory.
Apprehensive, risk-averse retailers may decrease their order quantities across-the-board in anticipation of falling demand. But even in the worst of downturns, demand does not fall evenly across every category and every product.
That means that indiscriminate cutting will cause some in-demand items to be out-of-stock, leading to lost sales, and worse, lost customers. Retailers that can anticipate how demand will shift (through the use of AI-based forecasting, for example) can make investments into the right inventory – picking up new customers from out-of-stock competitors.
Expanding your market can also be taken literally.
In 2008, Lego, on the brink of bankruptcy, became a massive growth brand by simply expanding geographically (while everyone else was too busy cutting costs).
Examples of successful retail investments during a recession
Just prior to the 2007-2009 recession, in 2006, Jeff Bezos, founder of Amazon, invested in technology by taking the private cloud infrastructure Amazon was using for its data-based business and turning it into Amazon’s own product. He launched Amazon Web Services (AWS) and used it to increase Amazon’s profitability by sorting through one billion GB of customer data and generating 10-30 percent of revenue through predictive analytics.
This investment set Amazon up for success, got them through the recession, and kept them growing substantially into the 2010s and beyond.
During the Great Recession of 2008 to 2009, Samsung reorganized its business, cut back on the range of products they sold, and instead invested in becoming a global leader in a limited number of high-quality products.
They successfully anticipated that consumers would shift to higher-quality products out of fear that companies with low-quality products wouldn’t last as long in a recession and be left with obsolete products.
In 2022, a year of economic uncertainty, menswear brand Psycho Bunny expanded into the Canadian market with four new brick-and-mortar stores. In addition to its booming brick-and-mortar business, Psycho Bunny’s e-commerce more than doubled in 2021 compared to 2020.
Given the new Canadian market and new customer base, Psycho Bunny invested not only in prime store locations but also in AI-driven analytic solutions to keep their momentum going.
How top retailers invest with confidence
In a downturn, retailers, and many other industries don’t have all the answers. They may try one or any combination of strategies to achieve desired results and stay profitable such as:
Sometimes a new pair of expert eyes are needed. When companies are stressed or in panic mode it helps to welcome ideas from experts outside the company. They’ll take emotion out of decision-making and see more clearly.
An experienced consulting firm can help inform retailers about any number of topics that could help the business—marketing, sales, technology, and compliance issues, for example.
Many times consultants are brought in to make a business lean, nimble, and sensitive to market shifts resulting in money and time saved.
Even in a recession, economies in different parts of the world may be performing better than others. It could prove lucrative to shift sales to different regions, even other countries, where sales would do better.
For example, during the recession in 2009, Lego saw profit growth of more than 63 percent, reaching an all-time high of profitability. Why? There are a few reasons, but the most important was expansion into the global market. While Americans were facing the worst of the recession, Lego expanded into Asia and made concentrated efforts to build sales in Europe.
Analytics and AI
Retailers use new tech tools to build their retail armory; then use them to show with great clarity where they should invest dollars to make their retail business better.
Tools like AI-driven data analytic platforms deliver valuable and detailed insights about their customers’ behavior and products’ performance.
Smart retailers use this information to drive their investment decisions.
“Analytics is always interesting in times of crisis because all of a sudden people become very data-hungry,” said Glen Rabie, CEO of Melbourne, Australia-based Yellowfin BI. “Now that all of a sudden the brakes are on, all of a sudden every CEO and every board on the planet I guarantee you is looking at their data line by line to see where their risks are and where they can save money. That’s risk management.”
Many retailers still use a patchwork of disconnected applications that don’t communicate. This leaves them blind to critical problem areas of the business as well as precious opportunities.
Conversely, those who invest in AI analytics solutions, built specifically for them, benefit from unified commerce that creates a single source of truth and delivers tangible gains.
With AI-based analytics solutions retailers benefit from:
- Visibility across their business as a whole
- Real-time, accurate information
- More reliable figures
- Ability to create “what-if” scenarios
- Insight into the performance of products and promotions right down to the SKU level
Risk-averse retailers armed with this depth of insight and informed by their own data and AI-driven analytics can make high-stake financial decisions with more accuracy, faster, and with confidence.
Mergers and Acquisitions
Some may consider it a pretty bold move in a recession to invest millions to merge with and/or acquire (M&A) another business and its brands. But retailers who do invest in this way see the opportunities clearly.
The acquiring retailer gains:
- New market share instantly
- New product offerings
- Existing expertise of the acquired business
They get all of the above without building a new company from scratch which takes time to scale, research, and additional finances; yet can leverage all of the acquired assets to their benefit.
Taking advantage of investing during a recession
Resilient retailers invest during an economic downturn because they understand that this can be one of their strongest strategies for success.
While it’s reasonable to think that holding back on spending is a lifeline to safety, the consequences of being too thrifty in a recession have costly and long-lasting effects.
On the other hand, investing valuable dollars strategically can propel savvy retailers towards increased growth and profits despite a recession when they invest in the right people, techniques, and technology to reach their highest ROI.
So, when the economy bounces back, as it always does, they’ll be in the best position possible.
If you’re interested in investing in success for your business and want to learn more about AI-driven analytics as a tool for increased ROI; contact Retalon Team.