Photo: RetailWire
Retailers should be prepping now for economic recovery
The U.S. may or may not experience a recession in the coming year, but in either case retailers should be strategizing and hiring with the era that follows the economic dip in mind, according to Dr. Ira Kalish, chief global economist at Deloitte.
In a session at the 2023 NRF Big Show, Dr. Kalish explored the causes of the current inflation, where things appear to be heading in the U.S. and globally, and what it means for retailers.
“Lately when I’ve met with many of our clients, not just retailers but clients in many other industries, they often ask me how to prepare for the coming downturn,” Dr. Kalish said. “My answer has been, don’t worry too much about the downturn, focus on the recovery. Prepare now for the recovery.”
Dr. Kalish attributed the inflation that the U.S. and the world have been experiencing to multiple factors, beginning with lockdowns starting in March of 2020. During lockdowns, consumers shifted spending from restaurants and other service-oriented transactions to durable goods like appliances, furniture, electronics and exercise equipment. This led to massive stress on the global supply chain, increasing scarcity of goods and causing prices to skyrocket. This element of inflation has been improving month-over-month, with durable goods costs coming down. The war in Ukraine, however, has prevented recovery in some areas, though gas and oil prices have also been coming down recently.
In terms of the current state of the economy, Dr. Kalish said that while 60 percent of people in the U.S. believe that the country is already in a recession, that is not currently the case. For the near future, Deloitte’s position is that there is a one in three chance that the U.S. will experience a recession in 2023, though Dr. Kalish believes the U.S. is more likely to avoid a recession, and if there is one it will be mild.
Dr. Kalish observed that retailers already appear to be taking steps in the direction of preparing for the period after the downturn with their strategies.
“Companies are hoarding labor, they’re continuing to invest in technology; they see what’s coming and I think they’re getting prepared,” said Dr. Kalish.
Discussion Questions
DISCUSSION QUESTIONS: Do you agree with Dr. Kalish’s advice that retailers should prepare for a post-downturn recovery in their hiring, spending and strategizing? If yes, what does doing that look like?
Poll
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Ken Morris
Managing Partner Cambridge Retail Advisors
Peter Charness
Retail Strategy - UST Global
Companies need to be prepared for both downturns and recovery, but it really depends on the individual retail segment. Given the rebound in travel and other experiential purchases, stores that cater to that lifestyle may be better positioned than those focused on home goods. inflation and the lingering effects of the pandemic are still in the air, so it pays to be nimble.
All the research I’ve ever seen says that companies who prep for post-recession times, redoing their marketing research, their advertising and promotions, and maybe refreshing stores, benefit when a recession ends — making back what they spent.
If Dr. Kalish is prescribing investment in technology and focusing on the post-downturn economy, I like those doctor’s orders. In this type of environment I would adhere to Warren Buffet’s approach of doing the opposite of the crowd. When we come out of this speed bump, those retailers who have invested in the recovery will seize the day.
Retailers can take advantage of this time to make their operations more efficient and cost-effective. Automation, RFID, and prescriptive analytics are all technologies that can help streamline operations, reduce costs, and provide a better customer experience. But retailers should also be investing in the development of their employees, creating career paths and providing training opportunities to ensure their employees are well-equipped to handle the challenges of the future. I have no idea what Dr. Kalish meant by companies “hoarding employees.” Not sure where they’re being hoarded, and I hope they’re all okay.
Dr. Kalish is right: Retailers need to invest in the future of retail. Retailers should plan now to align with top trends and allocate resources to areas of growth and efficiency. Big opportunities lie in retail media networks, omnichannel maturity, collaboration and integration, and loyalty.
Retailers certainly need to be thinking of the recovery but with the short term in mind, which is looking more like a recession even if technically not one. Spending on technology at times like this is always a smart move, it gives the retailer the competitive edge as the economy improves and enables them to be more efficient in hard times. Unfortunately, too many retailers are currently keeping their heads down and hoping to survive which is not a great strategy.
Retailers need to become more agile. The only valid prediction out there is that “things will change” and retail will need to get in front of, but also quickly react to, whatever the economy has in store for us. There are some long-term trends that are quite predictable, such as scarcity of labor and long term experience and knowledge retiring and walking out the door. Retailers can plan for these with a high degree of probability.
These general economic predictions such as Dr. Kalish’s trends are unfortunately normally well quantified only after they happen. Retailers also need to look carefully at their own segment to plan for the future. In the depths of COVID-19 for example grocery flew and apparel died. Overall trends, right or wrong, have to be interpreted segment by segment, and retailer by retailer.
Exactly, Peter! “The only valid prediction out there is that ‘things will change.’” Any company that thinks and acts like today is the future will fail.
Retirements of key staff with critical knowledge will only accelerate as the rest of the Boomers depart on schedule, and Gen X heads out as soon as they possibly can. After decades of cutbacks and task-heaping on remaining staff, there may be no one left to conduct training by the time companies start thinking about succession planning. This outweighs temporary inflation or supply chain disruption challenges.
I think it’s always a good time to invest in the company — strategy, hiring, spending oh my! It all sounds good — who is going to say no to that?
The trick will be making sure that you’re focused on the right areas. Upgrading tech, teaching, training and investing in employees are key areas that will help companies be in the right place, no matter what the economic conditions are. Omnichannel development in particular is going to help companies be in the right places at the right time.
We know what’s coming, but can we really predict when it will happen? I’d be careful to time the market. That doesn’t mean you shouldn’t prepare and invest. Just be cautious about trying to time an economic recovery.
A lot of recently published data indicates a softening in spending during December. That has to be telegraphing a softening in spending during the next couple of quarters, regardless of whether or not we call it a recession. So “don’t worry too much about the downturn” is odd advice given the circumstances. Action now is what will position a retailer for their best performance when things bounce back. Did the retailer come out of the holiday season with clean inventories and tightened levels of on-order? If inventories and on-order are not in solid positions today, then the retailer is going to spend the downturn canceling and discounting — still, again.
The evolution of retail is going to proceed at a quickening pace, given all the great conversations coming out of NRF. Decisions and actions today sometimes affect tomorrow and sometimes they affect nine months from tomorrow. Decisions and actions today affect both the downturn and the recovery. They go hand in hand. The dots are always connected — always.
Economic cycles are relevant and important. However they are not the sole determinant of success in retail — that comes from understanding the customer. Focusing on the customer and where they are headed is what matters most. That’s both a short range thing in terms of trading tactics and a longer range thing in terms of business strategy. Paying attention to both is critical.
With a heady economy and progressive sales and profit results, companies tend to make careless operating decisions. We are seeing that in the tech sector. The announced layoffs are not really for cost-cutting but adjustments in what the company truly needs to operate. The best companies use downturns to reevaluate their business. The absolute best companies have been doing that all along. The less-than-best companies grow carelessly and cut carelessly.
Net-net, companies should always be preparing for the future.
Wow, Dr. Kalish has credentials that I don’t have, but so what? He is very wrong.
I’ll skip the paragraphs that I can write about his folly. The “downturn” hasn’t even started. It’s going to be quite bad. Either he’s on some medication or he/his employer has an agenda, because his claims are devoid of reality.
Sure, retailers can prepare for a post-downturn recovery, but unfortunately, many thinking about it won’t be around to act on it.
60% of the population think they are in a recession, because about 60% of the population are already in a recession. Savings evaporated and credit card debt is up for the bottom-half income earners, while real wages are negative. More sticky inflation, notably housing and center store grocery, is taking over. And now is a good time to reinvest in you business? Duh (sarcasm off).
It takes much more time and effort to ramp up than it does to pull back. Retailers should always be investing in people, especially given tight labor market.
Most executives stress when things go wrong. This thinking and related actions have been manifested recently. The question is, what needs to be done to prepare for the next wave of prosperity? Like surfing, you can venture out to capture the “killer” wave or watch as it crashes onto the beach. Same choice for all businesses today.
History has shown over the past 50 years that when recession is about to overwhelm the economy and companies in Retail, CPG, Service sectors especially pull back on marketing spend as well as personnel, those whom they compete against who do the OPPOSITE come out on the other side at a significant competitive advantage in terms of market share on a sustainable basis. We are seeing retailers INVESTING in customer acquisition and retention, not the other way around. 1:1 dialogue with best customers is the best medicine for combating economic slowdown.
Happily for Dr. Kalish, whether the future bodes well or ill, it will always be a good idea to hire a consultant! OK, that’s perhaps somewhat cynical — particularly as he offered a consultation for free — but I’m not sure how useful his advice is. Yes, of course, it’s always a good idea to look beyond the current situation toward the next one, but you still have to get thru the present situation first. Businesses have to make real-time decisions on inventory levels, hiring/firing, store expansion (for those who still operate stores), etc. Long-term planning is fine, particularly at the boardroom level, but managers and workers are going to need to concentrate mostly on the present.
I’ve seen recessions swing us back to more reasonable business behavior. A few areas where retailers can double down, continue to invest, and how they can come out strong on the other end:
Audit Vendors and Design Win-Win Partnerships. Audit your vendor footprint to find wasted licenses or seats. Look into multi-year agreements with discounts.
Rightsize Salaries and Roles to Match the Revenue. Right size roles and compensation. Restructure incentive plans for shared success.
Conduct Analytics and Planning. Conduct advanced analytics and planning to avoid making poor choices. Based on a year of sales, what sizes and ranges are the most possible for your clientele? Can you offer exclusive yet in-demand items and pair them with excessive inventory to drive sales and pair back that older inventory?
Optimize Inventory. Excessive inventory pummels the balance sheet, forces excessive discounts, and adds time bombs like spoilage. Now is the time to optimize merchandising strategies to present or bundle excessive inventory items in the most favorable way to drive sales, potentially avoiding profit-shredding discounting.
Determine Technology Investments with Instant Impact and/or Automation. Determine what you can automate with off-the-shelf software that doesn’t deliver a large expense and pays dividends forward. Put off large-scale projects.
Smart business people have always taken advantage of market turmoil to plan for the recovery in order to distance themselves from competitors too afraid to invest in their own future. This list of past victims is long and oft repeated. The same holds true in almost any situation, challenges create the very best opportunities for the future.
It is really nice to see some optimism in the current business environment. Through history there are examples of companies continuing to invest through a recession and coming out stronger as a result.
I read a piece over the weekend citing both Proctor & Gamble and Southwest airlines in relation to this — with Southwest gaining market share when the market changed. Worth having a look at this.
To be resilient during economic downturns, retailers should always be prepared. Factors such as growth opportunities, cash flow, cost structure and agility should be considered and strategized long before the first signs of a decline. Looking at the successes from the recession of the late 2000s, the retailers that came out on top were all well prepared and acted swiftly to capitalize on opportunities that would drive revenue. For example, scaling marketing efforts to attract new customers, boosting frontline employees to deliver quality customer experiences and moving into new markets as others scaled back.