The holiday season is rapidly approaching and retailers are receiving mixed signals about the economy. It’s no secret that consumer spending has kept the U.S. economy strong over the past decade; however, there are signs the good times could be coming to an end. Philip Georgiadis (@Philgeorgiadis) writes, “Investors are increasingly fearful of a global recession, according to a survey of many of the world’s biggest asset managers. The likelihood of a downturn in the next year — driven by concerns over geopolitical uncertainty and trade tensions — stands at 52 per cent, according to the findings from Absolute Strategy Research. This is the first time since the survey began in 2014 that investors have seen a greater than 50 per cent chance of a recession.”[1] Jack Kelly (@compliancex), CEO and Founder of WeCruitr, adds, “If you’ve watched any cable news lately, read a newspaper or have logged into Twitter, you must have seen dozens of headlines screaming that America is heading into a recession. The hyperbolic reports predict doom, gloom, massive unemployment and a stock market meltdown.”[2] On the other hand, Deloitte is predicting brisk holiday sales.

Holiday sales could be good

Daphne Howland (@daphnehowland) reports, “Global consulting firm AlixPartners expects November through January retail sales to rise 4.4% to 5.3% year over year. But researchers warned of ‘unprecedented uncertainty’ caused by recession fears, the incoming U.S. election, unrest abroad and ‘on-again, off-again tariffs’.”[3] Unprecedented uncertainty is not what retailers need heading into the holiday shopping season. Jeff Berman writes, “With all the uncertainty caused by the ongoing impact of the United-States ‘trade war,’ it stands to reason that there has been somewhat of a trickle-down effect on consumer spending. And it is for good reason, too, considering that many of these tariffs, especially of late, have a direct consumer impact, which is, of course, a cornerstone of economic growth, with consumer spending directly impacting roughly 70% of U.S. GDP.”[4]

On the bright side, consumer spending has held fairly steady during the past couple of turbulent years. Howland reports Deloitte analysts predict consumer spending will remain strong during this holiday season. According to a report she received from Deloitte, “Holiday sales are poised to rise 4.5% to 5%, exceeding $1.1 trillion from November to January, with holiday e-commerce growth of 14% to 18%, reaching between $144 billion and $149 billion.” Berman adds, “The bottom line for the 2019 holiday sales forecast is that even despite the growing concerns about the economy (which are with merit, to be sure), Deloitte is bullish about this year’s prospects.” According to Berman, “Deloitte U.S. Economic Forecaster Daniel Bachman partially attributed the expected growth in the 2019 holiday season to a strong labor market.” Bachman told him, “Near record-low unemployment rates, coupled with continued monthly job creation, may encourage people to spend more during the holiday season. The economy is still growing, albeit at a slower rate. Additionally, we continue to see consumer confidence elevated, which also helps boost holiday spending. The Deloitte executive also pointed out that this year’s holiday sales estimate shows what he called expectations for consistent growth over the course of the holiday season, adding that 2018 holiday season retail sales did not meet expectations. As for why that was the case, he cited the federal government shutdown, an increase in consumer spending, and a decline in the stock market as potential factors.”

Retailing in a recession

Chances are the U.S. won’t head into a recession before the holiday shopping season. Nevertheless, Kelly notes, “For those who skipped Economics 101, a recession is loosely defined as a period of time in which the gross domestic product growth rate — the amount of stuff we produce and sell — is negative for two or more consecutive quarters. During recessionary times, there is an accompanying decline in personal income and corporate profits, unemployment increases and production, manufacturing and retail sales fall.” Even if we aren’t headed into a recession, we may experience an economic slowdown. Should a downturn occur, what should retailers do? Writing during the heart of the so-called Great Recession, Ken Favaro, Tim Romberger, and David Meer wrote, “Hard times — even a deep recession — can be an opportunity to win the loyalty of more customers, increase productivity, and strengthen market position.”[5] They suggested five rules retailers could follow to remain relevant during a recession and emerge from it even stronger than before. Those rules are:

Rule 1: Go Where the Headroom Is. “We define ‘headroom’ as market share you don’t have minus market share you won’t get. Customers who are loyal to your competitors represent market share you don’t have and will likely not get. Customers who are loyal to you represent market share you already have. Protecting your most loyal customers is an obvious priority in a downturn. … Your headroom, therefore, lies with customers who are loyal neither to you nor to your competitors — we call them ‘switchers’.” Another oft-used retail term is “churn.” Cognitive technologies can help retailers better understand churn.

Rule 2: Close the Needs-Offer Gap. “To fill the gap between what [consumers are] looking for and what you’re offering, you must forsake the incremental ‘last year, plus-or-minus’ optimization approach that may have served you well in headier times. Such ‘needs-offer gaps’ can take any number of different forms. They can reside not only in the makeup of your product mix but also in your service levels, in-store environments, or the brand positioning itself. … To survive a downturn, retailers must constantly work to identify and close their needs-offer gaps to win as much of their headroom as they can.” Again, a cognitive computing platform can help retailers with things like product mix, product placement, and targeted advertising.

Rule 3: Go After Bad Costs. “When sales stall, retailers confront a stark choice: Cut costs or face declining margins. Most choose to take out costs to preserve as much of their margins as they can. And who can blame them? But all too often they take out the good with the bad. If you think about it, it’s obvious what the good costs are — they’re the ones essential to producing what your customers value and are willing to pay for. Perhaps these are costs associated with providing convenience, a particular shopping experience, a distinctive service, or a better range of goods than competitors offer. Taking out good costs might improve margins initially, but sooner or later revenue will begin to suffer and margins will come under further pressure, thus defeating the very purpose of taking out the costs in the first place. Conversely, bad costs are those that add nothing to what customers are ultimately willing to pay for.”

Rule 4: Cluster Stores. “Merchants have been tailoring stores to local markets for years by adjusting assortment, layout, and overall shopping experience to reflect local peculiarities. … A ‘cluster’ is a group of stores representing a set of communities that are very similar to one another in terms of their competitive situations and their customers’ needs and behavior but very different from the communities (and stores) found in other clusters. … There is no best way for all retailers to cluster stores because the factors that explain differences in customer behavior are different for each company.” Cognitive technologies applying advanced analytics can help retailers understand the many variables that go into locating a store so the benefits of clustering can be achieved.

Rule 5: Retool Core Processes. “When sales slow and margins erode, retailers’ decisions tend to become more inward looking. The customer research process must help to prevent this from happening. Traditionally, such research asks, Who is shopping at our stores? What do they buy from us? How satisfied are they with us? and Who are our most profitable customers? These are fine questions, but it would be much better to ask, Why are customers shopping our stores? What do they buy from other retailers? What are their needs relative to what we offer? and Who are the most profitable customers that we don’t have but could get? Answering these kinds of questions is what will give retailers the information they require to find and exploit their headroom and determine which costs they can cut to protect margins without undermining sales.” Advanced analytics are obviously at play here.

The point Favaro, Romberger, and Meer are trying to drive home is this: “Strategic decisions still need to be made regarding space allocation, chain investment, store format, cost structure, and staffing. When facing a downturn, the imperative in every one of these areas must be to go where the headroom is, close the needs-offer gaps, go after bad costs, and exploit the differences among store clusters.” Fortunately, cognitive computing platforms help business leaders make all these strategic decisions.

Concluding thoughts

Most analysts believe we can avoid a recession and they don’t see an economic slowdown significantly affecting this holiday shopping season. Economic downturns, however, are inevitable. By leveraging cognitive computing capabilities, retailers can excel in good times and weather bad times in the best possible position.

Footnotes
[1] Philip Georgiadis, “Global recession fears grow among asset managers,” Financial Times, 23 September 2019.
[2] Jack Kelly, “Recession Fears Dominate: Here’s The Reality Of What May Happen And What You Should Do Now,” Forbes, 27 August 2019.
[3] Daphne Howland, “Holiday sales growth could top 5%,” Retail Dive, 17 September 2019.
[4] Jeff Berman, “Deloitte is bullish about 2019 holiday retail sales,” Logistics Management, 23 September 2019.
[5] Ken Favaro, Tim Romberger, and David Meer, “Five Rules for Retailing in a Recession,” Harvard Business Review, April 2009.