The US economy has been in an expansion period for 11 years, the longest time in the history of the nation. Recessions are cyclical and come back every number of years. Around half of the nation’s business economists predict a recession in the US economy by the end of 2020. And for the first time since 2008, on July 31 this year, the Federal Reserve slashed interest rates as a precautionary measure to reduce recession risks.
Another early warning signal of a possible recession is fewer freight shipments across the country. The Cass Freight Index is showing a decline in goods shipped via truck, rail, and air from growing at 7.2% in June 2018 to a drop of 6% in June this year after consistently slowing down since last year. This downturn is different from that in 2015 and 2016 because it’s not caused by oil-related freight but an overall decline across methods. The economy is also showing a slowdown of GDP growth to 1.8% in Q1 2019 versus 3.1% the previous year. Such contraction is consumption also an early indicator of a possible recession. Economic output in Germany, the world’s fourth-largest economy, contracted in the second quarter, according to a report on Aug 14, while a report on factory output in China, the second-largest economy, came in lower than expected.
To add to the deepening global economic slowdown, the U.S. will impose a 10% tariff on the remaining $300 billion worth of imports from China on “certain articles”, originally slated to take effect Sept. 1, now delayed to Dec. 15. These include cell phones, laptops, some toys and some footwear and clothing. Retail executives on earnings calls have warned about the effects of these tariffs on their businesses, noting the potential for eroding margins and higher costs being passed on to consumers.
Last two recessions started the downfall of departmental stores while e-commerce was still in a growth stage. Online sellers have enjoyed unprecedented growth during the economic expansion while the departmental stores continued to struggle. The next recession will test the now widespread online businesses for the first time as the marketplaces are becoming saturated.
Cash is king
Warren Buffet, the legendary investor and Berkshire Hathaway’s chairman, is one of the most successful people to benefit from recessions. He even said that he hopes to see a lot of recessions in his lifetime. Berkshire Hathaway has made some of the best investments during the recessions. The secret behind this success has been their ability to conserve cash during the economic boom and view the recession as an opportunity to invest at a much better value for money.
Buffett’s simple rule in investing is a philosophy that any entrepreneur can learn from, including eCommerce. With cash in hand, you have the freedom to pursue opportunities that others cannot.
Invest in Infrastructure
Almost all businesses will be affected by the recession, which frees up opportunities to take advantage of lower asset prices that can help improve your manufacturing or ecommerce fulfillment. Having a solid bank balance can help you acquire infrastructure, including machinery and perhaps even warehouses. As an online seller, this can be an opportunity to purchase a warehouse from a struggling business to expand your inventory capacity or lower your cost on 3PLs. Another good investment can be purchasing an automated packaging machine or robotics-powered fulfillment technology, reducing your dependence on labor which is only getting more expensive and scarcer.
Expand into New Categories
During economic turmoil, some merchants will find it hard to weather the storm and eventually fold out. This is a good time to assess your opportunities to capture market share from merchants who have folded. With a good cash position, you can look to expand into those categories. A 2012 research study from Marketing Science Institute found that new products released during recession and right after recession have higher long-term survival due to the reduced noise and clutter in the market. Keep in mind the growth in the new categories may take some time, make sure you have enough reserves in your bank account to cover for your operations as you wait for the growth phase after the recession.
Expand into New Geographies
Not all countries or regions will be affected equally by the recession; some markets get hit harder than others. There is a chance that struggling businesses in those areas will be folding and selling their assets. This allows you the opportunity to purchase assets to establish yourself in the area at a more affordable price. If you have the capital to grow, be on the lookout for these opportunities in the coming recession. Behavioral finance tells us that people are prone to panic and liquidate their investments during crises such as recessions; but historically, markets bounce back after a crisis.
For an online seller, this can be an opportunity to set-up additional sales and operations infrastructure in a new market at a throwaway rate due to the recession. It may take time, but the business will ramp up as the region grows out of recession.
Invest in Hiring the Best Talent
Lay-offs are inevitable during recessions. During the Great Recession, 2.1 million Americans were laid off in 2009 alone. But with a solid financial position, this could be a time to hire the best talent out there. In an economic downturn, soft demand from customers can turn to a downsize, which leads to more job seekers in the market. With the coming recession in mind, plan out skills and competencies that your business will need for the long term and roles you should prioritize hiring. This would be a great time to assemble your perfect team. For marketplace sellers, warehouse and operations staff is always challenging, due to the physically-demanding nature of the job. Therefore, it would be easier to find talent to grow your warehouse team.
Negotiate the Best Deals with Your Vendors
When the recession hits, the services that rely on businesses as customers take a considerable hit as well. Vendors like shipping carriers, marketing agencies, advertising and media outlets, and packaging and merchandise suppliers may experience softening demands from their other customers. When these solution providers are feeling the heat from loss of business, you might be able to negotiate a better deal with them. One strategy is to negotiate lower rates with a longer commitment at a certain volume.
Acquire Your Competitors
Lastly, the coming recession may provide a rare opportunity for firms with liquid assets to acquire competitors and strengthen their market position. Unable to make profits, many firms scale down their sales capacity, and some eventually bow out.
Having cash on hand enables you to grab this unused excess capacity from other firms and expand your footprint. From a position of financial strength, you can negotiate a great deal to acquire a new online business or brand rights. Acquisition in the same category helps you scale rapidly when the markets recover. Plus, you might also inherit experienced talent from the acquired organization. Lastly, there will be cost savings through consolidation of shared business functions such as accounting, finance, legal and HR across the two entities. For example, instead of paying two subscriptions to order and inventory management software, the new firm will only have one. Keep in mind that integrating two companies is not a simple task, and the process can be quite complicated, consider enlisting help during the execution. Acquisitions can propel your expansion much faster than organic growth, provided you have the financial wherewithal.
Start Saving Now
Knowing how many opportunities a solid bank balance can bring, here are a couple of things you can do to build up your cash reserve for the coming recession
Optimize Your Costs
During an economic boom, businesses enjoy rapid growth in sales which can lead to reckless or maverick spending and lower margins from operations. When the business is growing, some sellers tend to overlook inefficiencies, like inefficiently packing their orders in boxes bigger than necessary resulting in higher dimensional weights. Spotting these issues and replacing them with best-practice solutions will increase profitability. To learn more on keeping ecommerce order fulfillment costs low, check out the most comprehensive guide to making free shipping profitable.
Outsource Wherever Possible
There is merit in minimizing your fixed costs. Developing capabilities in-house such as specialized product design and marketing teams, dedicated content creators, in-house customer support and sourcing personnel, or even manufacturing would incur a significant addition to your fixed costs that might drag you down when sales are not doing well. Thankfully, nowadays you can outsource a lot of services from 3PLs, drop shipping, web developers, to customer service. These outsourced organizations allow you the flexibility to scale resources up or down as needed, especially when you know there is a recession coming.
What Else Can You Do?
Stay Nimble and Be an Adaptive enterprise
While it’s tough to predict how long the recession would last, when it would arrive, and what may happen to your long-term bets regardless of your cash position. Quoting Forrester, being adaptive is what allows companies to win customers irrespective of the economic climate. Flexible and scalable solutions like the Cahoot Network provides benefits regardless of expanding or contracting business, therefore leaving you one less thing to worry about when economic conditions change. Adaptive firms have a higher chance of walking out of the recession stronger than their counterparts who are reluctant to make changes to their technology stack and in business processes in response to rapidly changing customer, competitive, and technology trends.
Act on Your Leading KPIs
Just as we track economic indicators to predict the recession well in advance, it’s advisable that you keep track of key business performance metrics as well. Typically, a business will keep track of revenues, costs, and profits. These however are lagging indicators because they are reported as results of your operations and not as helpful in understanding the future trends (e.g., why is the revenue lower this month).
On the other hand, the leading indicators are metrics that are available earlier and help explain your lagging indicators. For example, a business selling umbrellas on the Amazon Marketplace has its sales decline in the last month. Its leading indicators: number of impressions, number of product page visits, and search frequency of umbrellas all went down at a similar rate. All 3 of these metrics may explain there’s an overall decline in interest in umbrellas perhaps due to season changes. Knowing this the owner of the store can look for other things to add into the product catalog to continue growing sales. More examples of leading indicators are:
- The conversion rate of your customer visits, if search frequency and product page visits are healthy, is there something on the product page that is deterring the user from completing the purchase? Was there something newly added or changed on the page? Diagnosing this can help merchants take corrective actions quickly.
- Advertising spend on a particular advertising channel can be linked to total referred sales, making ‘traffic from a source’ a leading indicator. Should there be a dip in traffic coming from a particular source, the merchant can investigate further and try to fix it or increase promotion on other channels.
For the coming recession, look out for dips in overall customer demand by keeping an eye on your leading indicators, especially if it persists despite your corrective actions. When that finally happens, adjust how you operate to limit your exposure — Dial-Down your purchase orders to match the expected decline in consumption. If you are using third-party logistics(3PL) or Fulfilled-by-Amazon (FBA), be conservative in how much inventory you send there, so you don’t end up spending a fortune on storage costs or disposal in case the sales slowdown.
Some industries like dollar stores and fast food services weren’t severely hurt by the recession in 2008. These categories became substitutes when customers were cutting back on spending. Some of them did very well in the past recessions. There are many reasons for their resilience. The most apparent products are the affordable and essential categories; goods like cosmetics will continue to thrive because many people wear them daily for work and going out. In times of recession, people might opt-out of exotic holidays and scale back on their entertainment, which explains why affordable luxury (not cheapest) would continue to grow, and at-home entertainment like video games are likely to stay relevant. If you do not sell products in these categories, you might want to start offering them or at least build a sourcing channel for them, so you can deliver them when the recession hits. Having a more affordable version of your current product portfolio could also be a great value proposition for your customers when the recession hits.
Be Wary of Market and Government Reaction
Market or government reactions to a recession, such as your vendors folding or import tariffs up to 25% on your merchandise, may spell bad news for your business. Stay up-to-date with current events so you can spot potential restrictions that will affect your sourcing strategies, marketplace options, and ecommerce fulfillment services. For example, many eCommerce sellers are worried about sourcing from China because of the recent plans by the President to impose tranche four tariffs on $300 billion worth of Chinese imports. The government may pass such a bill during the coming recession, and it’s best to have alternative sourcing lined up in advance, if possible.
It is also essential to measure the impact of currency exchange rate on your business. If you are sourcing in one currency and selling in another, weakening of one currency could have an immediate effect on your profitability. Although we may never be completely accurate in predicting the impact of the coming recession on exchange rates, we can prepare for it. Consider adding more buffer in your margins to shoulder potential swings in exchange rates when the downturn comes.
Build Your Brand
Find the strengths of your products that determine why you matter in the market, especially in an economic downturn. If it’s been a while since you set this, this is a good time to rethink and redefine your unique selling proposition. When the recession hits and customers start to cut back, having a strong brand will discourage customers from switching. Additionally, when a big brand stumbles during the recession, you could stand out as an alternative brand to the migrating customer if you are a known and a trusted brand.
Prioritize Content and Email Marketing
Quality content and SEO optimization is key to generating organic traffic to your online presence, which will be important when it’s time to cut back on ad-buy. It would be best to have built these content and optimizations before the recession hits while you’re still enjoying healthy profits and strong sales growth. Another tool to generate organic traffic is creating an email strategy that goes beyond the catchy promotions and focuses on delivering targeted messaging to the customer. For example, invest in creating a data-driven recommendation system to send out a targeted email to your customer.
There are many ways you can prepare for the coming recession, but the key is building up a good cash position and a strong brand before it hits, and be a dominant player in the market. As a powerful buyer, you have the opportunity to get better rates and discounts from suppliers and double down on your long-term growth and profitability. And as a brand, you can be the go-to-alternative for flailing competitors and still have loyal customers sustaining yourself in the downturn. Recession is not a question of if, but a question of when. Being prepared for such an eventuality will be the key to turning bad news into good news.
Quoting Littlefinger, who was always a few steps ahead in the Game of Thrones, “Chaos is a ladder.” Let this coming recession be your ladder!