Mixed signals. That’s what every retailer faces as the year ends and a new one is about to begin. The economy is poised for a fall, even while U.S. consumer spending remains robust.
“Going into 2023, we have a broad-based slowdown in the global economy,” Gita Gopinath, of the International Monetary Fund, shared at a Wall Street Journal CEO Council Summit. “The possibility of avoiding a recession is really narrow for the U.S.”
It’s so narrow that in October, The Conference Board predicted a 96% chance of a recession in the next 12 months.
Confounding the economic forecast is “continued resilience in the U.S. labor market [and] in consumption spending in the U.S., both of which are more positive than what we expected,” Gopinath continued.
The National Retail Federation weighs the positives more strongly than the negatives and expects November and December retail sales to grow between 6% and 8% over 2021, which broke historical records on a 13.5% surge over 2020.
NRF Chief Economist Jack Kleinhenz emphasized in his forecast that consumer fundamentals remain in place, supported by healthy household finances and strong job and wage growth.
Yet savings accumulated over the pandemic have started to shrink, while the personal saving rate has dropped below pre-pandemic levels. And in even more troubling news, credit card balances rose 15% year-over-year in the third quarter, the largest increase in more than 20 years, according to the Federal Reserve Bank of New York.
Whether or not consumers meet NRF’s holiday spending prediction – or even exceed it – retailers will face a turbulent environment in 2023, much like they confronted during the 2008-2009 Great Recession.
Research from Boston Consulting Group looked back at retailer performance in that period and during the 2001 downturn before it to provide guidance for retailers to weather the coming economic storm and come out on top.
“Clearly there are differences between now and past downturns,” Tiffany Yeh, managing director and partner at Boston Consulting Group, explained. “Besides Covid, we’ve faced supply chain issues and geopolitical turmoil, but the uncertainty for retailers is the same. We studied what actions retailers did then that made them winners versus losers so that retailers can learn from the past.”
The conclusion is that the retail winners during past turbulent periods had structural advantages that powered them forward.
“The standout businesses in those time periods focused on creating unique structural advantages in four main areas: customer proposition, cost, infrastructure and talent,” Yeh said.
These four factors pretty well sum up the keys to long-term success for any retail business, but being willing to change in times of turmoil when the road ahead is unclear is even more important.
Structural advantage is defined as the fundamental and systemic ways a company operates that yields a significant competitive advantage. In retail, it represents the unique combination of product, processes and people that result in rising revenues and profits, the ultimate measure of retail success.
Increasingly, due to changing customer needs, Yeh observed the retail products offered might be of less importance than the way in which those products are delivered. For retailers, that may mean expanding into services.
She points to Best Buy’s
Lululemon did it, too by acquiring the home-fitness platform Mirror to enhance their customers’ exercise regime. And Home Depot and Lowe’s have leaned into women as drivers in DIY projects, making their stores more welcoming to her, as well as enhancing services to pros that pay back big time in repeat purchases.
Almost any product category has a service component that can complement it, whether it’s meal kits to recreate chef-quality dishes at home, decorating ideas for design-challenged home furnishings customers or closet cleanout and fashion-styling advice.
Managing costs is another structural advantage winners in past downturns used to their advantage.
Specifically, BCG’s research found that past winners were careful to avoid passing rising costs along to customers. They held their suppliers’ feet to the fire to ensure price increases were warranted and managed their own operations to maximize efficiencies, operating lean and mean instead of fat and sluggishly.
“Winners were able to use their scale, or other creative means, to keep costs low and maintain margins,” Yeh said, adding, “On the front end, they were also able to communicate value perception within their price range.”
Being upfront and open about price increases is important. Consumers understand prices are rising and will reward retailers and brands for transparency.
On the other hand, consumers view the recent trend toward “shrinkflation” negatively. Reducing the size and weight of product packages while maintaining price levels is seen as a sneaky way to make more money.
In addition, retailers that have leaned heavily into promotions during this holiday season which may turn on them in the New Year. Customers will have expectations of even more, not less promotions when they come shopping next year and leave disappointed when anticipated discounts can’t be found.
“The key is to have good value communication, not necessarily discounting and being low cost, but communicating value,” she advised, with value being the operative word.
Loyalty programs like those offered by luxury retailers Nordstrom
And then there’s Amazon
Optimizing Physical Infrastructure
Winning retailers in past downturns continued to tailor their physical footprints to the shifts in consumer shopping patterns. That might have meant making more investments in new stores instead of the knee-jerk reaction of closing stores.
Yeh notes retailers need to respond to the current flight from urban centers into the suburbs and even rural areas. Nearly a million people have moved from the cities since Covid, while rural and suburban areas have seen a net 1.1 million increase.
“Retailers’ infrastructure network, store footprints and distribution centers must reflect that shift,” she advised.
For example, Walmart
Jewelry giant Signet has been moving many of its Kay and Zales stores out of malls, where they effectively competed against each other, to off-mall locations in strip and lifestyle centers.
And Ikea keeps tweaking its store footprints, testing smaller stores and Ikea Planning studios that offer design services.
Retailers can build structural advantage with their people, finding and keeping the best employees to serve the customers’ needs.
“Retaining talent and thoughtfully hiring will be more important than ever,” Yeh said, especially as retail job openings continue to plummet.
“Past downturns have shown that the employee value proposition is a key part of talent success,” she continued. “To manage the best talent, retailers should think about how to provide consistent schedules and employee bonuses.”
Observing that as many as 40% of retail deskless employees want to leave their jobs, retailers need to lean into employee development programs by offering training along with paths to advancement.
And they need to avoid building too many layers into their organizational structures, which only slows decision-making and complicates up, down and lateral communication.
“Retailers are going to continue to see churn in their employees at the store level and distribution centers if they don’t look more closely to adding benefits that really benefit the employees. If they don’t adapt, they will constantly be looking for new people, which adds to costs,” she said.
Retail Resiliency Through Structural Advantage
Perhaps the biggest challenge retailers face right now is the tendency to hold the line until things begin to resolve, but by then, it may be too late.
“The path forward is unclear given all the uncertainty around the conflicting economic indicators, “ Yeh said. “It leaves people in a wait-and-see mode. But retailers can’t wait and see.”
Retailers must take action across these four dimensions of structural advantage. They must lean into the customer proposition and their changing needs, manage costs and customers’ value perception, continue to invest in building a strong infrastructure and energize the business’ human resources.
“By acting now, retailers will set themselves up for success, not just next year, but for years to come,” she concluded.