As HighPoint Associates Founder Sumeet Goel called-out in his recent article, Recession-Proofing: Start Now, businesses need to begin preparing for a very likely recession – and stat.
For retailers, the saying “No rest for the weary” may come to mind. That’s because in addition to the general impact COVID-19 has had on the vast majority of businesses, the Retail industry has also had to cope with a compounding of long-standing labor shortages, pivoting to keep up with changing consumer behavior, and confronting massive supply chain disruptions.
Some industries truly benefited from the massive pandemic tailwinds (such as consumer electronics and home hardware), but all too many experienced crippling headwinds (airlines, leisure, and restaurants, to name a few). But it’s not all doom and gloom: The good news for retailers and other businesses that rely on in-person interactions to drive sales, is that most countries have now lifted COVID restrictions, and as a result, consumer behavior is beginning to make its way back to normalcy (or its post-pandemic proximity).
Now retailers are having to readjust once again, this time due to new market conditions, and are doing so amid growing recessionary concerns that are reshaping the retail environment day by day. Remember those retail companies that experienced massive tailwinds? For the past couple of years, they’ve been struggling to keep up with demand. As a result, instead of focusing on stimulating customer demand, their focus was on worrying about their overall supply chain and embracing near-shoring (HPA Senior Advisor Alex Nesbitt wrote a great piece on supply chain resilience). Until very recently, there’s been no need for retailers to launch promotions, invest in marketing, or train staff to upsell or expand on basket sizes.
“Those leading businesses in sectors such as outdoor goods, consumer electronics, or indoor furnishings experienced such unusually high demand that there was no need to be promotional or even advertise. Consumers were flocking to these retailers and the focus was getting access to inventory as demand outstripped supply.” – Phil Arrata
On the flipside, those retail businesses that experienced massive headwinds had to hunker down, cut costs, micromanage cash flow, and dial up online channels to ride the home delivery wave.
“As a CEO, when COVID restrictions came into place, our primary concerns were understanding how to support our staff, shifting the business to eCommerce, and negotiating new terms with business partners. Projects such as benchmarking, tracking NPS, and cost containment became a secondary priority.” -Phil Arrata
So, given the above, and the reality of a new market correction period with a side order of softening economy, what does all of this mean for your retail business? Here are a couple of scenarios to explore.
If your retail business has experienced a windfall over the past two years, now is the time to rewrite your strategy playbook to account for demand regression.
- Invest in smart marketing: Pausing the demand marketing engine made a lot of sense during periods of hyped-up consumerism. However, in the current context of softening demand, the fight for share of wallet will only intensify. This means dialing promotional activity back up while managing margin compression.
- Focus on KPIs: During the height of the pandemic, leaders were focused on ensuring the health and safety of staff and customers. As a result, time and emphasis on scorecards and KPIs declined. It’s now time to dust off those scorecards and benchmark current performance (e.g. close ratios, average basket size, employee productivity) to pre-pandemic levels and the organization’s targets.
- Rethink your selling, general, and administrative expenses (SG&A): With periods of high demand, companies have a tendency to focus less on cost efficiency. It is now time to flex that muscle again and turn over stones to find areas where the company can be more efficient. This may involve changes in policies, processes, or use of technology to improve profitability.
- Get back to the balance sheet: Companies that performed well during the pandemic were in a cash-rich position. With slowing demand, it is now time to scrutinize inventory health and turns, working capital, and payables and receivables. Now is the time to work with the merchant teams and monitor inventory levels and POs, and work with suppliers to seek out improved terms.
“Brands that target consumers who are more impacted by the current levels of inflation may need to be particularly good about sales effectiveness and watch SG&A. On the other hand, companies that cater to higher income consumers may be less effected by inflation, and will be more able to reinvest in marketing to capture share.” -Richard Berger
If your company lost share of wallet over the past two years, restarting your growth engines will require a relentless focus on delivering great customer experiences.
- Turn customers into promoters: As this recent article by HPA Partner Richard Berger, Senior Retail Advisor Phil Arrata, and Senior Project Leader Andy Fennel lays out, physical retail is now the Comeback Kid. That’s because customers are coming out of lockdown, dropping their masks, and looking for exciting, new, real-life experiences. What do you need to do to reengage your customers? Double down on creating compelling in-store experiences. As the saying goes, you only have one opportunity to make a good first impression. Delivering outstanding customer experiences will be critical to having those customers turn into repeat shoppers.
- Rigorously manage inventories: As seen by companies that had a pandemic demand burst, the same will likely happen for a good number of retailers post-pandemic. Be prepared from a supply chain perspective to ensure you have the right inventory mix and levels, and the ability to re-stock.
- Position your organization for sustainable growth: As consumer demand snaps back, it will be hard to assess how long the catch-up spend will last. Ensure that as an organization you are not assuming this is the new normal; rather, it’s a temporary demand swing. It’s also critical to make certain your buying, internal processes, and team structures reflect that reality.
Scenario planning is key.
Regardless of your demand profile, it is clear with inflationary pressure, recessionary talk, and shifts in consumer behavior, the future is murky at best. As a leadership team, this is the time to develop thoughtful demand scenarios and corresponding action plans to prepare your organization for whatever comes next.