Many retailers are feeling overwhelmed by the uncertainty surrounding today’s economy. Although the National Retail Federation expects US retail to grow in 2022, consumers are starting to tighten their wallets.
“It’s an interesting time,” says Bob Hoyler, Senior Consultant at Euromonitor International. “High inflation is driving up costs, reducing margins, and discouraging consumers from splashing on highly discretionary items.”
At the same time, shoppers are returning to work and social engagements. “There is also a mental shift going back to the end of 2021,” he says. ‟Consumers want to put [the pandemic] in the rear view mirror. Apparel is seeing a lift, since those with discretionary funds are going out more.”
For retailers, recessions are challenging to navigate. Rising inflation and the lingering effects of the pandemic have retailers across categories pondering how to prepare for the future.
Note: This guide is provided for informational purposes only and is not intended to substitute for obtaining financial or legal advice from a licensed professional.
What is a recession?
According to the National Bureau of Economic Research, a recession is a “significant decline in economic activity spread across the economy, lasting more than a few months.” Signs of a recession include a flattening yield curve, tightening monetary policy, low unemployment, and rising asset prices.
During a recession, consumers often continue to spend on food, health, personal care, and essential clothing. Most affected are luxury goods, accessories, furniture, home products, electronics, and sporting goods.
Spending habits, however, vary by income level. Hoyler is seeing this pattern accelerate due to the pandemic. “One of the most important trends is an increasing bifurcation of the consumer market in the US,ˮ he says. “We’re seeing an increased focus on the ‘haves’ and ‘have nots’.”
Remote workers may have more discretionary funds, due to rising wages and lower transportation costs. For others, the impact of inflation on basic needs like groceries and gasoline is taking a toll.
What does a recession mean for retailers?
Recessions often create structural changes by accelerating emerging trends, introducing new business models, and exposing existing weaknesses.
“Recessions are hard on retailers,” says Dan McCormick, Chief of Staff at Not Boring. “Discretionary spend goes down. Retailers miss forecasts [and] inventory piles up.”
Lessons from the past
During the Great Recession, the retail industry saw the rapid growth of ecommerce. Direct-to-consumer brands like Warby Parker, Bonobos, and Everlane were born online and mission-driven. These companies offered a new approach to traditional categories, often at a reduced cost.
Since the end of the Great Recession, online sales have doubled. Ecommerce now accounts for more than 20% of total retail sales.
The Great Recession also saw the expansion of new competitors in the United States. From 2008–2011, European brands such as Zara and H&M saw store growth rates of 10%–13%. The US also saw the growth of discount retailers like TJ Maxx and Ross.
Overall, the financial crisis exposed the existing weakness of legacy retailers. Retailers who had seen success in the 1990s and early 2000s had been slow to move online. By 2008, they were grappling with large store portfolios. For many companies, aging storefronts and the reliance on physical retail made it impossible to keep up with consumer trends.
How can retailers stay competitive in a recession?
With preparation and flexibility, a recession can be an opportunity to increase customer loyalty, boost productivity, and strengthen market position. Here are 8 ways retailers can stay competitive.
Embrace your "why"
Retailers must define their value proposition. “The main thing you can do is figure out what sets you apart from your competition,” says Euromonitor International’s Bob Hoyler. “What attracts customers to your stores? Find those positive attributes and emphasize them. Embrace your core message.”
After learning that socks were one of the most requested items at homeless shelters, Randy Goldberg and David Heath founded Bombas in 2013. The brand donated one pair of socks for every item purchased. While Bombas has since expanded into new categories, its mission to “offer new, clean clothes to everyone who needs them” remains.
For Hoyler, communicating your “why” is critical for long-term success. “It’s going to be a challenging environment,” he says. “But embracing your core message is what keeps consumers coming back in the long run.”
During a recession, understanding consumer preferences is critical. Often retailers will put in place new initiatives to capture customer loyalty. While loyalty programs and promotions can be valuable tools, they can be costly if they don’t meet customers’ needs.
Customer research is vital. Retailers should focus on why consumers are shopping and how brands can best fit their needs.
Brands will also need to be more creative about collecting customer feedback. New consumer privacy laws are making it difficult for brands to gather customer information online.
Sustainable fashion brand Aday reaches out to every customer after they make a purchase. The brand uses feedback collected to inform strategy and refine recommendations.
True Fit, a digital fitting room tool, helps shoppers find their correct size while shopping online. This data can also provide critical insights to retailers about who is shopping and their preferences.
Create an experience
Finding ways to engage with the customers is more important than ever. Customers expect personalized service. Fifty-eight percent of consumers won’t buy from a brand that doesn’t provide a valuable customer experience.
“People often forget that the customer is human,” says Taylor Offer, founder of Feat Clothing. “They think of retail as just a store and optimize it to selling products. Make it a human experience. Elicit an emotion from the customer.”
In Feat’s new Santa Monica store, the brand has a coffee bar where consumers can work. The store also has an event space where they plan to host yoga classes. But for Offer, creating an experience doesn’t have to be a costly event or tool. “Do small things. If it’s a hot summer day, offer people a cold glass of water. Offer someone a coffee. Those are the intangible things that actually matter,” he says.
Retailers are often quick to cut their marketing budgets during a recession. But for Not Boring’s Dan McCormick, recessions can be an opportunity to build brand recognition.
“While general conversion rates may go down, many advertisers are pulling back [on] spend,” he says. “This presents an opportunity to buy cheaper impressions and build awareness. Look for marketing arbitrages as marketers pullback spend.”
During the Great Recession, TJ Maxx increased its spending by 15% to target customers outside its core market. The following year, the company reported that 75% of shoppers had been first-time customers.
For Ashley Cummings, a freelance writer and marketing consultant, companies need to adjust their marketing strategies to meet consumer habits in 2022. “Customers aren’t shopping linearly, nor are they shopping across singular channels,” she says. “If you want to reach your customers, you [must] strategically meet them with targeted messages where they are. That’s everywhere (on and offline).”
Moving into a recession doesn't mean you should panic and cut your marketing budget.— Ashley R. Cummings (@ashleyrcummings) June 16, 2022
Do the opposite and invest more heavily. Here's why:
Adjusting your message to meet consumers during a recession is also vital. “Retailers should consider repositioning their thematic value proposition from ‘why the customer wants my product’ to why the customer needs my product,” says McCormick.
“Consider a retailer of travel goods,” he says. “During boom times, they might position their suitcase to encourage the consumer to book that extra trip to the islands. During a recession, the [message] may be less aspirational. The customer may need the suitcase for that one trip back home to see their family during the holidays.”
During a recession, the right marketing strategy will communicate and strengthen a brand’s value proposition.
A recession is an opportunity to identify and reduce bad costs. “Are your unit economics upside down? Did you overhire? Does a contract need to be renegotiated? Take this opportunity to get your financials in order,” says McCormick.
The next 18 months are going to be tricky for DTCs. There is (likely) a recession coming and consumer behaviors will change.— Dan McCormick (@damccormick13) June 8, 2022
But it also presents an opportunity for patient & opportunistic operators.
Be conservative now & aggressive when the market drops: 🧵
During the Great Recession, McKinsey found that successful retailers reduced selling, general, and administrative costs from 13% to 11% of sales. For “non-resilient” retailers, that number rose to 15% of sales.
Hoyler argues that this is more important than ever. “Good and bad costs have changed a lot over the last two years,” he says. “Retailers might be able to cut costs that were necessary in the past. Due to improvements in ecommerce or inventory, they’re not as necessary to running the operation as they used to be”
However, Hoyler recommends being strategic about what you cut. “Avoid cutting costs that are important to providing a positive customer service,” he says. “We see this happen quite a bit. Retailers cut back on staff and it’s a much more negative shopping experience.”
Using savings to reinvest
By cutting expenses, retailers can better weather reduced profits and use savings to reinvest in their business. “Recessions are a time to focus on efficiency rather than making large investments in innovation & growth,” says McCormick.
While studying the impact of the previous two recessions on retail, Deloitte found that companies who reinvested savings during the recession showed a higher growth rate during the recovery period.
Brands should look for investment opportunities that embrace automation and improve customer service. How can you free up staff to focus on high-value tasks?
Look for opportunities to expand market share
Recessions can also be an opportunity for retailers to capitalize on growth opportunities.
New formats and markets
Recessions can be an ideal time to expand into new formats and markets. Retailers can often lock into lower rents and better lease terms.
In early 2020, the outlook for Petco seemed grim. According to Moody’s, the specialty pet retailer was at high risk of defaulting on its debt. When store traffic halted due to the pandemic, the industry had little faith in its survival.
Yet two years later, Petco is a health and wellness destination for pet owners. The retailer is outperforming the online pet food market and reported a profit of $159.8 million last year.
For Petco, new store formats have been critical for success. Earlier this year, the retailers opened shop-in-shops with Lowe’s to better meet customers.
They also acquired Thrive Pet Healthcare as a push to include vet clinics inside stores. Petco reports that stores with veterinarian clinics inside see comparable-store sales improve by 200 to 300 basis points.
On June 17, 2022, the retailer opened its first Neighborhood Farm and Pet Supply store in Floresville, Texas. The stores will provide services focused on rural communities, including food and supplies for farm animals.
Subscription models can be an opportunity to capture additional market share and drive brand loyalty. It can also make it easier to forecast revenue and offer more security.
- Petco recently introduced Vital Care, a paid annual membership program. Vital Care members can access unlimited veterinarian visits and savings on grooming and nutrition. With its subscription, Petco can drive repeat customer visits and brand loyalty.
- Lululemon recently debuted a paid membership program. For $39 per month, members receive access to Mirror, the brand’s at-home fitness platform. The membership also includes special events, savings, and early access to product releases.
Meaningful partnerships can build brand awareness and unlock new value for consumers at a reduced cost.
- T-Mobile recently partnered with BankMobile to offer customers no-fee and mobile-first checking accounts
- In March, sneaker brand Supreme partnered with Nike to produce three new SKUs from its popular SB Dunk High sneakers
- Last month, Parade and Essie debuted a self-care package that includes limited-edition underwear and nail polish
During a recession, retailers must keep up with changing consumer habits. “The one big mistake retailers make is that they don’t change course,” says McCormick. “Forecasts remain bullish, common-sense promotion periods are avoided, and large teams are kept on to chase non-core initiatives. The market changed, [and] so should your strategy.”
McCormick recommends continually monitoring key metrics. “For online retailers, the feedback loop is almost instantaneous,” he says. “For retailers with longer feedback loops, [like] those that primarily sell wholesale, consider adding more frequent touch-bases with your partners.”
Offer urges brands to stay close to the consumer regardless of title. “For me as the founder, it’s picking up the phone and calling customers. It’s talking to the people in my store.”
Retailing in a recession
While recessions can be difficult to navigate, they can also be an opportunity for retailers to examine their business and optimize their operations for the future.
To be successful during a recession, retailers must look for opportunities to reinforce and expand their value proposition.