Welcome to part 2 of our Recession-Proofing Your Business series. In the first part of this series we went over strategies that retailers can use to handle the recession. Some of these strategies included:
How to use software automation to reduce operational costs
How to reduce inventory based on changing customer needs
How to improve your relationship with customers.
In this blog, we will explain why consumers needs recession-proofproducts.
What are recession-proof products?
As the name suggests, recession-proof products are items that traditionally sell well during a recession. These are the type of products that people will keep purchasing even when money is tight. Here are 4 ways to tell if a product is recession-proof.
1. Inelastic demand
Elasticity with products or services is a way of explaining how shopper behavior changes when retail prices and household finances change.
When something has elastic demand, it means that any small change in price or the economy will have a big impact on whether customers will change the way they shop. The best examples of this are discretionary products. This is products that are not essential such as clothing or vacations. When the price of these items increase or people are short on money, more people will buy less clothes or take less vacations.
In comparison, products with inelastic demand are things shoppers will keep buying, even when retail prices increase or they are short on money. These products are usually seen as ‘essential‘, without any good substitutes. Products such as prescription drugs, tobacco, salt or mobile phone plans are good examples.
Remember that essential products aren’t always things needed for survival, but they are products that shoppers feel they cannot stop buying. This can include products that comfort people during difficult economic times such as recreational products which satisfy certain emotional needs. Maselow’s hierarchy of needs above is a good way to think about whether a product you sell is inelastic. Products that satisfy needs higher up in the pyramid are more likely to be inelastic and harder to substitute.
Uncertainty during a recession can lead to a lot of stress and anxiety. People will be looking for ways to escape from these tensions. So products that entertain people and help them keep their mind off of things often sell well during a recession. TV streaming, video games, junk food, alcohol, and similar products are examples of this. In the last part of our Recession-Proofing Your Business series, we touched upon the idea of the lipstick effect. This is a great example of how people shop based on the need for escapism and comfort during a recession.
Whenever there is inflation, people want to stock up on certain products to avoid paying a higher price in the future. As a result, every day essential products with long shelf life will do well in a recession. As long as supply is reliable, essential products such as canned foods, rice, toilet paper, dish soap or instant ramen noodles that can be sold in bulk will continue to sell.
Encouraging shoppers to stock up on shelf stable products is known as stocking the pantry. By selling products in bulk, even at a lower price, retailers make marginal profit on the same sale and limit the space available in a household for shoppers to stock competitive products.
4. Seen as a lower-cost option
If you sell elastic products (non-essential products), it’s always a good idea to offer lower-cost options during a recession. This can be something as simple as smaller sizes or features. Making a smaller sale is still better than losing a sale completely. As long as you are clearly communicating how features vary between differently priced options, you will still be able to offer higher value products for those who can afford it.
You can also use the Apple’s Goldilocks strategy. Placing an expensive option next to a decently-priced option makes the cheaper one seem like better value.
Here are a few examples of how smart retailers are offering wallet-friendly versions of popular products during these inflationary times.
Retailers sell two versions of the Flonase nose spray. One with 72 sprays and one with 144 sprays. Giving consumers a choice between spending more to get more uses, or spending less. (Source)Uniqlo uses the idea of the Apple’s Goldilocks strategy here. Where you show an item at a higher price right next to a cheaper item. The more expensive product doesn’t look much better than the sale item, so consumers feel as if they are getting a great deal. (Source)
This is the same, even if you sell services or subscriptions. For example, it’s a good idea to offer lower cost subscription plans to avoid cancellations. The best example of this is what Netflix has done recently with their new ad-supported tier. By offering a downgradable plan, more shoppers will keep Netflix versus cancelling their subscription.
Netflix Canada’s pricing table for the different tiers of membership (Source)
Recession-proof product categories
Now that you understand some of the reasons that drive shoppers to buy during a recession, let’s take a look at some examples of product categories that sell well when times are bad.
Food
This one is obvious since people need food to survive. As we said earlier, food that has a long shelf life will perform better when times are tough. The demand for cheaper food will always increase when shoppers are looking to save money. Of course a recession won’t stop consumers from purchasing food, but you can expect shifts in the type of food they will choose to spend on. If you’re a grocer or you sell food at your store, take the time to consider how to change your product line to meet these new shopper needs.
Products for personal hygiene, self-care, and beauty have historically done well during recessions. This is thanks to the lipstick effect. However some of these products are also necessities, such as: toiler paper, soap, towels, etc. These products are needed by consumers and demand will generally remain stable.
DIY products
DIY lifestyle products also do well during recessions. This includes products that help improve your home (e.g. gardening tools, drills, hammers, nails, lawnmowers, etc.). Other examples include DIY products that give people an affordable creative outlet such as home decor projects or hobbies. It also allows consumers to save money as they will not want to pay a service for things like home maintenance during a recession. After all, DIY is a form of escapism and helps people de-stress.
Pet products are strong recession-proof items as people consider their pets as members of their family. So they are not going to be forgotten during a recession. Especially essential products for those special family members. These include: food, litter, treats, and waste removal bags. Pet products will remain inelastic in demand throughout a recession.
Once again people’s need for escapism helps another product category remain recession-proof. Recreational products are a staple during a recession. Lower-cost recreational products perform even better. A deck of cards, board games, cheaper video games, and cost-effective movie streaming are all examples of great recreational products. However these recreational products don’t only have to be in-home options. People will look for way to escape outdoors as well, sports equipment and camping gear are other great recession-proof products.
Off-price retailing is the strategy of buying out-of-season or overstocked branded products and selling them at heavily discounted prices. Off-price shopping increases during recessions so if you have any distributors or suppliers willing to sell you their extra stock at a lower cost, you can also look at offering branded products at prices below MSRP.
Conclusion
Now that we’ve gone over product categories which have historically done well during a recession, you should review your own product mix to determine if you’re selling the right things during these tough times. If you are seeing success with other categories, please feel free to share your thoughts with us below in the comments.
To deal with a recession, investing in tools that optimize your operations is key. TAKU Retail is helps you manage your entire store and ecommerce operations, all under a single login. At the same time, we’re constantly adding new features to help our merchants deal with labor shortages. Click below to learn more about our new self-checkout feature to sell more with less staff.
Don’t let uncertain headlines give you the wrong impression, we are most certainly heading into a recession. With the IMF reducing their global GDP forecasts, there are tough times ahead. This can be a worrying time for business owners. But going through a recession doesn’t have to be as scary if you can prepare your business for it. Recession proofing your business today will make it much easier for you to ride out the storm ahead. This is Part 1 of TAKU’s series on recession-proofing your business.
What exactly is a recession?
A recession is a drop in economic growth in a country for at least two quarters (or 6 months) in a row. The drop in economic growth is calculated by GDP. Some people say that GDP does not truly represent the health of an economy. However, it is still a good indicator when to expect a slowdown. If you look at the graph below, you will see that Jan 2022 to June 2022 were the first periods of economic decline since the start of the pandemic.
This chart shows that the 2 quarters of 2022 have had drops in economic growth – officially making this a recession. (Source)
Knowing that your business will face a decline in sales or a lack of access to outside financing, we can begin by developing a game plan to recession proof your business.
Find ways to save money during a recession
More and more businesses will have cash troubles as the recession continues. So it is crucial that you consider ways your business can save money. Here are some tips regarding saving during a recession:
As a retailer you may be paying for services and products that are not essential to your business operations. It is important to take a look at the costs for your business and figure out which things you don’t absolutely need to keep your business running.
While you will want to review every single expense, it’s important to remember that the best way to stay profitable is to focus more on tools or services that help you sell more or save more money. This means, if you have to decide between buying a scale or running an ad campaign, you’re better off spending on digital marketing to keep sales up and possibly even grow market share when your competitors are pulling back.
One of the few good things during a recession is that demand will fall on things such as marketing spend. This can be good for your business as your competitors are spending less while it will cost you less to run ads.
At the same time, as demand for some services or products fall, when it’s time to renew a contract, make sure to try to negotiate for better rates or at least lower increases during these inflationary times.
Debt is often unavoidable when you’re running a business. But in these times of higher interest, all debts aren’t equal. Make sure that you’re familiar with the interest rates, fees and due dates associated with the debt you’re carrying. When paying down debt, always pay down higher interest debt such as credit card balances first to minimize the amount of interest you’re paying.
Investments are always necessary to maintain and grow businesses. But similar to what we’ve said about debt, all investments aren’t the same. The most important thing for any investment is to consider the return on investment. Return on investment refers to how long it will take for you to recover the cost of the investment. And usually ROI is best on purchases that help you optimize profitability by increasing sales or reducing your operational costs.
Pay monthly instead of upfront
Another thing to consider is whether or not what you’re looking to purchase is available on a monthly basis. This is particularly true with technology solutions. While it can appear to be cheaper to make a one-time purchase when buying software, the reality is that technology moves quickly and technology solutions that charge on a monthly basis offers a number of benefits:
Significantly lower upfront costs. In these inflationary and recessionary times, cashflow is king.
Constantly updated technology so that you always have access to new features that work with the latest devices. “Resilience” was a keyword during the pandemic. And a recession is just as uncertain for businesses. Having the ability to adapt your business with the latest, flexible technology might be key to your survival.
The ability to try technology to make sure it is right for your business. Most installed software cost the equivalent of several years of subscriptions. And if you’ve paid that much money upfront, you won’t be able to switch even if it’s not working out.
Use automation to reduce operational costs
Everybody has heard about the staffing shortage in the retail industry after the pandemic. With record high inflation, hiring staff is only getting more expensive. Where possible, consider using automation technology to reduce operational costs. For example, if you’re a busy store, solutions such as self-checkout kiosks are an easy way to lower operational costs while improving customer experience and sales by speeding up lineups.
Understand consumer needs
The businesses best able to thrive during a recession are those that are constantly aware of what their consumers are looking for. Even though overall demand will decline during a recession, there are product or service categories where demand may stay the same or even increase. This happened during the pandemic and it will happen again during a recession as shoppers change their buying habits.
Recession-proof products and services
The performance of some product types during a recession (Source)
The most recession-proof products are the types consumers will always need. Things such as food and energy will always be in demand. Normally speaking, businesses selling non-essential items will have a harder time. The interesting thing with the current recession is that there is also a trend of shoppers looking for ways to improve their lives after several years of pandemic restrictions.
The best example of this are products with “lipstick effect”. When shoppers do not have enough money to spend on big-ticket luxury items, many will find the cash to purchase small luxury items, such as expensive lipstick. So while it can be expected that shoppers will spend less overall on “discretionary” products, they will spend money on things that increase their standard of living, especially if they are good value for money. In Part 2 of our Recession-Proofing Your Business series we will take a deeper look into current retail product trends and how retailers are successfully marketing products during a recession.
Trim your inventory
As mentioned, lower sales lead to more unsold stock on shelves. When you’re carrying more inventory, you will need to deal with more theft, damage, obsolescence, and increased storage costs. You will need to get on top of this by:
Purchasing products your customers are more likely to buy. Do this by staying on top of any changes in your shopper buying patterns. This means tracking your top sellers on a weekly or monthly basis to see. For example, buying products more likely to have the lipstick effect such as home spa kits is always a smart move during a recession.
Stocking less seasonal products unless you are sure that they will sell. The selling time for seasonable products is more limited vs. products that can be sold year-round.
Have a good relationship with your suppliers to optimize your purchasing lead time. As a retailer, it’s important to have products in stock when shoppers want to buy them. But you don’t want to stock too early or too late to avoid locking in your cashflow or not having products to sell. As the supply chain problems during the pandemic start to improve, make sure you’re working with your suppliers to receive products when you need them. Depending on their own situation, good suppliers will try to work with you, especially during a recession, as their business depends on your own success.
Consider your existing operations. Are there ways you could add new sales channels or add products to generate new revenue? A few ideas you could consider include:
Adding more recession-proof products
Distributing to other retailers if you make your own products
Starting an online store under a different brand to sell only discounted or clearance items
The important thing to remember here is that additional revenue streams are incremental sales. As long you’re not adding a lot of extra overhead costs, they generally have the lowest marginal cost as you would not have made those sales anyways.
Partnerships and alliances with other businesses can help strengthen your business. You can reach out to other businesses and see how you can help each other during a recession. Partnerships can help make your offerings more attractive to customers. For example if you sell homemade soaps, you could reach out to a local business to start selling from their store or sell kits together with them. This way you have more products to sell and/or another way to reach new customers cost-effectively.
Take the time to really deepen your bond with your customers. Focus on providing excellent customer service to improve loyalty. Obviously this is an important strategy during all economic conditions, but during a recession it can really help you keep your business afloat. Studies have shown that shoppers have continued to support local businesses more even after pandemic restrictions ended. When customers are loyal to you they will continue to shop with you despite hardships.
There will be tough times ahead for all types of businesses. But this does not mean it is all doom and gloom. Smart entrepreneurs will look for ways to make their business more resilient by optimizing their operations, pivoting based on consumer needs, and even finding ways to grow. You should take some time and evaluate your business’ position. If you are able to make good decisions during this time you may just come out of this recession better than before.
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