Recessions are a fact of life in the modern U.S. economy, tethered as it is to a steady cycle of boom and bust. But fallout from the 2008 Great Recession has many consumers—and retail companies—still reeling from a slump whose aftereffects continue to reverberate through the consumer economy.
Economic sentiment and consumer confidence have been all over the map in recent weeks. At the turn of 2019, retailers and trade groups crowed about the best holiday sales season in more than half a decade, a premature celebration perhaps, given the chaos unleashed by the longest federal government partial shutdown in history. With the 35-day shutdown over and fresh economic data rolling in, a new picture of December emerges, one that reveals monthly sales contracting 1.2 percent—the largest drop in nine years.
Rumblings around the industry hint at the possibility that the next recession could be closer than we think, given months-long positive unemployment trends and jobs numbers, and what seems to be an economy steadily chugging along. To ensure companies aren’t caught flatfooted by any changes around the bend, Deloitte looked back at trends defining the winners and losers in past recessions to inform futureproofing strategies that retailers can leverage to weather another contraction—whenever it strikes.
If there’s one thing many companies failed to recognize as the economy sank into turmoil in the late 2000s, it was just how much the fundamentals of the retail industry were in flux. Most of the businesses rocked by the Great Recession underestimated the “degree to which the structural change of the industry not only continued unabated during the periods of downturn, but actually appeared to accelerate, leaving many of those that failed to reposition during the downturn even more exposed when the market returned,” Deloitte said in its report, “The Next Consumer Recession: Preparing Now.”
That “structural change” is better known today as digital and e-commerce. Online sales drove most of retail’s growth throughout the economic collapse. Plus, not only did the web outperform expectations but it also laid the foundation for new vertically integrated and digitally native brands to crop up, stealing market share from entrenched incumbents. “Many legacy retailers were weak and were not able to invest to resist new competitors; as a result, many consumer preferences shifted,” Deloitte noted, adding that sky-high debt levels caused some merchants to focus “internally” rather than on external priorities.
On top of competition from newcomers, retailers were forced to contend with the resurgence of discount and off-price players newly resonating with value-conscious consumers. But perhaps more than anything, patterns of reinvestment predict how companies emerge from economic challenges. Reinvestment rates, a forward-looking “gauge of how much a company continues to replace its assets,” distinguish the success stories from those that did not, or were unable to, devote capex to meaningful initiatives. Retailers reinvesting at high rates during the Great Recession saw a four-year combined annual growth rate of 7.9 percent, more than twice the 3.6 percent achieved by underinvesting businesses, according to Deloitte’s numbers.
So how can retail enterprises ensure the next glitch in the economy doesn’t sink them altogether? Double down on a value proposition that serves either the high or low segments of the consumer market, Deloitte recommends, adding that relevance is how winners “survive and thrive.” But retailers also need to stockpile a “war chest” for recession-time investing. Getting rid of underperforming assets, reviewing existing debt levels and focusing on only the most strategic capex projects can free up funds for a reinvestment reserve earmarked for growth vehicles. That can take different forms for different retail businesses, from tweaking fulfillment operations and store formats to implementing innovative digital technologies, diversifying capabilities and acquiring a new customer base.
Deloitte says retail companies cannot put off investing in robotic process automation much longer, especially as labor costs continue to climb and technology is getting comparably cheaper. “Align human capital with advancing digital capabilities; co-investing in talent and technology can be a powerful partnership,” the company added.
There’s strength in numbers, too; retailers should consider brand-building partnerships and planning jointly with suppliers and other stakeholders. Ferret out supply chain overlap and inventory inefficiencies and tightly integrate pricing and markdown strategies, Deloitte recommended, adding that siloed consumer data yields stronger insights when unified.
“Rather than just act, the moral of the story is to slow down for just a bit and plan for what the future might look like,” Deloitte said.