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Yale Economist K. Sudhir on the Future of Work, and How Retailers Survive a Recession

A man wearing glasses in a blue shirt.

K. Sudhir is in some ways a highly decorated translator. When he is not consulting for Fortune 500 companies, analyzing reams of internal data and converting them into actionable market insights, he is the James L. Frank Professor at the Yale School of Management, making enough sense of concepts like econometric modeling and quantitative marketing that they might reasonably be repurposed as term papers.

What better source to tap to help understand a time that quite literally comes without historic precedent—when a global health crisis has made mincemeat out of an otherwise healthy global economy? From his home office near Yale’s campus in New Haven, Conn., Sudhir discusses what types of companies weather a recession better than others, where opportunity lies for businesses and industries in crisis, and why the ways we work may never be the same again. “I think this actually is lighting a fire onto a fuel that is already there,” he says. “I imagine that there are going to be big changes to the nature of work.”

(This interview has been edited and condensed for clarity.)

Professor, let's begin with the million-dollar question. As we stand here today, what is your best projection about how our global economy is likely to suffer as a result of this pandemic?

Sudhir: Well, it's not good news. We are expecting, by various estimates, at least a 30% shrinkage in GDP (gross domestic product). Thirty percent seems fairly optimistic by many standards. 

[By] many expectations, there is going to be a big drop in the second quarter. But what I think people are concerned about is how quick the snap back would be. Most people, I think, are being optimistic when they expect this kind of a V-shaped curve, where it says, “Well, it's going to go down and then it's going to come back right up again.” 

I think it's more likely to be a U-shape, where it's going to stay for a bit at the bottom, and it'll take a while before things get back to normal. That's not so pleasant news, but I think that's probably more realistic.

What regions of the globe do you imagine might be hardest hit by this? 

Sudhir: I think, virtually, every part of the globe. China is coming back, and you'll see a certain level of optimism in China as things are opening up. I think the challenge, of course, would be whether they would have a second wave of infections, which would mean that everything would go back into closure mode again. And that can be quite bad.

Anything about the biology, the epidemiology, of [COVID-19] suggests to us that without a vaccine or a cure, the chances of things coming back is quite high. So my sense is [China] is going to test the waters, see how things are. Open it up a little bit. Try to keep things under control.

China has begun to re-open its nation following the COVID-19 shutdown

In a few weeks, China could be a good way for the rest of us to see how things would happen. In the U.S., I think it's going to take a while before we are going to see normalcy again. Almost all models that we see suggest that the peak [of positive COVID-19 cases] is going to be in 2-6 weeks or so. But that's all assuming that we are social distancing and we are keeping things under control.

Economically speaking, the retail sector is especially in flux right now. Supply chains have become a difficult proposition. Demand, outside of a few outliers, is generally decreased. Perhaps most notable of all is that many of our stores across the world are simply closed for what seems like an indefinite time. What is the risk in the retail sector as it stares down a recession?

Sudhir: Physical retail is obviously being decimated. The demand is nonexistent once you've told everyone to shut down, except for grocery stores and some essentials. Meanwhile, most retailers are trying to recover some of their business through online methods. For certain categories, that works. For many other categories, it doesn't. 

But we're going to see fundamental changes in consumer behavior—the creation of new habits around purchases. We obviously have a trend toward online. This would definitely accelerate that online trend. 

For retail, it's really, really bad because it's a high-cost sector. Lots of rents. Lots of debt. This is a highly leveraged sector. For many large retailers—think the JC Penneys of the world, Sears, the Neiman Marcuses who all are sitting on a pile of debt—whether they would recover from this recession, even if it is temporary, is a bit of a question. It will depend on how long [a recession] would be, whether they would have the liquidity to come back up again. 

For many smaller retailers, I think [they] will be fine to stem this tide and stay in business. But some of these very leveraged retailers, I think it will be really difficult.

What kind of retail companies tend to weather a recession better than others? 

Sudhir: The grocery market, you would imagine, is probably doing okay. Things like fashion are going to be suffering. People wear [clothes] because they want to go outside. If you're not going outside, you don't have much of a need to buy new things. Areas like skincare have done really well, where people are getting more time to groom themselves [at home]. [But] if you planned a home improvement, now is probably not a good time for consumers to go and spend that money. 

I think we'll have to look at it category by category. Anywhere where something is postpone-able, people are going to postpone it. Things that, if you don't consume today it's no longer necessary—you will see a big drop.

Grocery stores are one of the big retail winners during the COVID-19 pandemic

What happens after will be very interesting, because then, for some categories, you might see a segment of consumers—who have not been able to take advantage and enjoy these products—are probably going to go right back and say, “Well, let me consume all of that and splurge on those experiences.”

But more realistically, what's going to happen for a large segment of customers is that their incomes are going to drop, and they are not going to be able to splurge. It's going to take a while for many categories before the demand is going to snap back again. 

If I'm a retail company, what is the way I can best position myself to make it through this? Costco, which has dramatically shifted its SKU offerings, jumps to mind. Other companies are cutting costs like advertising. How should retailers become leaner and better suited to survive a downturn like this?

Sudhir: I think you make a great point. There are lots of things that you don't need and you don't buy [right now]. If people are going to restrict their demand to a very small number of items, it makes perfect sense [for retailers] to stockpile on inventory that people want a lot more of when they're staying at home, and cut down on all the other things that you don't need to have in the store. That's definitely something that we are going to see most retailers adapting to deal with this.

How else can they be lean? A combination of reducing inventory [alongside] financial restructuring would be necessary in order to be able to keep liquidity going. Many employees are going to be furloughed. That’s definitely one part of being lean. Making sure that you are still figuring out ways in which you keep most of that relationship going so that you don't lose these employees when things come back again—that's a tightrope walk right there.

Then with customers, trying to maintain as much of the relationship and trust that you can in the recession so, when things are better, that relationship can be continued. I think the biggest thing for most retailers is to think about the appropriate use of content marketing—the appropriate use of influencers in an online world to still reach out to that customer and be able to gain business.

The inverse of that is: Are there areas that retail companies should actually be wary of cutting right now? In other words, it may be tempting for a business to eliminate this cost from their current balance sheet—but that you might advise they should be cautious about trimming back on. 

Sudhir: What research has shown is companies that have continued to establish those relationships—spend the money on advertising and retain some of the relationships [with customers]—have flourished post-recession. 

The realistic perspective is: You've got to survive. Keeping liquidity going [however you can] is probably the most important thing at this stage.

There's no telling when retail stores may re-open following the COVID-19 shutdown

You mentioned changing consumer behavior earlier. How long does an economic crisis have to drag on for before changes to consumer behavior can no longer be considered temporary? They become actually a permanent change in the way consumers go about things… 

Sudhir: There's not a general answer to that question, but I think the answer is like trying to get anybody to try a new product. You have an onboarding process. And that onboarding process becomes second nature to you over time. Then you realize, “Hey, this is not so bad.” Using mobile payments, ordering online—these are behaviors that take time. 

The changes that we are now constraining people to force them to go online and order things. They have to solve these problems by necessity. And that means habit is a form of learning. It's a [new] routine [consumers are] learning. The sheer act of learning will shift behaviors [into] habit.

A new thing is: I've learned to cook, so I will cook more at home. Whether it becomes a habit or not [when this crisis ends], that will definitely bring down the share of [people’s] out-of-home [food] consumption.

For those still fortunate to have jobs right now, a significant chunk of employees have turned to remote work, which is certainly a new phenomenon. Do you have a sense of what, if any, may be some longer-term economic impacts of that? Do you believe we are simply able to be as productive as a working society when we work remotely?

Sudhir: In the short run, the answer is, “Well, you're asking me to fundamentally change a lot of my [working] behaviors. So I'm not as good as I might have been when I was in the office.” But again, this is like consumer behavior. This is an employee behavior thing—that I learn to adapt and do new things. 

I’ve learned to teach better using Zoom in my classroom. My students are now beginning to think, “Well, do I need all of these things in the classroom?” Student expectations are going to change, and the same thing happens at work. 

Offices, like retail stores, remain closed across the world

Beyond work from home, I think you might also see broader implications for outsourcing of work, which is essentially that, if things can be done online entirely, it may not be necessary to have them done within the office, as well. The ability to digitize a whole lot of work is increasing, and you're learning how to work in virtual environments. I think this actually is lighting a fire onto a fuel that is already there. I imagine that there are going to be big changes to the nature of work.

Speaking of the nature of work, many people across the globe right now are reliant upon the gig economy for their income. Indeed, they have been among the hardest hit by this crisis so far. Do you see this as a temporary slip that will return as the economy does? Or are we in need of a more dramatic correction as it pertains to the precarious nature of a basic income structure in the gig economy? 

Sudhir: The gig part of work is one that I think will come back. Because, again, everything that I just said about technology, disintermediation, or online channels—all of that is going to be supporting the gig economy. 

I mentioned outsourcing of work. The gig economy is one form of outsourcing where you're really bringing [in] and matching people. That is a trend that obviously is being cut off now, because people don't want to interact with each other. But once that issue is over, I think it is likely to come back because technology is going to enable that even more and enable more [gig work] rather than less. 

While the gig economy has been hardly hit, it may retain stronger than ever following a recession

We have had many things cause economic downturns in our history, from a shaky banking sector during the Great Depression to a shaky housing sector during the 2008 recession. Even 9/11 had its own significant impact on the economy at large.

A global viral outbreak, at least in what we may consider recent times, is something new altogether. Do we have a historical comparison to this time we are in now economically? 

Sudhir: The historical comparison is the Spanish flu, I would imagine. But that was a very long time ago, and the world was a very different place. Clearly this [COVID-19 crisis] has definitely taught us a few things. A lot of it is learning about: Do we need to travel so much? Do we need to commute so much? 

A question that relates especially in the context of climate change is: Are certain kinds of changes in behavior important? Lots of people are seeing blue sky in various parts of the world for the first time in many, many years. L.A. has clean air. Beijing has clean air. New Delhi has clean air. These are things that citizens, in the abstract, probably couldn't imagine [were possible].

Pollution levels are low in major cities across the world due to COVID-19 shutdowns

I think, for a whole lot of young people, it could be interesting that they understand these are things that actually we could have if we were able to reduce consumption in certain ways. It definitely opens the possibilities that perhaps there are different ways of doing business and creating supply chains that could be better globally. That's a trend that was already beginning to happen in spite of this, but this gives us some signs that those possibilities are there.

Some of the latest news, in a report from CNBC, suggests that this recession we may be heading toward will be unlike any other that has come before it—in that it was prefaced by a health crisis, not necessarily an unhealthy economy. What does that mean for our prospects of recovery?

The good news is that there was no fundamental economic issue that caused this. But the pain that it has created in terms of lost demand and all of the other costs that happened—many people not being able to pay interest payments, people not being able to pay rent—is going to create a whole lot of debt and other things, which will then be a heavy stone for people to move forward. 

While it is absolutely true that there's not the underlying lack of demand or other supply side or fiscal problems that caused this, the loss of demand, the loss of trade, and the loss of economic transactions has caused real damage to people and their lives.

To me, [recovery] will eventually start, because the economy is fundamentally okay. But the question is: How fast will it snap back? My view is that [the economy] is going to remain flat a little bit before it takes off, rather than something where it says, “Okay, well, we've gone down, things are back again to normal, and we are going to go right back up again.” That's how I think it will take place. 

There is room for opportunity in times of crisis. The dot-com bust, say, produced companies that thrived in the wake of that downturn. 2008 was also a time when an underserved part of the retail economy—ecommerce—began to really take off for the first time. Do you have a sense of what that might be this time around—where that opportunity may live for new enterprise right now?

Sudhir: The need for efficiency. Companies are going to think about their production technologies in very different ways. Should I use robots to produce things? These technologies are there [already], but [most companies] have not committed to those expenses because you still have an alternative way of production. But this might accelerate some of those things, with logistics and automation.

Companies may look for even more resilient forms of automation going forward

From a social perspective, we are already beginning to see an interesting change. When [former U.S. presidential candidate] Andrew Yang (pictured below) talked about a universal basic income idea, nobody took it that seriously—even though a small segment of the population thought that was a sensible thing. Now that you're sending out $1,200 checks to people, people are beginning to see, “Oh, we see this as a universal basic income idea.” You could never have imagined that three months ago as something realistic.

Now, I'm not saying that the country is ready for universal basic income in the next year. But the idea behind universal basic income was that if robots are going to do most of [our] work, we can produce incomes and economic growth without really having to employ people at the levels at which we have to employ [them].

I don't imagine any of these things are going to happen very quickly. But this kind of dramatic change has made it really feasible and possible to think about those options in serious ways. An idea of universal basic income may not be as far-flung as we might have thought if technology and some of the changes that we are seeing from the sector have a multiplier effect on production itself.

One-time Democratic presidential candidate Andrew Yang ran on a campaign of universal basic income

Let's wrap up here, professor, with a couple of quick notes on optimism. What will recovery look like for us here? Will it be signals in the stock market? Will it be other economic markers that suggest we are on the upswing again? What will tell us that recovery is underway?

Sudhir: The stock market is obviously an important indicator. The stock market is also going to look at other aspects in what drives [recovery], like: Are businesses [re-]opening? Are people willing to take debt? Increases in demand, etc. 

What we are now seeing with small rises [in the U.S. stock market] is a belief that the couple trillion dollars we are putting back into the economy is going to have some impact on keeping the economy alive during this period where there is very little traction. 

It's probably better for us to adapt to the idea that there is going to be a somewhat long period before demand will snap back up. Because people are going to be very worried about spending their money—the limited amount of money they have.

Obviously, a certain segment of the market which had been cooped at home would be very happy to go back and live their lives again. But a large number of people, I think, would be more worried about their liquidity. I think we are probably going to see a shrinkage of the economy for a while before we see it snapping back again.

This article originally appeared in the Shopify Plus blog and has been published here with permission.

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