How Retailers and Brands Can Prepare for an Economic Downturn
Now that we have near consensus from key financial figureheads as to the near-term economic outlook for the global economy - whether that's Jamie Dimon saying that JPMorgan is "bracing itself for an economic hurricane" or Bloomberg Economic's prediction that US economic growth might outpace China's GDP growth for the first time since 1976 - it's time for some real talk.
As we've all in retail had to over the past few years, it's yet again a moment to recalibrate and prepare for what's next. So while no one knows the severity or duration of these global economic headwinds, it's clear that the consumer is going to be shifting their behaviors - yet again. Ahead, let's discuss how to be ready and responsive to those shifts.
Focus on Assortment Mix
The "lipstick effect" is a widely known phenomenon, whereby consumer spending on lipstick increases during an economic downturn, as the reality of less discretionary income intersects with the desire to create external signals giving the appearance of success. The core idea is that while some products do well during economic downturns, others will not. And the shifts between product categories might be swift.
Case in point - StyleSage data shows that during the pandemic, product counts in categories like heels and dresses went down, while other more casual categories like sneakers and leggings saw increasing numbers. But fast forward two years, too many leggings in your assortment might mean you're missing the present boom in apparel for going out.
If we go back to the lipstick example and examine moves from brands like Hermès and Dries Van Noten who have launched premium cosmetic offerings in recent months, we can unearth some strategic benefits. While these present new categories of entry for these luxury brands, they also offer the possibility of connecting these luxury brands with up-and-coming consumers. As NPD analyst Larissa Jensen said in an interview with Business of Fashion, "In the scheme of things, you talk about a $75 lipstick, you can’t compare that to...a $5,000 pair of shoes. It still is that affordable luxury.” Very few can afford the latter, but quite a number more can rationalize the former, and they could very well be your future core customer.
So does your product portfolio include a balanced mix of products and price points that reflect your various customer profiles' needs? And what's your "lipstick" going to be?
Promote with Intention
Another point that dovetails with assortment mix is that of if, when, and how much to discount and promote your merchandise. Many retailers immediately turn to discounts when supply is mis-aligned with demand, and global supply chain issues have only exacerbated this issue. (Look no further than retailer Target who warned this week it will have to take additional discounts to move excess inventory.)
Target's move isn't typical for them, and from the company's official statement you can sense the difficulty of taking this decision. That's because discounting and promotions can be difficult to pull back or reverse, once you've started.
Our advice is to follow the data - don't fail to track what's happening beyond your own inventory and sales levels. What are competitors doing at the category and item level? And when discounts are necessary, be surgical and finite in their application. The last thing you want is to set the consumer expectation of everything, on sale, all the time.
Renewed Focus on Experiences
Recent data shows that retail spending in the US is up 8% from one year ago, but even more remarkably, spending at bars and restaurants has jumped 20% during the same timeframe. What does this mean? Consumer demand is making a shift towards more services, in particular those like travel and dining out, which were unavailable during the height of the pandemic.
While this might seem to spell trouble for retailers in the business of selling stuff, that isn't necessarily the reality. Instead, consider that if consumers are craving services, how might your brand augment or add services and experiences to your existing retail business?
This can take shape in a lot of different ways. Take Arket, for example, a brand from Stockholm-based retailer H&M, whose main line of business is apparel, but whose adjacent cafe has become a destination for shoppers to come by more frequently for a coffee or afternoon cake. Another take on experiences is retailer Net-a-Porter's partnership with upscale vacation home rental service Plum Guide on ‘unique travel advice’ and a ‘masterful edit of vacation wear’. Or UK-based department store Selfridges, who has partnered with Restory, a company that will refurbish shoes and bags, to give them a new life. (Bonus points for this kind of partnership which hits on multiple resonant consumer themes like sustainability and value consciousness.)
So what are the opportunities to create new experiences around your brand? Now's the time to think outside your box.
Fix Your Customer Service / Lean into Loyalty
Another angle about which to talk about services is regarding your core customer service. Coming out of the pandemic, most of us have experienced the service shortage firsthand. Indeed, retail turnover reached 69% in 2021 - a high during the past five years. Whether it's airlines who laid off employees during the pandemic or the retail store employee who doesn't know (nor care), customer service - and the resulting customer experience - have arguably never been at lower levels.
Perhaps counterintuitively, this isn't the time for retailers to cut back, rather this is a time to build loyalty by doubling down on good customer service. Don't forget, existing customers do spend 31% more with your brand than new ones. Service wasn't your forte to start with? Well, there's never been a better time to start.
Speaking of loyalty, you are sitting on a treasure trove of data and insights with that loyalty program you have. During these times, it's critical to utilize this data in order to react quickly to the ebb and flow of consumer sentiment and demand.
Want to understand more about tools for pricing and assortment mix that are critical during these times? Learn more here!