Boom, gloom, or doom? What the next recession might mean for consumer companies has been added to your bookmarks.
Boom, gloom, or doom? What the next recession might mean for consumer companies
How to start preparing now
The retail industry has good cause to celebrate this holiday season: Consumer confidence is up, spending is up, unemployment is at historic lows, and inflation appears to be relatively tame. But with many US consumers still recovering from the Great Recession and the retail economy showing signs of weakness, what will happen when the next recession hits?
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- A tale of two recessions: Acceleration of structural change
- Eroding retail ROA = challenges ahead?
- The new recession playbook
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Ominous clouds on the horizon
Since World War II, the US economy has faced 12 recessions, one every 6.1 years on average. A decade after the collapse of Lehman Brothers, the US economy still seems to be showing signs of strength:
- Consumer confidence is at an 18-year high
- Unemployment fell to a 49-year low of 3.7 percent in September 2018
- Inflation appears to be relatively tame at 2.1 percent and within respective central banks’ range
On the other hand, recovery from the Great Recession has been uneven for both retailers and consumers. We are also starting to see ominous clouds on the horizon that could be warnings of a recession ahead. The flattening yield curve, rising asset prices (with sharp corrections), tightening monetary policy, and ultra-low unemployment
In our recent analysis, The next consumer recession: Preparing now, we encourage retailers to plan for and invest in what is likely inevitable: The next consumer recession.
A tale of two recessions: Acceleration of structural change
While there were striking differences between the dot-com crash and the Great Recession, both left large portions of the population struggling for income growth and served as a catalyst to accelerate structural change in the industry. Digital commerce has continued its steady ascent. New competitive entrants, including digitally native startups, European entrants, and consumer product companies direct-to-customer efforts, accelerated their performance and challenged traditional players. Consumers who shifted to discount players during the Great Recession continue to bolster performance for discount retailers today.
- Will relative digital and e-commerce sales growth surge again?
- Will market competition increase and share fragment?
- Will discount formats accelerate and outperform the market?
With entire segments of consumers still not fully recovered from the Great Recession and the industry showing signs of weakness, what will happen when the industry faces the next recession?
Eroding retail ROA = retail apocalypse?
Between 1999 and 2012, retail performance predictably rose in bull markets and declined during bear markets, as measured by return on assets (ROA). At this point in our long economic recovery, one would expect strong retail performance and healthy, improving ROAs.
Instead, ROA fell from a high of 9.3 percent in 2012 to 6.1 percent in 2017 based on retailer fiscal-year performance. The unabated decline has been staggering, placing the industry in the precarious position of showing significant weakness when you’d expect strength.
Return on assets (median value of more than 100 US retailers)
Source: Capital IQ, Deloitte analysis of more than 100 US retailers using retailer fiscal year performance.
The decline in ROA appears tied to a confluence of factors: slower revenue growth, compressing margins, increasing SG&A, and slower turnover of total assets inventory levels. While industry analysts may point to declining ROA as evidence of a retail apocalypse, we see it as an opportunity for companies to differentiate winners from the losers.
Regardless, the trend raises important questions: Are consumer companies healthy enough to withstand a potential downturn? If a recession comes, will retailers be able to endure financial pressures while re-positioning for the potential of accelerating structural change?
The decline in industry-wide ROA has been staggering, showing significant weakness during a period in the business cycle when you’d expect strength.
— Kasey Lobaugh, Deloitte's US Chief retail innovation officer and omni-channel retail practice leader
The new recession playbook
Today, nearly 10 years after the start of the Great Recession, the consumer industry is showing cracks in the foundation. With structural changes upending the industry and profitability in a precarious position, it’s critical that consumer companies develop a recession plan now.
If you revisit the cost-cutting playbook of the past, you run the risk of retrenchment at the exact moment you need to be looking ahead. Your new recession playbook should focus on four factors critical to success:
- Determine why you matter
- Build a war chest to invest in growth
- Embrace technology and automation to better leverage growth
- Look outside your four walls to embrace partnerships
As we look out at the horizon, we see cause for celebration and caution. While consumer business and the US economy, in general, are strong, an increasing set of indicators point to a more challenged macro situation, which could ripple through the economy to the consumer. The next recession is certain to occur, and companies with moderate growth and declining returns are likely to be in a precarious position if they have not developed solid strategies to plan and invest through the recession.
The moral of the story: Slow down.
Don’t just act. Plan for the best, plan for the worst, but plan for the future of retail now—before the recession is at our door. We are fascinated to see how the industry continues to unfold and accelerate, and we hope our full report proves valuable to your business as you prepare for whatever the future brings.
Consumer companies cannot rely on the old-cost reduction playbook anymore; they should invest in the reality of accelerating structural change.
— Rod Sides, Deloitte's US Retail and distribution practice leader