Many of us remember the 2008 recession. While the cause of the 2020 recession is different; a health crisis rather than an economic crisis, the effects have been similar:

  • Uncertainty
  • Loss of confidence  

We’re in a recession. We need to change our thinking.
The biggest mistake made by businesses in 2008 was the failure to change their thinking. Many businesses continued with their long-term strategies; opening new stores and promoting new products and brands and hoping the market would reverse in 1 or 2 months. It was over 2 years.

We are in a recession.

  • GDP, household spending, business investment, manufacturers’ sales, exports and imports are down.
  • CPI unchanged, household savings and unemployment are up. 
  • Consumers are going to be spending less.

Consumer spending is emotional and unpredictable.
It’s still early days. Consumers are still reacting emotionally with Panic Buying, Supply Shortages and Catch-up buying. You can stare for hours at the current market data and learn nothing significant. It is easy to come to the wrong conclusion or see a trend disappear when the next round of sales data is released.

Recession 2008 vs 2020

What sold in the last recession?

  • Beverages
  • Food products
  • Household products
  • Personal products
  • Camping gear
  • Automotive parts
  • Coffee, tea, and energy drinks
  • Tupperware
  • Candy
  • Cosmetics
  • Pet care products.
  • Movies, TV, and video games
  • Clothing 
  • Baby Products

What’s changed? 

  • Stay at home
  • Social distancing
  • E-commerce
  • video streaming, home electronics
  • More countries affected
  • Global supply chain

According to the World Bank, 90% of countries will be in a recession in 2020. The global supply chain is disabled. In 2008, the recession was primarily in North America and Europe. The economies in China, India and Australia continued to grow. 

The supply shock that started in China in February and the demand shock that followed as the global economy shut down exposed vulnerabilities in the production strategies and supply chains, Harvard Business Review.

In 2007, Amazon had less than 150,000 employees. They now have well over 1,000,000 employees and an infrastructure that rival the US military.

In 2007, Netflix started development of technologies that would allow streaming to television sets. In 2020 Netflix has 193 million members in 190 countries.

Rules for a Recession: Blue-sky planning doesn’t make a lot of sense when the sky seems to be falling.

Go Where the Headroom Is: Headroom = Market share you don’t have minus market share you won’t get.

Protecting loyal customers is an obvious priority in a downturn but if your loyal customers are suddenly spending less, most of that will come directly out of your sales. Your headroom lies with customers who are loyal neither to you nor to your competitors (switchers). 

Planning for most retailers is a process of stocking up on what’s selling well and stocking down on what’s not. But in a recession, the process should be governed by answers to these four questions:

  1. Which products should be expanded because their headroom and current profitability are high?
  2. Which products should be shrunk because both their headroom and profitability are low?
  3. Which products should be fixed because their profitability is low, but their headroom is high?
  4. Which products should remain because their profitability is high, but their headroom is low?

You can measure headroom in many different ways—identify switchers by category, by local market, product or by where or how customers shop. Where are the switchers and what do they want?

Opportunity for new market share is usually concentrated in only part of the business. In a recession it is about products. The trees not the forest.

Close the Needs-Offer Gap
Most businesses have a lot of customers who could be spending more money with them than they are. Information systems have led to greater efficiency in inventory management and purchasing. But this information says nothing about what your customers might be buying elsewhere which is precisely where the headroom is greatest. 

Sales data can tell you only what is selling, not what could be selling. Sales reports lead to gaps between what’s offered and what customers want. What they want may not be more of what you’re currently selling to them. 

Customer and market segmentation may not apply.

  • What do your customers buy from your competitors?
  • Who are the most profitable customers that you don’t have but could get?  (with a little fixing)
  • Cut Bad Costs

In tough times, there is often no avoiding the need to take out costs. Protecting margins and maintaining sales in a downturn is different from growing sales and building for the future. 

Good costs are the ones essential to producing what customers value and are willing to pay for. Consumer’s values change during a recession. Exceeding customers’ expectations may not be affordable.

Bad costs in a downturn may require putting complex synergies (branding & economies of scale) on hold. You may have some great new products or services but not in this economy.

Last year’s strategies in a growing market may only have marginal benefits when fewer products are selling.

Costs are not all good or all bad. Cuts need to be targeted. Avoid “last year, plus-or-minus”.  

Refocus Business Processes
To find headroom, expose needs-offer gaps and reducing bad costs requires changes. The planning process must be entirely focused on meeting those imperatives.

Changes need to be communicated to all employees. Cost cutting may require layoffs, reduced hours and some reorganization. Employees need to understand the challenges and their role during these challenging times.

“Did you find what you need?” clerks should ask, “Is there something you want that we don’t carry?”

Scorecards should indicate where employees stand in capturing headroom, closing needs-offer gaps, and taking out bad costs.

Time to change your thinking
An era of consumer frugality has begun, shifting from a tailwind into a nasty headwind. Some will turn this into an opportunity to strengthen their business and gain market share.

The market is changing every day

  • Don’t spend too much time on long term projects and planning.
  • Last month’s sales data won’t be much help.
  • Focus on headroom, product gaps & cut bad costs.
  • Ask for and consider all suggestion.
  • Develop tactics and measure and reward results.

Source: Harvard Business Review, COPA
Comments, questions or discussions are most welcome.
Please contact CHHMA-COPA analyst Bob Smith at rsmith@chhma.ca