How retailers are gearing up for another economic downturn

The ‘R’ word is not something that any company likes to talk up, as it can be a self-fulfilling prophecy, but the portents don’t look good. 

The UK economy shrank by 0.1% in March and by 0.3% in April, according to the Office for National Statistics. As a persistently high rate of inflation squeezes incomes and makes it increasingly hard for millions of Britons to make ends meet, the nation is in a grimmer mood than it was during the 2007-08 financial crisis, after the Brexit referendum and even in the early weeks of the pandemic. According to market research giant GfK, consumer confidence has fallen to its lowest level since the firm started tracking it in 1974. 

Shoppers are already limiting their expenditure and trading down. Retailers will need to show that they’re in the trenches with their customers, sharing the pain and working hard to retain their loyalty. 

“If you don’t flex with the prevailing winds as a retailer, you’ll get blown over,” warns Nick Cooper, global executive director for insights and analytics at the Landor & Fitch consultancy. “Brands have to remain price competitive. If they don’t offer value, consumers will be forced to switch. The trick is to retain the loyalty of customers when times are bad and pull them back up when times are good.”

As their budgets tighten, shoppers’ preferences are likely to become more extreme, more diverse and, hence, more difficult to predict. They will also seek more control as the economy becomes less stable. 

While many firms will start discounting, “the smart retailers will keep trying to crack what customers are really looking for in their lives. As everyone else is cutting prices, they’ll be focusing on creating value,” says Martin Bui, experience design director at marketing agency Tribal Worldwide. He points out that Amazon launched its first Kindle e-readers just as the global financial crisis was unfolding in late 2007 – “and people bought them then because they were perceived to be of value”.

No strategy will be worth its salt unless it’s driven by high-quality data. More efficient data-led planning and targeting will become crucial as consumers’ habits evolve during the downturn. 

Brands will need to dig deep into first-party data to really understand why consumers are behaving in certain ways. The aim will be to target and reward customers with timely, tailored promotions and boost that value offering. 

“A focus on data-driven tactics that are fully trackable, highly targeted and more able to deliver fast results will be understandably attractive,” says Siobhan Simpson, strategy director at ad agency The Brooklyn Brothers. “It will be interesting to see what consumers will cut back on. Over the past few years we’ve been reassessing our perceptions of what’s essential and non-essential. The things we think we simply cannot live without have changed as we’ve reconsidered what’s truly important to us.”

Physical retailing could also be hit hard again, just as it was during the darkest days of the Covid crisis. Fuel and energy cost inflation, staff shortages and supply chain disruptions are all hurting high-street retailers, which are also desperate to pass on high business rates to consumers. Having a multichannel contingency plan that can be adjusted quickly will therefore be crucial.

“It’s hard to implement a business-changing strategy to cope with recession a few short months before it hits,” observes Hugh Fletcher, global head of consultancy and innovation at Wunderman Thompson Commerce. “Retailers that ride out the storm tend to have large cash reserves, enabling them to thrive while their rivals struggle. They also tend to have omnichannel strategies, enabling them to dial up or down the channels most affected. They’ve also built technology solutions that can scale up and down with ease.” 

The past two years of upheaval have shown that brands could do more today to prepare for economic shocks tomorrow. We all crave reassurance and familiarity in uncertain times, so expect retailers to focus on showing such qualities. But a recession will ultimately mean some form of compromise. They will therefore need to work out what consumers are willing to concede and what they aren’t. 

“If not price, what are customers willing to compromise on? In the case of Netflix’s new subscription tier, it’s the inconvenience of watching ads,” notes Andy Humphreys, senior strategist at branding agency Coley Porter Bell. “Cosmetics retailer Beauty Pie has seen huge success after compromising a luxury brand for products less than half the retail price. Identifying what the negotiables and non-negotiables are for customers could unlock interesting new recession strategies.” 

Above all else, expect companies to build resilience. There are some new tech tools in the retail armoury, including AI systems that can identify new consumer trends as they emerge. A downturn certainly drives changes in buyer behaviour, which in turn create new commercial opportunities. 

Bui cites Lego as a case in point, noting that the firm’s profits increased during the previous recession when those of its rivals didn’t, “because it recognised that customers wanted toys with longevity. So it adapted its message to promote the durability of its products,” he says. “There’s still a lot to play for.”