Christmas cheer is not brimming among retailers – the cost-of-living crisis is hitting their customers hard and spending will be squeezed over the next few months.
But there are useful strategies to pursue, categories to prioritise and lessons from previous economic downturns. Propeller’s panel Ouch! Right in the wallet … coping with a cost-of-living Christmas crunch at eCommerce Expo laid out what retailers should prioritise and actions they can take to preserve margin.
Will Parrott, Propeller Practice Director for Commerce, chaired the panel featuring former CEO of Jack Wills and Executive Director at Debenhams Suzanne Harlow, Chief Operating Officer of Everything5pounds.com Robert Kulawik, and Chairman of Retail Economics Stephen Robertson.
Consumer tactics to save money
The panel agreed that when the likely recession arrives, it will not affect consumers equally. The least affluent will suffer disproportionality – their disposable income down 17% year-on-year in September, according to Retail Economics’ Hyperjar Cost of Living Tracker.
Retail Economics quizzed its consumer panel on the tactics they were adopting to save money, which are ranked by importance as:
- Trading down to value items and ranges
- Using more voucher codes
- Delaying buying big tickets
- Buying second hand and purchasing essentials in smaller quantities
- Shopping more in-store and using cash more to help control their finances
According to Stephen, the impact of belt-tightening is not equal across all categories and the survey suggested consumers will cut back on Grocery, Hospitality (both out of home and delivery), Subscription and Apparel. But these are matched by a set of categories where people said they won’t economise, which include Pet, Beauty, Fitness and Insurance.
As Stephen pointed out: “This recession is going to create winners and losers – let’s be positive about the areas of opportunity.”
Living in the future but looking at the past
The 2008 recession does provide some pointers for retailers and brands on how to react, although ecommerce was still very much in its infancy at this point and social media usage was still nascent during the last big economic downturn.
Suzanne was Group Trading Director at Debenhams during this challenging time and highlighted that one of the main lessons learnt was ensuring strong focus on where retailers place promotional emphasis – simply discounting across the board does not make sense and only serves to dilute profit. She said: “You have to be laser-focused on promotions or you just destroy margin.” People will be bargain-hunting and “want real value and real deals,” she added.
Stock levels need to be closely monitored and multichannel retailers need to monitor inventory minute by minute and allocate it to their most profitable channels.
Robert stressed that as a budget clothing retailer, it was getting harder for his business to find the deals to give value to customers in the face of rising costs, such as the duties and taxes on goods from Europe. “Retailers have to ask themselves what other uniqueness can they deliver to customers? What do you have on offer?”
Stephen added that it was important to understand the price elasticity of your products as consumers would still want small luxuries and there would be huge demand for little treats like chocolates, and lipsticks.
Marketing spend should be ring-fenced
Cutting marketing spend is also very dangerous. Brands have to stay visible in such a fiercely competitive market and when a rebound comes it is far harder and more costly to re-acquire the customers that have drifted away.
Stephen cited the example of Procter & Gamble, which adopted a ‘double down’ marketing strategy during the COVID-19 pandemic to maintain brand visibility, compared to Coca-Cola, which chose to ‘go dark’. P&G enjoyed revenue growth of 4% for 2020. Coca-Cola saw a full year reduction in net revenue of 11%, while rival PepsiCo, which kept investing, grew net revenue by 5%.
Robert explained that his own company had to cut marketing costs during COVID and “paid very dearly over the next few months.”
Summing up, Suzanne said, “there will be a finite amount of money to spend” for Christmas; people will start buying children’s gifts early, will hold back spend for Black Friday leading to a real dip in the run up to Christmas.
The final piece of advice was to try to understand profitability on a granular level for channels and SKUs by ensuring the finance department gives fast and accurate breakdowns.
Overall, the panel agreed retailers who hold their nerve, are smart on pricing and promotions and maintain their marketing activity have a much better chance of maintaining margins, finding new customers and increasing their share of consumer spend over the final quarter.