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Surviving an Economic Downturn in the Retail Sector

April 13, 2023


Although the economy has proved remarkably resilient, there are so many unknowns at play that no one can predict what future economic conditions might be. Having said that, few if any economists are predicting a bright, short-term future. Nobel laureate Paul Krugman reports that, when high inflation raised its ugly head, two camps of thinking arose — stagflationists and soft landers. He explains, “One side — call it Team Stagflation — argued that it would take years of pain and high unemployment to restore price stability, which is what happened after the high inflation of the 1970s. The other side, call it Team Soft Landing, argued that the situation was very different this time.”[1] He asks, “So where does that leave us?” Although he admits he was initially wrong about how hard inflation would hit, he is cautiously optimistic about the future. He writes, “The inflation surge may not be completely behind us, but there’s good reason to believe that we can restore price stability without huge economic pain. … No doubt this debate will continue, as economic debates tend to. But I think we’re approaching the point at which Team Stagflation will have to … admit that they got it wrong, and try to figure out why.”


Consumers React to Inflationary Pressures


Even if we accept that a soft economic landing is possible, consumers are feeling the economic pinch and tightening their belts. Correspondent Melissa Repko reports that it might take some time for retailers to figure out how consumers are going to behave over the coming months. She explains, “There are signs that shoppers may be running out of gas. Credit card balances have ticked up. Personal saving rates have fallen. And sales of big-ticket items like jewelry and electronics have weakened. Plus, Americans’ spending spree during the earlier years of the pandemic, fueled by stimulus money, boredom and socked-away savings, have made for tough comparisons.”[2] Nevertheless, she observes, “Retailers are more on edge.”


As consumers continue to tighten their belts, journalist Ray Schultz asserts they don’t mind being called cheap. He explains, “A survey by bargain retailer Ollie’s found that 54% of consumers feel it’s a compliment when someone calls them cheap. What’s more, 39% say getting a good deal is as pleasing as eating their favorite food, and 37% believe it’s as good as going on vacation. What do they consider a good deal? Specifically, 25% consider 50% off a good offer. But 76% will accept a bargain below that amount. In addition, 70% believe they can find a deal on virtually any item. And 67% say getting a good deal makes them feel better about spending money. Perhaps surprisingly, 74% place more value on finding deals on low-ticket items than high-ticket ones (69%).”[3]


The problem for retailers is that steep discounts cut deeply into profits — which makes price optimization and trade promotion strategies critical.


How Retailers Can Bolster Their Resilience


Journalist Lisa Lacy reports that many retailers have reacted to changing consumer behavior by reducing their workforce. She reports, “Retailers like Best Buy, Party City, Walmart and Wayfair announced layoffs in 2022. And a recent survey from job site ResumeBuilder found 61% of companies expect more staff cuts in 2023. But for anyone harking back to the last major recession in 2008, the stakes are far different this time around for consumers and retailers.”[4] On a more positive note, Lacy points out that retailers are better equipped to deal with a downturn than they were in  2008. The reason, she explains, is digital technology. She writes, “Retailers will have to make some adjustments as they contend with the biggest recession of the digital era. The good news, however, is they have plenty of options in their product assortments, store footprints, customer behavior and even virtual worlds as they face these economic headwinds, using tools including basket analysis, which shows what customers are buying, and assortment planning, which helps retailers decide what to sell.”


The Enterra Revenue Growth Intelligence System™ (ERGIS™) was developed to help the consumer packaged goods (CPG) sector make better choices about pricing, trade promotions, and other activities affecting revenue growth. Digital technologies, like ERGIS, depend heavily on data collection and analysis. Fortunately, data is generally available. Analysts from the ToolsGroup note that reliance on data-driven decision-making has ushered in “a remarkable shift in the world of retail from a product-centric to customer-centric model.”[5] They add, “Whereas retailers once purchased merchandise largely based on the gut instinct of trend-savvy buyers and the push of whatever manufacturers tried to sell them, nowadays, they need to take a much more customer-focused and data-centered approach. Customers are in control, and retailers who fail to accurately predict demand are doomed to fail.”


In addition to leveraging advanced digital technologies, both ToolsGroup and McKinsey & Company analysts insist that retailers must improve their supply chain performance to survive. ToolsGroup analysts suggest retailers adopt lean retail principles, which affect all aspects of the supply chain. Those principles include:


• Using sophisticated forecasting and replenishment algorithms. Those algorithms allow retailers “to buy and allocate just the right quantity of merchandise, and avoid keeping extra stock on the shelves. Intelligent demand management software is the key technology enabler of lean retail merchandise management.”


• Finding ways to limit the handling of merchandise. ToolsGroup analysts suggest activities like “cross-dock techniques in warehouses and ‘door-to-floor’ methods in stores, where the merchandise gets where it is needed without ever sitting in storage.”


• Optimizing customer order fulfillment. In an omnichannel environment, “keeping costs low while still meeting customer expectations for speed and quality of service [is essential]. This may include in-store or curbside pickup of online orders (also called click-and-collect, or BOPIS) or shipping from stores.”


McKinsey & Company analysts suggest ten step retailers can take in order to shock-proof their supply chains.[6] Those steps include: 1) Reducing risk through strategic supplier fragmentation; 2) Creating long-term supplier partnerships; 3) Doubling down on efficiency; 4) Investing in automation and analytics; 5) Investing in private fleet capacity; 6) Prioritizing purchase-order flows by mode; 7) Allocating inventory strategically in the near-term; 8) Standing up a digital control tower; 9) Organizing cross-functional operations in a way that best optimizes them; and, 10) Reshaping the end-to-end network to match today’s global business landscape.


Concluding Thoughts


Ananth Chakravarthy, a Regional Vice President of Sales at Denodo India, insists, “Data is an indispensable part of the modern retail age. As the industry has evolved to accept this realization, it must also learn to properly utilize data.”[7] In the Digital Age, the proper use of data is even more important during troubled economic times. ToolsGroup analysts conclude, “It’s true that the business of retail is part art and part science, but beware of leaning too heavily on gut instinct when making decisions that can have such a significant impact on the financial health and performance of the company. Turn to the data, and obsessively study the behavior of your customers to make the right decisions about what products to stock, where, when, and at what price.”


[1] Paul Krugman, “Stagflation or Soft Landing? It Depends Who You Ask.” The New York Times, 31 January 2023.
[2] Melissa Repko, “Retailers brace for tougher times and more frugal customers in 2023,” CNBC, 2 January 2023.
[3] Ray Schultz, “U.S. Shoppers Say: We Like Being Called Cheap,” Marketing Daily, 13 June 2022.
[4] Lisa Lacy, “Retailers’ Secret Weapons to Survive a Potential 2023 Recession? Digital Tools and Data,” Adweek, 10 January 2023.
[5] Staff, “What is Lean Retail (+ Why Retailers Must Embrace It),” ToolsGroup Blog, 16 December 2021.
[6] Helen Sydney Adams, “Top 10 moves for retailers to future-proof the supply chain,” Supply Chain Digital, 18 February 2022.
[7] Ananth Chakravarthy, “The pivotal role of data in the modern retail landscape,” Economic Times CIO, 29 November 2022.

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