Some retailers may think they have very little control in a recession, that they are left to be tossed about like a ship on the waves of inflation, reduced consumer spending, and excess inventory–but what if this wasn’t true?
What if retailers who have a plan and take strategic actions are able to gain more control and thrive during downturns?
Let’s see how one wise old man in the fable below sees an opportunity to make a plan, take action and use a recession to get the results he wants:
A man, when he retired, purchased a house near a high school. He spent the first few weeks of his retirement in peace, then the new school year began.
One afternoon early into the first semester, three young boys came down the street, merrily beating on every bin they passed.
They did this for a week straight until the man decided it was time to take some action.
He walked out to meet the boys as they banged their way down the street.
Stopping them, he said, “You kids are a lot of fun. In fact, I used to do the same thing when I was your age. Would you do me a favour? I will give you each a dollar if you promise to come around and do your thing.”
The boys were more than happy to accept this and continued to bang the bins.
After a few days, the man came out to meet them with a sad smile, and said, “This recession really is putting a dent in my income. From now on, I will pay you each 50 cents to continue.”
The boys were unimpressed by this but continued to do the same afternoon activities.
A few days later, the man approached them again and said, “Look, the recession has again reduced my income, so from now on, I am afraid I can only pay you 25 cents each.”
The leader exclaimed angrily, “That’s it! If you really think we are going to waste our time banging the bins for 25 cents each, you must be a fool. No way that’s going to happen. We quit.”
So the man enjoyed peace and serenity for the rest of his days. (Author Unknown)
This little story set in the backdrop of a recession is humorous, but what can retailers take away from it?
The learning is that even in situations that are out of a retailer’s control–like a recession– if they take meaningful action, they can get desired results.
Resilient retailers are always looking for opportunities that are hidden in challenges. So, what is some helpful actions retailers can take that will lead to opportunities?
Let’s consider the actions that all retailers can benefit from.
1. Get clear on what a recession means for retailers in 2023
As the saying goes, there is more than one way to skin a cat. Apparently, there is also more than one way to define the recession.
There are two main definitions for a recession: the traditional definition, and a newly developed definition by the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee.
Traditional definition: Two consecutive quarters of decline in a country’s Gross Domestic Product (total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period) constitute a recession.
NBER definition: A recession is a significant decline in economic activity that is spread across the economy and that lasts more than a few months as measured by output, consumer demand, industrial production, retail sales, and employment.
The US has adopted NBER’s definition.
Ultimately depending on which definition retailers subscribe to, some countries will either be on the brink of a recession or have fully entered one.
Regardless of which definition retailers subscribe to, retailers can expect:
- Reduced aggregate demand
Economies run on people, firms, and governments requiring and buying things. In a recession when the total demand from buyers is reduced, supplies may initially be in excess.
Excess supply won’t last though. When manufacturers don’t get the orders they usually get, they have to cut back too, and the result is a drop in supply..
- Reduced discretionary spending
Rising prices make shoppers choosey, budget-minded, and less loyal to their favorite brands. They actively look for savings and wait for markdowns.
In fact, researchers at rewards marketing platform Blackhawk Network found that 46% of consumers they surveyed are buying more things on sale, and 22% say they’re buying less from their favorite brands.
Retailers need to find the most appealing prices to entice customers to buy.
- Reduced retail sales
As noted above, typically retail sales generally decrease as people have less money to spend.
Goldman Sachs maintains that retail sales in the U.S. have risen about 10% in the last year, but most of that reflects the high price of gasoline and other goods sold at this year’s inflated prices.
- Reduced production
The cost of inflation impacts everything in a recession, including the cost of raw materials. Therefore manufacturers reduce production. This decline reduces exports and slows economic activity overall.
For example, manufacturing activity in the U.S. fell sharply during the Great Recession (2007-2009), as businesses reduced production and laid off workers. During this particular recession, employment in manufacturing declined by 10% and the manufacturing sector only began to recover in 2010, after the recession had officially ended.
- Reduced employment and income
As the economy shrinks companies may invoke hiring freezes, put a hold on pay increases and even let their staff go to cut costs. This creates less job security felt among the masses.
When the labour force suspects their income is not guaranteed they will automatically save more and spend less.
It is a vicious cycle, reduced incomes lead to reduced demand, which leads to reduced production, and so on.
2. Learn from past recessions
While recessions may vary in duration and causes, they are not a new phenomenon.
Taking a look back we see that:
The U.S. has experienced 34 recessions since 1857 according to the NBER, varying in length from two months (February to April 2020) to more than five years (October 1873 to March 1879). The average recession has lasted 17 months, while the six recessions since 1980 have lasted less than 10 months on average.
History clearly shows us that retailing survived these many recessions.
Past recessions also show that retailers in different verticals are affected to different degrees. And there are some verticals that seem to do well no matter the economic environment.
The reason why some of these verticals do well may surprise you!
Recession-proof verticals
- Consumer staples
While there are certain purchases consumers are willing to forgo in order to tighten their wallets, products needed for cleanliness are on the must-have list. Items like toothpaste, soap, shampoo, laundry detergent, dish soap, toilet paper, and paper towels are always in demand.
- Grocery stores and Discount Retailers
The logic is clear here that grocery stores continue to do well as food items are a necessity, and they also offer a variety of consumer staples under the same roof. This provides them with a continued, and predictable consumer base.
As for discount retailers, this summer’s Washington Post reported that despite the benchmark S&P 500 Index falling into a broad bear market by tumbling 20.2% […] Dollar General Corp. rose 4.58%, Dollar Tree Inc. surged 18.1% and Ollie’s Bargain Outlet Holdings Inc. soared to 33.2%.
This stunning level of outperformance reflects the theory that as inflation accelerates,
consumers will choose to trade down for cheaper and lower-quality goods sold by
discount retailers.
- Alcohol
The alcohol industry is generally considered recession-proof, it doesn’t necessarily spike with higher sales, but it doesn’t dip too low either.
A consumer behaviour change that does occur, however, is that during economic weakness, consumers tend to drink at home where it is cheaper versus at a bar or a restaurant and trade down to more affordable products.
- Cosmetics
As households cut back on spending during a recession, cutting budgets completely on frivolous items is common. But what exactly is considered frivolous?
Apparently, cosmetics, and specifically lipstick, are still in big demand.
The concept is that in times of a recession and other economic stresses, people will indulge in discretionary purchases that provide an emotional uplift without breaking the budget. Lipstick and other beauty products fit the bill.
This is otherwise known as the Lipstick Effect, a theory first put forward by economics
and sociology Professor Juliet Schor in her 1998 book The Overspent American.
While all verticals have to contend with recessions, certain ones tend to show more resistance and continue to perform well.
We looked at verticals, what about iconic companies that emerged and did well in the midst of recessions?
These companies were innovative in their thinking and took risks that offer today’s leading retailers great examples of what is possible.
Lessons of the past from top companies
Inventor Thomas A. Edison once said, “Most people miss opportunity because it is dressed in overalls and looks like work.” That is to say, opportunities may not be obvious and require real effort.
The following companies demonstrate how they created opportunities for themselves in the marketplace during some of the worst economic downturns.
Here are some lessons today’s retailers can take away:
Microsoft
In the early 1970s, the U.S. entered a 16-month recession when the GDP took its worst hit in nearly two decades. It was during these difficult times (1975) that college drop-outs Bill Gates and Paul Allen developed the concept of easy-to-use computing for homes and offices. This would eliminate some of the highest boundaries for businesses to leverage technology and pave a new path for Microsoft to become one of the most valuable companies in the world.
Lesson: Technology doesn’t stop evolving even in a recession. Investing in technology gives companies an advantage.
Warby Parker:
Warby Parker was founded in the middle of the Great Recession (2007-2009). The founders highlighted an enormous pain point in the market–it was nearly impossible to purchase an affordable pair of fashionable glasses online. They capitalized on the opportunity of their customers’ tightened purse strings and went on to grow Warby Parker into not only a thriving business but also a direct-to-consumer retail and e-commerce leader.
Lesson: Become the answer to your customers’ existing and new pain points. Those pain points still exist and need a solution even in a recession.
Trader Joe’s
Another business born during the Recession of 1958, Trader Joe’s got its start under the name Pronto Markets in Southern California. After founder Joe Coulombe returned to the U.S. from a vacation in the Caribbean, he sensed an opportunity to provide unique international food offerings in his stores to consumers that were becoming increasingly global. The concept stuck, and Coulombe grew his business rapidly until he sold it to German billionaire Theo Albrecht in 1979.
Lesson: Customers will continue to purchase what is unique and appealing to them, despite a recession.
Gucci
Recessions don’t affect everybody equally. As early as 2011, luxury retailers were some of the first to bounce back in the U.S., with brands like Gucci boasting a 23 percent increase in sales while more modest retailers were in desperate need of customers.
Lesson: Luxury brands can fare better than more common ones during a downturn because of their exposure to high-income consumers.
These companies carved a space for themselves during those trying times. Today, retailers face both similar and very different influencing factors though; so, examining some of the most critical factors for retailers in 2023 is a good idea.
3. Analyze the factors impacting retailers today
Factors retailers are dealing with in the current recession environment are apparent in 2023. Giving them serious consideration when creating an action plan is beneficial.
Some of the most pressing factors in retailing currently are:
Retailers ordered too much inventory
A global pandemic, massive swings in consumer demand, stimulus checks boosting demand, massive port delays, month-long factory lockdowns, worker shortages, and a dozen other variables all led to a massive supply chain crunch in 2020 and 2021. It is no surprise then, that retailers, having lost billions in 2020 due to out-of-stocks, invested heavily into replenishing their inventories. In fact, they may have invested too heavily.
Inventory levels are the highest they’ve ever been. As overstocked retailers attempt to rid their overstock, they put downward pressure on prices for all sorts of discretionary goods (toys, fashion, etc.). This impacts not only the retailers that overstocked – but also the retailers that played it smart. If competitors are consistently selling inventory for 30% lower then other retailers must do the same to remain competitive.
Retail sales are decreasing in real value
While retail revenues have increased quickly over the last year, the reality is that those numbers have not kept up with rising inflation rates.
So, in effect, if adjusted for inflation, retail sales have been dropping for the past 16 months.
If inflation continues retailers will find that, despite record revenues, the cash they have on hand will pay for less operational costs (inventory, equipment, fixtures, logistics, services, leases, etc.) because the cost of those things are increasing faster than their revenues.
Reduced disposable income for consumers
Real disposable income (income that doesn’t go towards paying for necessities) has been steadily decreasing since the middle of 2021. There is less and less money in the economy earmarked for purchasing discretionary goods and services.
As consumer spending shifts and inflation takes its toll, retailers are also adjusting their sales forecasts to reflect the impact.
The chart above shows US retailers cutting their outlooks as consumer spending has shifted.
These are just a few of the factors negatively influencing retailers in this downturn. The good news is that most retailers can leverage something they already have access to that will give them the edge they need–big data.
Let’s see how.
4. Use analytics to find hidden opportunities
It’s easy to put all the attention and energy into factors that are out of a retailer’s control.
However, a retailer’s power lies in what they can control, have immediate access to, and can leverage to their advantage.
For leading retailers, one of their most powerful tools is their own data!
Keep in mind though, while that data can hold the secrets to what a retailer should be selling, details of their client base, promotions that do well, etc.; it still requires advanced analytic technology to reveal the opportunities that lie within.
The overwhelming volume, velocity, and variety of data make it difficult to make sense of it in a meaningful, advantageous way for the retailer.
By implementing a dynamic combination of data and advanced analytics as part of a retailer’s action plan, they can succeed at three pillars of retailing success – increasing revenue, optimizing pricing, and delivering high-quality customer experiences.
Increasing revenue
Advanced analytics ensures retailers can detect early indicators of shifts and trends in their demand. With the ability to spot those changes quickly, retailers can avoid overstocks and understocks in volatile times.
For example, if year-over-year brand-name sweaters are always top sellers, a retailer may not notice until well into the winter/spring season that, due to the recession, they did not sell very well — and that sweatshirts were flying off the shelves instead.
As a result, they were understocked in sweatshirts and lost money. The retailer also had to then drastically reduce the price of the brand-name sweaters in hopes of moving them out–again losing more profits.
However, if the retailer has the right analytics technology to build their demand forecasts their business sees this shift sooner, is prepared to make changes, and makes better decisions to keep their “A” products available and maximize ROI on inventory.
Optimizing pricing
Retailers know that finding the right product price can either make or break their sales.
In a recession when consumers are pinching pennies, it’s especially important to implement price optimization to identify the optimal price point for any given product at any given location and online that will yield the highest profit.
Even a small change in price can have a very powerful impact on whether inventory moves or sits on shelves. According to McKinsey Research:
“Pricing right is the fastest and most effective way for managers to increase profits. Consider the average income statement of an S&P 1500 company: a price rise of 1 percent, if volumes remained stable, would generate an 8 percent increase in operating profits”
In a recession, retailers should recognize that in addition to how correct pricing influences profitability, the right or wrong price point will also affect consumer demand, cannibalization, inventory levels, margins, costs, and even brand image.
Advanced price optimization software can make a world of a difference because it accurately optimizes pricing as the product travels through the entire product life cycle and recommends pricing as it accounts for recession factors of consumer behaviour and inventory levels.
Delivering high-quality customer experiences
Retailers must work even harder to stay close to their existing customer base and reach new potential customers in a recession economy.
Advanced analytics provides retailers with real-time intelligence about customers. Real-time information allows companies to communicate, and make changes and improvements quickly to better serve their customers and encourage purchases.
It’s something leading retailers should strive for because 84% of consumers say being treated like a person, not a number, is very important to winning their business.
It’s a hyper-personalized shopping experience that consumers will continue to expect, especially as they are more thoughtful about which retailers they choose to spend their time and their dollars with.
Take action to get ahead of the recession
The hard truth is economic downturns will come and go. It’s best to be prepared with a plan of action.
- Start with recognizing what a recession looks like in the current economic environment and what the retailing industry can expect.
- Then, learn from past recessions and what successful retailers did to succeed.
- Next, understand how the recession could impact your business specifically by the current influential factors.
- Last but not least, take advantage of all the data your business collects and use it to optimize your revenue, price, and customer experience
If you need help with any of these steps, you can contact our Retalon Team. We’ve helped our clients weather three recessions – without a single one of them closing their doors.
