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5 New Rules for Retailing in a Recession

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Back in 2009, during the Great Recession, Harvard Business Review published a piece by Ken Favaro, Tim Romberger, and David Meer entitled “Five Rules for Retailing in a Recession.” In this article, we’ll take a look at the rules the authors laid out and see whether they stand up in today’s crises. And, if they don’t, we’ll adapt them for 2020.

Let’s start by talking about what happened then in comparison to where the industry stands today.

 

What happened to retail in the Great Recession?

By the authors’ own account, the 15 years prior to the Great Recession had been a great time to be in retail, thanks to inflated home values, freely available credit, and low interest rates that encouraged rampant consumer spending. At 25%, the rate of growth in the retail sector between 1996 and 2006 more than doubled that of the U.S. economy. Retailers were expanding their national and international footprint, building their digital presences, and launching new concepts.

Even before the Great Recession began, retail was showing signs of a slowdown. Same-store sales had dropped, store closures began, and shareholder-value declined.

By 2008, retail sales had dropped to 35-year lows. Steep discounts became the norm. The rise of e-commerce didn’t help, as shoppers began to bargain hunt and some of retail’s long-established frontrunners—like department stores—began to feel the pain.

 

What’s happening to retail in the Coronavirus Recession?

The global effort to curb the spread of COVID-19 has dealt a major blow to retail. On one hand, essential retailers are trying to meet unprecedented demand for a limited subset of products that seems to evolve on a week-by-week basis. On the other hand, the vast majority of retailers have shuttered their stores and are relying exclusively on e-comm sales to move merchandise. Given the collapse in demand for non-essential items, spurred by stay-at-home orders, mass layoffs, and furloughs, we’ve seen a sharp drop in economic activity.

The Federal Reserve and Congress’ stimulus plan will provide retailers some relief, however it’s likely that we’re only seeing the beginning of long and sustained economic downturn.

Now that we’ve established where we stand now in comparison to 2009, let’s look at the rules and see whether they stick in 2020.

 

HBR Rule #1: Go to Where Your Headroom Is

According to Favaro, Romberger, and Meer, in a recession, retailers should resist the impulse to roll out new initiatives in an effort to retain market share and focus instead on getting the highest return on their resources.

In order to do this, they say understanding their “headroom” is key. Headroom refers to “market share you don’t have minus market share you won’t get.” Customers who are loyal aren’t part of your headroom, and neither are customers who are loyal to competitors.

Instead, your headroom is potential “switchers” who aren’t loyal to you or the competition. If you can earn a greater share of what they’re spending—even when their total spending drops during a recession—then you have a clear win.

Verdict for 2020: Checks out (but more so for some retailers).

The pandemic-induced recession of 2020 has certainly changed up shopping habits. It’s not only altering what people are buying and how much, but from whom they’re buying.

If a consumer was loyal to Amazon for household staples like laundry detergent and toilet paper, then guess what? With next-day shipping out the window, they’re probably buying these products from their local grocer like they used to. If they relied on Madewell for chic office apparel, they may be heading to Lululemon for comfy but Zoom-friendly layers. 

Retailers and brands have a unique opportunity to hold on to these shoppers even after we get a handle on the pandemic… if they get their value prop and messaging right. In times like these, the idea isn’t shoot first, aim second. It’s ready, aim, shoot.

 

HBR Rule #2: Close the Needs-Offer Gap

In the original HBR piece, the authors reasoned that most retailers have a lot of customers who could spend more money in stores than they are. In order to get shoppers to spend, they advised retailers to give those shoppers more of what they want, i.e. narrow the needs-offer gap. This can touch multiple areas of a business, from the products you sell, to the service level or in-store environment you provide or brand positioning you adopt.

The authors tell the story of a department store which, back in the aughts, found its apparel business flagging, leading to poor space productivity in comparison with the rest of the floor. The retailer undertook a months-long process to understand why its shoppers were heading elsewhere for apparel and then worked to close gaps through a series of targeted merchandising initiatives. 

Verdict for 2020: Sure, but incrementalism won’t cut it.

The point stays, but the example the article provides isn’t relevant today. Now, retailers can’t undertake months-long initiatives and hope for incremental results. Rather, the arrival of COVID-19 is a perfect test for retailers to see just how nimbly they can respond to a long-lasting shock to their system.

And a few retailers have already done it really, really well. Here are some of our favorites.

  • H-E-B, in partnership with its Favor Delivery service, launched a new service on March 20 to give seniors access to personal shoppers by phone, who can help them select from a curated list of essential items to be delivered to their home.
  • Best Buy got on the COVID-19 response train early, barring customers from stores in favor of contactless curbside service in all stores starting on March 22.
  • Walgreens quickly expanded its drive-thru service at 7,300 stores to offer more than prescriptions. On March 31, the retailer began offering household essentials, over-the-counter medication, select grocery items and more at drive-thru stores.

None of these initiatives would have worked had they been conducted with a gradual, dare I say, cautious approach. Sure, these retailers had set themselves up for implementing these changes before the crisis began. But the fact that they were able to mobilize and manage communications around operational improvements meant clear narrowing of their needs-benefits gap.

 

HBR Rule #3: Go After Bad Costs

The argument here is simple. In times of recession, go after the costs that don’t benefit your shoppers. Preserve those that will protect your sales and margins in a downturn to future-proof your business.

Verdict for 2020: Stay Relevant, At All Costs

Never before have we lived week-to-week in the way we are today. While it finally appears that we may have slowed the virus’ spread it’s unclear just how soon normal business activities can safely resume. For retailers, that means uncertainly about when and where stores will reopen and to what result.

If your stores are open right now, you’re probably seeing a rise in operating costs. Store traffic is probably down, while basket size is up.  Kroger, who reported a 30% bump in same-store sales for the month of March, also reported a sharp rise in operating costs as store adjust to new safety measures, mix changes, and higher demand. They’ve done what they can to stay relevant and spent where they needed to in these unprecedented times

If your stores are closed right now, you may have furloughed or laid off your workforce to account for the loss in sales or modified your operating strategies. Lululemon was admittedly better positioned than many  apparel retailers to weather the coronavirus. Nonetheless, they’ve acted quickly to stay relevant amidst cost-cutting by reducing senior leadership’s strategy and stopping its share buyback program, amongst other things. It’s invested in online sweat classes and non-seasonal merchandise to remain relevant and protected until business as usual resumes.

All retailers, regardless of whether they’re open or closed, will need to take decisive action to stay relevant and valuable to consumers in the face of the pandemic. And retailers will need to adjust their strategy for doing so on a week-to-week—or even “day-to-day”—basis.

 

HBR Rule #4: Cluster Stores

The authors of the HBR piece argue that retailers should cluster stores to account for differences in customer behavior, and then use winning strategies to duplicate success across their chain.

They cited two examples. The first was a small specialty retailer who clustered stores according to just three factors: the nature of the local competition, store location, and density of the local population. The second was big, multicategory retailer who clustered store differently to account for individual categories and departments. Once the retailer did so, they could see more easily the dynamics responsible for demand in different stores.

Verdict for 2020: Use Fuzzy Clustering for Dynamic Benchmarking

What the HBR article describes—measuring one store’s performance against others in its pre-established cluster—is no longer the best way of predicting demand in a store at a given time. Retailers were right all along: no two stores are exactly alike. And more than that, events like the pandemic reveal that unforeseen factors constantly affect what shoppers expect to see on store shelves.

AI tools (like CB4’s) now bring retailers dynamic benchmarking in which algorithms learn from a chain’s POS-data in near-real time to constantly form new store clusters. Our patented AI algorithms constantly learn from the data we receive, uncovering new consumer demand patterns as they happen and helping stores respond accordingly to capture sales at every location in a retail chain. The “fuzzy clusters” CB4 detects are ever-changing according to what’s happening in the environments around your stores.

The ability to predict demand using fuzzy clusters is more important than ever during the coronavirus recession. With virus hotspots constantly changing and local governments evolving their policies daily, stale store clusters aren’t going to cut it.

 

HBR Rule #5: Retool Core Processes

In the final section of their article, Favaro, Romberger, and Meer suggest that retailers who want to recession-proof their business should rework four of their core processes. The processes include: 1) customer research; 2) merchandise planning; 3) performance management; and 4) strategic planning. 

When it comes to customer research, the goal isn’t so much to understand who customers are or what they’re buying from you, but why they’re shopping with you and/or with your competitors. From the perspective of merchandise planning, it’s not about stocking what’s selling and reducing what’s not, but about going after headroom and productivity. In terms of performance management, it’s about eliminating bad costs, benchmarking stores, and closing the needs-offer gap. With strategic planning, it pretty much comes to all of the above.

Verdict for 2020: Rejuvenate Your People

Today’s retailers are learning and iterating constantly to keep their businesses afloat. So rather than spending time retooling their core processes, great retailers right now are focusing on reconsidering their people.

If your business is non-essential, you may have had to furlough your workforce or lay off loyal team members. Don’t expect morale to be high as soon as you reopen your doors. If you want to keep shoppers loyal, focus on bolstering and supporting your boots on the ground. Show your workforce that you’re doing whatever you can to protect them and their livelihoods, and then do it. Lip service won’t be enough.

By the time non-essential stores open, essential retailers will have already risen to challenges they may have never thought possible. It’s critical now that you keep supporting the employees who kept your doors open throughout the crisis. Stay positive in the face of adversity. Then, put your money where your mouth is and think twice before you remove benefits that you started offering as a result of the pandemic. Bottom line: don’t let the memory of what your people did for your business and your customers fade once we recover from the health crisis.

As the pandemic unfolds, we’d like to help… even if you’re not a partner. CB4 can run a free report on your chain’s data to help you capture demand-related opportunities in your stores as they arise and when they matter most. Email us at hello@cb4 to get started or learn more

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