A recession is coming to an economy near you – and it promises to be painful, with spiking inflation adding to the misery. Even before war broke out in Ukraine, inflation rose sharply as the world adjusted to life after the COVID-19 pandemic. The recent crisis has sent food and energy prices even higher. Consumers’ purchasing power is rapidly eroding, with more problems ahead as central banks raise interest rates to fight the price rises.
No wonder the International Monetary Fund has downgraded its forecasts for global economic growth this year – it thinks the world economy will expand by just 3.2% during 2022, down from 6.1% last year. Economists are particularly gloomy about the prospects for developed countries, warning of an outright downturn in countries including the U.S., UK, and Germany.
The impact on the retail sector is inevitable. Cash-strapped consumers spend less money – decreasing revenues for retailers and product providers. This will be even tougher to cope with, given the high input costs the industry currently faces caused by raw material and energy inflation.
However, there are ways for your brand to get ahead of a recession. Here are six strategies that could pay dividends as the storm clouds roll in.
#1. Change up your product mix
Some products are inevitably more resilient to a recession than others. While retailers expect sales of consumer staples to hold up during an economic downturn and see a drop in the demand for luxury goods, there are some exceptions.
In particular, consider the “lipstick effect”, a feature of many recessions, meaning consumers seek out small “affordable luxuries” even when they’re striving to be budget conscious. These are products that sit outside necessity purchases but make people feel better about their situation – they’re more expensive, but not costly enough for consumers to steer clear altogether.
Every retailer should be able to identify their lipstick products – from lipstick itself in the beauty aisle to, say, a more luxurious cake in the bakery section.
#2. Choose the right messages
It is always important for retailers and product providers to think carefully about how they talk about their goods and services – and in a recession, a different tone of voice could make a big difference.
Take the Danish toy manufacturer Lego, for example, which increased its profits significantly during the global financial crisis a decade ago by stressing the longevity of its product. Lego recognized that when household finances are facing a squeeze, parents are more likely to buy products that will last – so they don’t have to replace toys a few months down the line.
A recent tie-up between the U.K. department store Selfridges, and the refurbishment company Restory provides a similar example. Restory is offering to refurbish Selfridges customers’ bags and shoes, to give them a new lease of life, in an alliance that underlines how the store recognizes consumers are feeling the pinch and is adjusting accordingly.
#3. Identify compromise options
When consumers have less money to spend but still want access to products and services they know and love, retailers that can find a way to square the circle with a compromise can profit.
Netflix’s plans to launch a low-cost subscription service featuring advertising is a classic example. The streaming giant knows consumers want to maintain their subscriptions to Netflix, but is also aware that it could be a victim of belt-tightening. By offering a cheaper deal, and consumers accepting the compromise of having to view advertisements, it has found a way to navigate this conflict.
Beauty Pie has done something similar with its launch of luxury beauty products that don’t feature expensive packaging, high-cost celebrity endorsements, or distribution through expensive retail partners. In other words, it has reduced costs by stripping out extras consumers are quite happy to do without while maintaining access to a high-end product range.
#4. Think about experience
There is a growing body of evidence suggesting many consumers value experience when shopping – they want to be inspired and engaged by retailers rather than simply finding another place to spend their cash. So if the retail market shrinks during the recession, finding a way to provide that experience could allow your business to stand out.
The Swedish retailer Arket, owned by H&M, has grown rapidly in recent years by incorporating an attractive café into all its stores, giving shoppers a reason to come in even when they weren’t shopping for its wares. Clothing retailer Net-a-Porter has done a deal with Plum Guide, the vacation company, providing travel advice to help its customers plan their holidays.
The aim is to give your customers a reason to visit your stores – whether physical or online – even when they’re not necessarily thinking about spending money with you directly. The destinations of choice for consumers will be in a better position to survive the recessionary storm.
#5. Leverage loyalty
Retailers know their existing customers spend more money with them than new ones – over 30% more according to some studies. In which case, it makes sense to focus on your existing customers’ needs during tougher times and ask yourself how you can retain more customers to benefit from that uplift.
Doubling down on loyalty schemes and maintaining high customer service standards will be important. These may feel like areas where you can save money without having an immediate negative impact, but that would be a mistake. Smart moves here can really pay off.
During the COVID-19 pandemic, Panera Bread launched a Coffee Club, offering subscribers unlimited coffee or tea for $8.99 a month, and attracted 600,000 participants by the end of last year. Now, the company is expanding the concept to cover soft drinks, with its Unlimited Sip Club, for $10.99 a month; existing Coffee Club members still get the lower rate.
#6. Focus on value, not price
The obvious thing to do when customers are struggling is to cut your prices to attract more of them. However, that may not be possible – many retailers are already struggling with very tight margins – and it may not be desirable, since it can erode profitability over the long term and harm the business’ strategic position.
Instead, focus on the value you deliver to consumers, shifting your marketing and inventory strategies accordingly. The British retailer Marks & Spencer, for example, is investing £100 million over three years in its “Remarksable” value range, which is price-matched against rivals’ products but also promises a commitment to market-leading sourcing standards and product innovation.
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