• May 1, 2008
  • By Jessica Tsai, Assistant Editor, CRM magazine

Market Focus:
Retail/Consumer Packaged Goods -- Price Check, Aisle 5

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After months of whispers and sotto voce chatter, the word is finally being uttered out loud: Recession. While some retailers are claiming immunity, the industry overall is undoubtedly feeling the pinch. Economic spending has declined and consumer behaviors are clearly exhibiting the symptoms of a recession. Experts anticipate this recession will have an impact lasting at least nine months to a year, easily rolling into a two-year phenomenon.

SpendingPulse, provided by MasterCard Advisors, the professional services arm of MasterCard Worldwide, is a macroeconomic indicator of the national activity of retail sales. (This research is not indicative of MasterCard's own corporate results.) According to results based on aggregate sales activity in the MasterCard payments network and estimates for other payment forms, including cash and check, retail is displaying growth rates that align with historical patterns indicative of a recession, says Kamalesh Rao, director of economic research at MasterCard Advisors.

After factoring out the spend on gasoline, and controlling for this year's extra day in February, Rao reports that retail's year-over-year growth from February 2007 to 2008 was 1.2 percent. In 1991, during a recession, the year-over-year figure was 1.4 percent -- which Rao says is a sign that "retail spending may have actually dropped to the level we expect to see."

While Rao says he understands that retail is a relatively more volatile industry, he expects to see the sector continue at this pace without any significant rebounds. Moreover, he adds, even if the rest of the economy starts to climb back, retail is traditionally slow to follow suit. Consumers continue to remain cautious with their money, especially if employment opportunities aren't expanding.

But this latest economic belt-tightening may be generating an all-new response. For the first time in the 15 years of its annual Consumer Sentiment Index, consulting firm AlixPartners found that customers ranked getting "the lowest price available" as the most important factor contributing to their shopping decisions. Furthermore, the research unveiled three other major trends in shopper behavior: Consumers are trading down; consumers are shifting from specialty stores to multiproduct department stores; and consumers are increasingly accepting of store brands, such as JCPenney.

Most shoppers are moving down the retail value chain -- Bergdorf shoppers are going to Nordstrom, to JCPenney, and to Wal-Mart. And yet pockets of the retail sector -- high-end, ultra-luxury goods -- are less susceptible to the recession. Consumers attracted to these products "may be cognizant of price, but they will not make their decisions based on price," says Fred Crawford, a managing director with AlixPartners. For those consumers, it's always been about brand image and the personal perceptions and sentiment attached to it.

This is not to suggest that retailers should resort to competition solely based on price. Service continues to be an important factor and maintaining close relationships with your customers -- figuring out their purchasing rationales and tendencies -- is absolutely critical.

Retail has always been comforted by a robust cash flow, but Crawford is doubtful that companies that don't adjust their business models accordingly will be able to ride out this two-year period. "Cash flow exists, but it's short-term," he warns. "You have to evaluate your cost structure, take the right risks, and get out quickly."

Instead, companies should focus on making the most of what they have. "Business analytics thrives during economic downturns," says Jim Davis, chief marketing officer of SAS Institute. Apparel retailers, for example, can benefit from size optimization -- quantities of small, medium, and large -- based on selling history, requesting just the right amount of inventory to avoid excess.

Successful companies understand their marketplace and their consumers -- and build the necessary infrastructure to support the entire ecosystem, Crawford says. Retailers need to be realistic about the market conditions, and Crawford has the following suggestions for preparing for potential headwind: "Stay the course, control your inventory, be prepared to mitigate risks, take your markdowns early, and complete your decisions," he says. In other words, now is not the time to be testing new strategies.

In rough economic times, the keys to survival are the abilities to make quick decisions and to remain flexible to the whims of the market. "You don't want to make the runway short and guardrails tight," Crawford says; otherwise, you'll find yourself stripped of any real options. In the end, it all comes down to restructuring the business in order to provide customers with the best value. The success stories of this era, Crawford says, will come from those that "understand their strategy, understand how they're different, and respect the decision and dynamics of the customer."

Top Vendors -- Retail/Consumer Packaged Goods Source: Cathy Hotka & Associates

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