You’ve likely never been tested by an economic downturn.
Ecommerce was just 3.6% of total U.S. retail sales when the Great Recession bared its teeth twelve years ago. Since then, worldwide ecommerce has boomed, accounting for 16.1% of global retail sales. It means most digitally native brands (DNVBs) were born in an unprecedented eleven-year period of economic expansion in the U.S.
It also means the current economic downturn is likely to turn the decade-long ecommerce boom into a bust for many.
Unfortunately, few have prepared for anything other than a goldilocks economy.
Research indicates 41% of ecommerce businesses have done nothing to prepare for an economic crisis. Seventeen percent said they didn’t know or were undecided as to whether their companies had made preparations.
Turns out the very businesses most susceptible to failure in a downturn are the ones least prepared for it.
Some perspective from the last recession on retail
The U.S. has survived civil war, economic depression, and financial catastrophe. The world has thrived despite pandemics like the Spanish flu, Ebola, and smallpox.
Hell has visited often, but we’ve bounced back every time.
The aftermath of the current economic downturn isn’t likely to vary significantly from the past. Preparing for the end of the world has proven to be a losing strategy each time it has been battle-tested. Optimism wins out over time.
Just look at the DNVBs that launched amid the Great Recession: Bonobos was acquired by Walmart for $300 million, Sole Bicycles did $10 million in sales after raising just $300k in capital, and Nasty Girl topped $300 million in annual sales.
It’s natural to be anxious. To worry. But it’s also rational to understand that an economic crisis can narrow your focus and clarify your value proposition and relevance in consumers’ lives. Amanda Hesser is CEO of Food52, a food community that has connected tens of millions of chefs and cooks, which launched during the Great Recession. Hesser suggests the timing of the launch and the toughness it took to succeed has made the company stronger:
“We started planning Food52 right as the financial collapse was happening in 2008. At the time, I’d been working on another startup, and while it was clear that fundraising was going to be strongly affected for any company in the short term, there’s something clarifying about these moments of crisis. When things seem blown apart, creative thinking and ingenuity are at their strongest. Discipline and grit are also in the air at these moments and together, all of these things help set a good foundation for a new company.”
In addition to Food 52, we examined nearly two dozen ecommerce brands born right before, during, or immediately after the Great Recession. They survived, and some even thrived, despite being new and fragile. The deck was stacked against them, but they beat the odds.
You can, too.
How will you survive a recession?
Researchers at Harvard studied how 4,700 companies navigated three recent economic downturns to identify strategies that can help companies survive a recession, get ahead during a slow-growth recovery, and be ready to win when good times return.
The researchers describe their findings as stark and startling: 17% of the companies studied went bankrupt, were acquired, or went private. Three years after a downturn, 80% had still not regained their pre-recession sales and profit growth rates. Only a sliver flourished after a recession.
Importantly, researchers classified companies and their approaches during downturns into four types:
- Prevention-focused companies make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks. Researchers advise against being too defensive.
- Promotion-focused companies invest more in offensive moves that provide upside benefits than their peers do. Researchers caution against being overly aggressive.
- Pragmatic companies combine defensive and offensive moves. Researchers acknowledge this is an elusive balance to strike.
- Progressive companies deploy the optimal combination of defense and offense.
Not many companies understand the balance between defensive and offensive—cutting costs and investing. Emulating retailers that have successfully done both simultaneously can give you an edge:
“According to our research, companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a recession. Within this group, a subset that deploys a specific combination of defensive and offensive moves has the highest probability—37%—of breaking away from the pack. These companies reduce costs selectively by focusing more on operational efficiency than their rivals do, even as they invest relatively comprehensively in the future by spending on marketing, R&D, and new assets. Their multipronged strategy…is the best antidote to a recession.”
Balancing initiatives aimed at achieving operational efficiency with strategic investment can occur before, during, and after economic downturns. Below are concepts, ideas, and tactics you may consider to help achieve the right balance:
Pre-recession retail strategies
Recessions beget bankruptcies. The fate of many retailers is often determined by the financial decisions they make long before a downturn. It may be too late for the obscenely overleveraged. The creative destruction that results will eliminate the weaker players or those that did not treat capital as preciously as they ought.
Retailers that fail during recessions tend to be highly indebted. You simply can’t preserve a memorable customer experience, take care of employees, or act strategically (acquire a failing competitor with attractive IP) if your cash flows are consumed by burdensome debt interest.
Economic crises often bring about structural changes that require investment. Companies with manageable debt loads can allocate capital externally (strategic investing) rather than internally (servicing debt). Surviving brands with manageable debt position themselves to outperform their indebted peers during the eventual recovery.
Image from Deloitte
Deleveraging, if possible, requires narrowing your focus and allocating capital where it will be treated best. Research suggests indebted companies consider the following bold moves:
- Get rid of underperforming assets while the market is strong to prepare for what comes next
- Prioritize only highly strategic capital investment
- Investment dollars should be funneled toward growth vehicles aligned with the direction of structural changes brought about by the downturn
Aswath Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University and has this to say about debt and its relevance during crises:
“Every crisis teaches investors and companies lessons that are temporarily learned, but quickly forgotten. This one is a reminder to firms that debt, while making good times better for equity investors, makes bad times worse. For some of these firms, that debt will threaten their continued existence and result in liquidations, fire sales and distress. For others, it will create constraints for the near future on growth and investment, and change business plans. For firms that are lightly burdened, it may create opportunities, as they use their liquidity as a strategic weapon to fund acquisitions and to increase market share. If you were worried about winner-take-all markets before this crisis, you should be doubly worried now!”
Identify your differentiator
If you haven’t already distilled your differentiating value proposition for consumers, it’s time to do so. If you have, it’s time to consider whether it might be refined, narrowed, or more effectively marketed. Economic downturns test relevance. Are you relevant even during the worst of times?
- Who do you serve?
- How do you serve them?
- Why should customers care about you vs. a competitor?
If you’re not the low-cost producer in a market that’s being commoditized, you may not be perceived as relevant in a crisis. If you sell a premium product and do not compete on price, stress test your target market to see if your value proposition keeps you relevant. For example, survey customers to learn how a 30% decline in their net worth might change their purchasing behavior.
If you didn’t exist, would customer demand be met by someone else at the same or better price? Or with the same or better service? If the answer is yes, analysts suggest you redefine your customer value proposition immediately and consider narrowing your focus.
Bonobos began to take share from more traditional brands like J.Crew as it carved out the unique value proposition of narrowly catering to men who often struggled to find pants that fit well. The company created a new type of pants that fit men better than traditional American and European styles and encouraged consumers to order multiple pairs and send back the ones that didn’t fit.
Ultimately, the company’s generous value proposition earned it the right to expand beyond the pants category. Just five years after the Great Recession, Bonobos was generating $70 million in sales a year and selling new wares like formalwear, swimwear, shirts, and other items men have historically found ill-fitting.
Bend the cost curve
Even DNVBs that have embraced technology can reduce costs ahead of or during recessions by harnessing the power of ecommerce automation. Rather than focusing on incremental change, concentrate on step-changes that can fundamentally alter how your organization operates.
Not only can automating workflows help reduce labor costs, it also allows you to redirect headcount to higher-value tasks that can generate better returns. Likewise, ecommerce automation that is native to your commerce platform positions you to put major sales or campaigns on autopilot and roll them all back with just a click of a button.
You can learn more about automation and get time-saving workflow automation templates in our Ecommerce Automation Checklist.
Separately, you can also simplify to save money. During the Great Recession, Costco cut costs by reducing the number of product variations from 60,000 SKUs to 3,700. Narrowing your focus can result in higher wholesale purchase discounts because you’re buying in greater bulk. It can also improve operational efficiency in your brick-and-mortar stores.
Likewise, reduce returns to lower reverse logistics costs. Also, look for ways to optimize your packaging to reduce fulfillment and logistics costs.
Hiring: In-house vs. outsourcing
What can we cut? That’s one of the first questions you or your team are bound to ask. The most straightforward levers to pull are the ones most often considered. For example, brands facing economic crises often immediately cut online advertising, as Facebook recently communicated to investors.
Michelle Cordeiro Grant, co-founder and CEO of bra and underwear maker Lively, has thought deeply about which roles companies should keep in-house and which should be outsourced. The insight she offers is especially relevant ahead of economic downturns. Cordeiro Grant suggests honing in on the heart and soul of your company.
- Product focused?
- SaaS or tech focused?
- Brand focused?
Your answer can help guide what you keep in-house and what you hire out during an economic downturn and thereafter.
“Whatever is most important—your heart and soul—that’s what you keep in-house,” she says. “Our heart and soul is our brand. So we lean forward on marketing, creative, and community building. I only hire what is my heart and soul.”
The rest can be outsourced. Importantly, Cordeiro Grant suggests outsourcing things that are systematic or programmatic like HR, payroll, finance, and accounting. Remember, if these are strategic, or the heart and soul of your business, you’ll likely make different decisions. The critical takeaway is to keep your heart and soul, whatever it is, in-house.
Ecommerce during the recession
Expect competition. During the global economic recession in 2008-09, traditional retail brands embraced ecommerce as a recovery strategy. Ecommerce was seen by many as a quick way to increase productivity, slash costs, and increase competitive advantage.
Ecommerce actually grew during the Great Recession. If you operate in a space where incumbents have been slow to embrace ecommerce, expect a downturn to accelerate the entry of new competitors. Be wary of increased market competition that could further fragment market share and lead to irrational pricing behavior.
Business model flexibility
Examining your business model is always smart business. Structural changes often result from economic crises, so you need to consider how they might impact your business. For instance, the COVID-19 pandemic may make lasting changes to how people work and from where, if remote work (distributed teams) proves its value to many traditional businesses. A global shift toward remote work would have major implications for the office building and office furniture industries.
The economics of business may also change because of increased competition, changing input costs, government intervention, or new trade policies. For example, companies in adjacent markets may opportunistically enter your market and compete directly. These changes may already be underway and accelerate during periods of economic decline (the trend toward cloud computing, SaaS, and streaming content, etc.).
There’s no crystal ball: Assessing how the world will look following an economic decline is difficult. Furthermore, repositioning your company for what’s next is something you may have to do multiple times.
For example, Warby Parker removed the friction of buying eyeglasses online by sending customers multiple pairs to try on and keep only the ones they like. Within 48 hours of launching in 2010, Warby Parker sold out immediately and wound up with a 20,000 person waiting list. It meant the company hit its first-year sales target in just a few weeks.
In the years following the recession, Warby Parker pivoted both its technology and business model to disrupt incumbents. The company experimented with virtual try-on technology to make home try-on redundant and reduce shipping costs. Warby Parker also expanded beyond ecommerce to open new physical shops housed within boutique retailers. Later, it evolved to enter a new $5 billion market by offering customers digital eye exams.
Analysts have long identified which companies are likely to outperform following a recession by looking at their rate of reinvestment during the downturn. Understanding this metric can help guide your capital allocation decisions. It’s known as the . It gauges the degree to which a company replaces its assets (possibly in excess of depreciation) which better positions it for growth during the ensuing recovery:
“Retailers with higher reinvestment rates grew significantly faster than those with a lower reinvestment rate. This measure was even further enhanced when companies funded their investment internally through cash flow from their operations. Companies that succeeded seemed to understand the structural change that was taking place in the market and developed a value proposition and investment strategy that aligned with the change.”
Image from Deloitte
Partnering with vendors
When it comes to vendors, it’s always smart to shop around. But cutting ties with a vendor simply because someone else undercuts them on price may prove shortsighted. Instead, have a candid talk with vendors. Discuss cost-saving options that work for both parties. Remember, they’re likely struggling as well.
Squeezing suppliers happens in every recession. However, the DTC ecommerce boom and the internet’s impact on price transparency likely means there’s less to squeeze and ultimately cut. If you squeeze them too hard, they may not be around to serve you in the future. Instead, research suggests attempting to identify duplicate or overlapping costs between you and your vendors.
Once identified, overlapping costs between retailers and vendors present partnership opportunities. Consider partnering with vendors to reduce costs if you identify overlaps like the following:
- Siloed consumer data sets
- Overlapping supply chains and inventory management efforts
- Independent product development
- Co-marketing but not collaborative marketing
- Unconnected pricing analysis and markdown planning
Brands can experience strategic and financial gain by leveraging the expertise of others, according to analysts, when they aggressively pursue joint business planning with suppliers and partners.
For example, The Honest Company partnered with its suppliers and vendors to initially launch 17 products rather than a single offering to establish its brand and product/market fit. The thinking behind the multi-product launch was that parents interested in chemical and irritant-free diapers would also be interested in chemical-free baby wipes, shampoos, etc.
Launches of this scale, especially during times of economic stress, require close coordination with suppliers and vendors.
Launch new products and expand into new markets
Recessions may actually be great times to launch new products. Research suggests that, especially in a deep recession, launching new products presents an opportunity to capture share and customers from weak competitors or those who have gone out of business. There’s even evidence that strong companies should consider launching more products in a recession than they otherwise had planned.
Likewise, keep an eye on global expansion opportunities. If an economic downturn hits harder outside your home country or markets, expansion opportunities may present themselves if competitors are forced to sell assets. If you had already planned to expand into new markets, a recession in those markets could help you accelerate expansion plans.
Importantly, consider launching products with a higher mission than just generating sales. Acting on this idea is one way Bombas became a leader in the sock industry. The company understands that socks are one of the most requested at homeless shelters, yet people are often not allowed to donate second-hand socks due to hygiene concerns.
So Bombas adopted a buy-one-give-one business model to provide people staying at homeless shelters in the U.S. with the socks they desperately need. By solving a problem not currently being addressed and doing so in its home country, Bombas can launch new offerings with mission-based marketing that allows consumers to feel good about doing good when they make a purchase.
Obsess over unit economics
Calculating the profitability of a specific unit is crucial in a downturn. If you’re not already focused on unit economics, you will be in a crisis.
Unit economics illustrates the value of a particular unit after its costs and revenue are accounted for, and informs strategic decision making. The money it costs to acquire a customer and the value of that customer are the key metrics that matter when you are fighting to survive. While revenue growth is often the focal point in a strong economy, revenue growth without profitability in a recession is a sure path to insolvency.
If a particular unit isn’t creating value, you may decide to sell it at a discounted price or to stop selling it altogether. The more you grow sales for such a unit, the more value you destroy. The opposite is true, as well. Unit economics can help managers decide what to stop selling and where to focus marketing spend.
For example, bed-in-a-box pioneer Casper de-risked the online purchasing decision by allowing customers to return their beds for free. The company, and many of its competitors, factor in return costs from the outset so they can accurately gauge the unit economics of each mattress sold.
Aaron Bata, head of customer experience at competing bed-in-a-box manufacturer Tuft & Needle, says, “Returns are obviously a cost, but that’s something that has to be built in … We think it’s going to be perfect for so many people — for the vast majority of people out there.”
Post-recession retail strategies for recovery
Remember, only a handful of companies flourish in the years following a downturn. Recovery is often slow, but that doesn’t mean there aren’t tangible measures you can take to accelerate the process. If you’ve navigated through the darkest of times, even a relatively slow recovery should be perceived as an accomplishment—one not every business enjoys.
Relish it. Take a moment to celebrate your brand’s survival. But note that you’ll likely have fewer but stronger rivals to compete against.
Hire your dream team
The best talent may be unemployed through little or no fault of their own. Be sure you hire for the skills and competencies that are best suited for any structural change your market has undergone due to recession. Millions of people will likely be looking for work. The aftermath of a recession allows you to upgrade your team and go to market stronger than ever during a recovery.
Target faster-recovering markets
Economic downturns affect different parts of the country differently. The geographical areas that are home to industries hit hardest in recession will likely be the last to recover fully, while the places where the recession least impacts industries will recover the quickest. Marketing and selling to regions that are likely to recover faster can accelerate your own recovery.
Split test PPC campaigns geo-targeted at these regions versus those aimed at your target market in general. If your return on ad spend (ROAS) is greater in regions that are first to recover, consider allocating more budget to these regions.
Optimize for changes in consumer behavior
The good ‘ole days as you knew them might never return. Downturns can leave indelible marks on the human psyche and result in permanent changes to what was once considered normal consumer behavior.
For example, the Great Recession prompted consumers to trade down to less expensive private-label consumer packaged goods. Many continued to purchase high-quality private-label brands long after their households recovered financially. And today, private-label sales are growing four times faster than national brands. The most notable is Costco’s Kirkland Signature brand, which generated nearly $40B in sales in 2018. That’s more than CPG heavyweights Campbell Soup, Kellogg, and Hershey combined. Kirkland brands are often 20% cheaper than national brands, forcing CPG companies to cede market share or lower prices to compete.
The shift away from more expensive products goes beyond the CPGs. Research suggests there’s evidence of similar behavioral change in the consumer electronics and building products (construction, home remodeling, etc.) spaces. If changes in consumer behavior are not obvious, analysts recommend the following two-step approach:
The first is undertaking a situation assessment to understand a category’s dynamics at a greater level of detail than can be achieved anecdotally or through survey research. Such an assessment involves analyzing purchasing behavior and motivations to determine how consumer requirements are changing and the effect of these changes on lower- and higher-priced products. Such an assessment involves analyzing purchasing behavior and motivations to determine how consumer requirements are changing and the effect of these changes on lower- and higher-priced products.
The second step is developing action plans based on consumer dynamics and how well positioned products are for recovery. That means deciding where to position them in a way that will optimize the trade-off between prices and benefits, on the one hand, and margins and volumes, on the other.
Acquire a competitor
If you’re in the rare position of having liquid assets at this time, you may get an opportunity to acquire a competitor at a price you never dreamed possible. Acquiring a competitor in the same category can help you emerge from a downturn with a stronger market position as economies of scale can result in cost reductions and increased sales.
Distressed competitors offer upside opportunity but also downside risk. Due diligence is crucial as you’ll need the time and talent to assess the target’s future cash flows and prospects. Acquisitions can save costs by eliminating redundancies (think paying for just one inventory management system instead of two) but also pose integration challenges.
Purchase strategic assets
If acquiring a competitor isn’t attractive, stay on the hunt for infrastructure assets you can acquire and further solidify your market position. Most businesses will struggle in a downturn. Many of them will not have the cash to sustain themselves. It means you may be able to acquire strategic assets at a deep discount.
Ecommerce brands may be able to purchase their own warehouse at a hugely discounted rate. Besides reducing costs and your reliance on using a 3PL, owning your warehouse may yield spare capacity you can rent to other ecommerce brands, creating a new stream of revenue like Amazon did with cloud computing.
The recovery ahead
It’s crucial to have appropriate expectations about economic recoveries. Only 9% of companies that survived the Great Recession posted better financial metrics than they did prior to the downturn.
Surviving and thriving after a recession requires balancing the right cost-cutting measures with the right investment activities at the right time. No one can tell you precisely what to do or when to do it. Remember, research suggests the best recession antidote is a balanced focus on operational efficiency combined with investment in existing and new assets.
We’re in this together. We’ll continue to design, build, and launch tools to help you through this. We’re working for you. We’re also rooting for you.
See you on the other side.
This article originally appeared in the Shopify Plus blog and has been published here with permission.