In the wake of the Great Recession, budget-strapped consumers flocked to off-price merchants and spurred the rise of direct-to-consumer brands that eliminated the retail middle man and offered quality, value and a new concept of luxury at attractive, justifiable prices.
Traditional retailers, caught flat-footed by the industry pivot toward a younger, shinier new commerce model, scrambled to modernize stores and meet shoppers on their digital, always-on terms.
And that effort led to the reimagining of brick-and-mortar stores as experiential centers where commerce isn’t the sole goal but just one of many activities that can take place within the four walls. But with rumblings of a recession unnerving big businesses, how could an economic slowdown rewrite retail investments this time around?
Tightening the purse strings can be a natural reaction during lean times, and retailers will likely rethink their budgets with the bottom line in mind.
“Given that consumer spending fuels our economy, I expect retailers to take a serious hit when the recession comes,” Paula Rosenblum, co-founder and managing partner of RSR Research, said. “When you look at the double whammy retailers are facing—tariffs and a potential recession (causative or not)—it’s hard to imagine expenditures not being delayed.”
Because many retailers base their budgets on sales and turnover, they’ll have little recourse if they want to maintain spending.
“Most metrics are expressed as a percentage of sales, so if sales go down, spending will go down in lockstep—from payroll to tech investments,” Rosenblum added.
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Forrester vice president and principal analyst Sucharita Kodali says anything that’s not indispensable to retail operations and profit centers will end up on the chopping block, noting that “the fluff will absolutely go away.”
“The experiments with experiential were always on the fringe anyway,” she explained. “No one made that central to every store.”
Retailers have been struggling to upgrade outmoded legacy systems to keep up with customer expectations of a frictionless omnichannel experience. Shrinking IT budgets could thrust some—but not all—upgrades and planned deployments into limbo. “Tech investments will be leaner but won’t be as drastically cut back because much of it is in essential things like e-commerce platforms, order management systems, automation, etc.,” Kodali added.
A recession could accelerate what’s been a steady migration to the cloud, which offers greater flexibility and lower overhead, as a way to “reduce IT payroll expense,” Rosenblum noted.
Suketu Gandhi, a partner in the digital transformation practice of A.T. Kearney, a global strategy and management consulting firm, agreed that cloud stands to be the big winner should economic growth contract. And retailers will likely have to rewrite many of their “paused” tech projects from scratch.
Because technology advances so quickly, retailers can’t simply take an implementation off the shelf and resume rollouts, Gandhi noted, because then “you’re building for yesterday and not tomorrow.” The industry will see a “general reset” on their tech plans and deployments, he added.
Certain retail tech remains untouchable in a sense; any software or hardware that prevents hackers from accessing critical assets must be safeguarded, Gandhi explained.
Recessions can serve as a rationalizing force on budgetary spending. Gandhi expects retailers to continue investing in competitive pricing tools, inventory visibility checkout technology and any initiative that enhances the customer experience. So-called “shiny toy syndrome” will fade away to a distant dream when retailers are forced to justify innovation that drives little tangible value to the bottom line, he added, noting that a “tariff is almost like a recession for the consumer.”
Michael Kim, vice president of data & analytics at AArete, a global consultancy, agreed that the customer experience will be front and central, though retailers will look to serve customer needs, not wants.
“In the midst of a recession, retail companies should double down on technology investments if they help drive the customer experience,” Kim said. “Technology to optimize bi-directional supply chains is a must-have to ensure seamless delivery of products to customers.
“Likewise,” he continued, “technological investments that enhance a customer’s digital experience through e-commerce pushes loyalty in the hardest of times.”
And Kodali also sees the consumer love affair with digital forcing industry investments in online channels.
“As long as Amazon is out there spending on free, fast shipping like a drunken sailor,” she said, estimating that the e-commerce giant spent roughly $30 billion on shipping investments last year, more that most retailers, “there will be no victory for BOPIS.”
Retailers have steadily been investing in BOPIS efforts that enable consumers to buy online and pickup purchases in store, but “everything gets cut in a recession,” Kodali said. “The companies that fare best are the ones that cut earlier than everyone else.”