The rumors of an impending US recession (and globally) are getting louder. According to a Wall Street Journal survey of economists, the average possibility of the US economy undergoing a recession sometime in the next 12 months has increased from 13% a year ago to 18% in January and 28% now. Surveys from Bloomberg also seem to agree – with 30% of their surveyed economists estimating the chances of a recession in the next 12 months at 30%.
The familiar signs are all there. Inflation increased to 8.5% in March, prompting the Federal Reserve to increase interest rates to cool the economy. Between the rising inflation and interest rates, we’re also seeing the third leading indicator of a recession – an inverted yield curve. US treasury bonds are now seeing higher yields on short-term bonds (v/s long-term bonds) – which is commonly considered to be a sign that investors are losing faith in the economy.
With all the common indicators pointing in one direction, we could be in for a downturn in the not-so-distant future.
Simply put, a recession is a contraction in the economy’s growth rate. This means that at the macro-economic level, there is a sustained decline in economic activity, i.e., consumers buy less. Hence, companies’ revenues decline, which leads to unemployment – and the cycle continues.
The current one is the fallout of multiple factors. Firstly, due to Covid-related lockdowns, there were significant supply chain disruptions that led to an increase in prices across the board. The Russia-Ukraine war added fuel to the fire, creating a further disturbance in the global supply chain of oil and food – all of it contributing to the highly inflationary economy we’re witnessing today. As the quantitative easing policies as part of the Covid stimulus issued by the government dissipate, there’s much less money going around to fund the consumer-led economic growth. Add to that the interest rate increases to curb inflation – and we have consumers with lesser cash and more expensive credit to get the economy back on track.
The Good News (for CPGs)
Let’s start with the good news. If you’re a Fortune 500 CPG company, recession doesn’t impact you as badly as it does the rest of the economy. Unlike travel, hospitality and the consumer durables industries, CPGs – for the most part – do okay during recessions as people still purchase consumer goods. Consumers can’t survive without food, toothpaste or toilet paper. In fact, according to Kantar, the correlation between the movement in GDP and spending on food and groceries is pretty weak. During bad times, food and beverages are one of the few indulgences that consumers can enjoy, as their spending on cash-heavy expense heads like vacations and cars significantly reduces. According to Kantar’s research in Spain, a 2% contraction in overall CPG spending can be expected – if there is one job loss per household.
The other bit of good news is that interesting opportunities emerge for you to exploit. For instance, in 2010, as the at-home breakfast category showed some relevance, Chobani made the most of the opportunity and achieved a Year 1 revenue of $149.4MM and a 58% distribution in the Food-Drug-Mass channel.
In short, due to the nature of the industry itself, CPG is already pretty resilient.
The Bad News
The bad news is that CPG companies have to scrounge for every dollar spent. When the industry grows slowly, the only avenue left for your company to grow revenue is to win a greater share. While market share is already a top metric for CPGs worldwide, with flatlining growth across categories, it becomes the most important to win and most difficult to hold. The latter is because past trends have shown that consumers tend to down-trade in search of value and gravitate toward store brands.
The second bit of bad news is for smaller businesses. While Fortune 500 CPG companies generally have sizeable cash reserves to help them tide over tough times, smaller players may not. Due to the nature of the economy, larger CPGs aren’t necessarily feeling acquisitive either, as they focus on conserving cash. This means that if you’re a smaller player in a down economy, your larger competitor can wait you out until you run out of cash.
So, while the industry as a whole does okay during an economic downturn, you have to fight for every basis point of market share there is. And if you’re a smaller player, belts need to be tightened to give you a long enough ramp to survive. It can be a very fine line to tow, to balance promotions on one side and cash on the other.
That being said, here are the five things that you can help your company with as an analytics leader to make the most of the bad times.
1. Conserve Cash
As the old saying goes, Cash is King. And while it is true in the best of times, it is doubly true in the worst of times. A larger cash reserve acts as a critical moat for your business and gives you a longer ramp to do impactful price and promotions actions that win market share for your business. Let’s look at a few business imperatives here:
The first thing companies will do in a recession is institute Zero-Based Budgeting systems. Simply marking up existing spending and budgets by 5% will not work. Every business, every function and every cost center will and should be required to justify their spending – starting with the assumption that they are unnecessary. ZBB feels pretty extreme, as it impacts all business areas. But, it is a useful system not only to cut out spending that is deemed unnecessary in a negative economic climate but also to refocus spending on activities that will help move the needle on key business metrics.
An interesting implementation of a ZBB-like system comes from Colgate-Palmolive. During the 2008 recession, Colgate-Palmolive instituted a spend-what-you-save program instead of cutting costs indiscriminately. Under this program, business leaders were asked to save costs in a certain business area if they wanted to expand spending in another area of the business.
The second key activity that businesses should introduce is increasing working capital efficiency. There are three main steps in this. The first step is to speed up collection using a dynamic collections strategy and improve credit risk monitoring. This will help reduce the time it takes for cash to come in from business debtors. The second step is to recheck supplier terms, widen your selection of vendors, and ask for early payment discounts. These steps help reduce cash outflow or give you a longer credit period to pay your creditors. The third step is to enhance demand and supply planning and improve inventory transparency, which helps keep inventory at its lowest.
The third key activity, related to the second, is that companies will review their risk management strategies. In addition to credit risk monitoring, businesses also review their exposure to riskier debtors and revenue leaks. Another important activity under risk management is to review the vendor network and ensure that we are able to avoid potential interruption in case a supplier isn’t able to deliver.
Key Analytics Solutions:
- Working Capital Management: The key metrics to track are Days Sales Outstanding (DSO), Days Payable Outstanding (DPO) and Days Inventory Outstanding (DIO).
- Order to Cash: Institute customer-level risk profiling scorecards and prepare scenario planning models based on past payment behavior. Aim to reduce revenue leakages by applying predictive analytics on past leakage trends. Use drivers and impact analyses on leakages and help your team plan corrective actions for plugging leakages.
- Procure to Pay: Similar initiatives should also be taken in the receivables area. Introduce supplier risk management scorecards using systematic and dynamic performance management.
- Cash Forecasting: Manage and monitor the performance of cash forecasting models that forecast demand, revenue, incoming cash and outgoing cash.
2. Product Supply
The second round of ‘tighten-the-belt’ moves is seen in the product supply function – under which we will include the entire spectrum of activities from sourcing to manufacturing to logistics. For years, product supply has been tasked with high-efficiency numbers, and during a recession, that focus continues – with a few tweaks here and there.
First, product supply teams must work closely with the revenue growth management and business teams. This feels like business as usual, but the collaboration will be centered around devising manufacturing plans that cater to products and SKUs that are seeing the highest demand. Manufacturing leaders will need to work closely to double down on the production of goods where there is maximum demand. Similarly, logistics leaders must double down on supply to ensure that the top-performing channels are well-stocked.
Secondly, on the procurement side, sourcing teams will be tasked to look for prudent deals on material sourcing. This might involve working on inputs from the finance teams to renegotiate some of the supplier contract terms – make them cheaper or secure a longer credit line on their contracts. Using input from the finance team will provide you with the required levers to negotiate contracts, such as supplier risk profiles. If contracts are highly restrictive, it might be worth exploring spot deals for materials, where you may have greater control over quantity, price per unit and credit terms.
Thirdly, manufacturing and plant operations managers will be tasked with a reduction in wastage. Making plant operations more efficient is often a technology-led play, so there will be a push and pull of efficiency-oriented investments in tech v/s, their potential trade-off measured as expense reductions. Manufacturing teams might also put new investments in increasing capacity on hold, and any available capacity will need to be directed toward categories that are doing well.
Finally, a few changes will be seen in the logistics and freight domains. The key terms again are utilization and wastage. Is the freight capacity fully utilized? Is there an opportunity to renegotiate contracts with existing logistics partners? Do we see wastage in the form of accessorial costs associated with not providing on-time-in-full deliveries? Are we holding too much-unsold inventory? Are we seeing higher incidents of pilferage that require action?
Each node in the supply chain is an opportunity to become more cost-efficient.
Key Analytics Solutions:
- Demand Forecasting: This is perhaps the most crucial analytics work you can do for manufacturing – and most likely to have in place already. However, not enough emphasis can be placed on the fact that recent economic changes might necessitate changes to the forecasting models. Plus, even the slightest increase in forecast accuracy can transform how well your business caters to consumers.
- Network and Logistics Optimization: In a large and complex supply network, solutions such as dynamic route optimization will help identify routes that can speed up time-to-shelf while potentially reducing the overall logistics costs.
- Inventory Optimization: The costs associated with having high inventory levels on hand can be fairly high. Here, better forecasting based on past data and other dynamic factors, such as weather conditions, can help maintain optimal safety stock levels.
- Predictive Maintenance: Predictive maintenance has multiple use cases in the product supply area. Beyond maintenance and early warning detection of potential defects and machine failures, predictive maintenance can also be used to monitor the health of your logistics fleet. This use case will help clamp down on potential costs associated with shipment delays.
3. Product Portfolio Rationalization
Reviewing the product portfolio mix becomes an essential activity at the outset of a recession. While it is useful to do it as a business-as-usual activity, the lens through which companies evaluate their product portfolio changes markedly in the changed economic conditions. When the economy is good, and companies are bullish, product portfolios are reviewed in light of identifying which new products and line extensions might be the next frontier in growth. In times of economic contraction, however, each NPD initiative and line extension is viewed as a cost center that needs to prove its viability.
The first action is reviewing relatively unaffected categories or seeing their relevance in the marketplace. This needs to be first evaluated at a market level to assess if there are some industry trends to pick up on. For e.g. during the 2008 recession, while most categories suffered, unit sales increased in the beer/ale/cider category, the cold cereal category and the bottled water category. On the other hand, the candy and carbonated beverages categories bore the brunt of the category contraction among the F&B sector. Business teams might want to assess which categories you are present in today, which ones are relatively better off and how they can address this gap.
Second, once you have a decent sense of market-level performance, assess how your products are currently performing as part of the category. The key metrics to track are value and volume sales, margin and market share. Typically during a recession, mid-tier brands have the greatest gravitational pull as consumers shift consumption over to value brands. Premium brands also tend to decline, but not at as high a rate as mid-tier brands. Beyond downtrading, many consumers also gravitate towards purchasing store-brand products in extremely commoditized categories, such as toilet paper. This is again a hit to your market share – and needs to be actively monitored. Consumer insights teams will be asked to unearth patterns illuminating the path forward. For instance, which of your brands within a category are outperforming others (and the category)? Which SKUs/pack sizes are seeing the highest amount of traction by region and store type? Which store formats are contributing the most to your sales?
The third step is to review which product lines are underperforming and what their underlying causes might be. Is it because there is a contraction in the category? Or is it because consumers are migrating to a store brand/competitor? If so, what is the market sensitive to – price, promotions etc. that could recapture share? Or is it a lost cause in the short term, and it is time to reconsider investments in these products?
Key Analytics Solutions:
- Category Analytics: Category analytics solutions help you understand and explore how different categories across the CPG spectrum perform and how your business is performing vis-a-vis the market. By applying advanced analytics over syndicated market data, you can decipher actionable insights at the category level.
- Assortment Optimization: SKU optimization solutions will help business teams discover the best products for each market. The objective is to map SKUs to locations where they will perform best and remove the guesswork out of what consumers will buy and what products to put on the shelf. Assortment optimization can also help decipher key product attributes and quantify their relative importance in the consumer’s purchase decision.
4. Price and Promotions
Many would assume a recessionary market would sound the death toll for price and promo actions, but that would be a needless overreaction. Marketers need to be frugal in their spending, but they can’t eliminate it altogether. The answer lies in reallocating spending on activities with higher ROI than others.
From a brand standpoint, the first action would be identifying which ATL channels provide the most bang for the buck. Most likely, CPG companies should gravitate toward digital and social media. As social platforms become increasingly popular, spending on those to achieve visibility and mindshare might be worthwhile. The first benefit is that social platforms can provide a relatively friction-free path to purchase i.e. gain mindshare and provide a simple way to buy a product. The second benefit is the highly granular attribution that digital channels offer will be significant in identifying which products are seeing uptake and which campaigns are more effectively leading consumers to buy.
Secondly, from a brand standpoint, it might be wise to invest in fine-tuning messaging and improving public relations efforts. Value is top-of-mind for consumers, but value doesn’t necessarily mean “cheap.” Value could also mean a multi-function product (one product, multiple benefits) or pivoting towards a health-oriented message in the foods category. Messaging can also change to have an ‘uplifting’ note to benefit from ‘emotive marketing’. A prominent example from the Great Recession is that of Coca-Cola – whose ‘Open Happiness’ campaign helped improve volume by 4-6% YoY between 2009 and 2012.
Thirdly, syndicated market data will provide a treasure trove of insights into your consumers. The three specific facts to look at in syndicated data are display, features and temporary price reductions. CPG companies should evaluate across categories, brands and SKUs which lever works best in pushing the needle on incremental and promo sales. A deep analysis might likely surface that temporary price reductions probably work best as consumers become price sensitive. However, results may vary by brand and category.
Finally, pricing. Common sense suggests that consumers are likely to be heavily price-sensitive during a recession. As the price elasticity window becomes narrower, it is essential to constantly check on competitor pricing trends. It might be worthwhile to explore rewarding shopper loyalty with price reductions to reduce switching.
Key Analytics Solutions:
- Marketing Mix Modeling: A no-brainer here – but MMM work will help your insights teams understand and recommend which channels and campaigns are helping achieve better penetration and a lift in value and volume shares.
- Pricing Analytics: Price is probably the most scrutinized feature of your product during a recession. A close eye on the price elasticity in the market will help you price products more efficiently – in a way that you discourage switching while maintaining pricing margins at a respectable level.
- Demand Forecasting: We’ve covered this before, but it’s worth repeating. More accurate demand forecasting will help insight teams sense the demand situation better and predict, rather than react, to potential actions taken in the price/promo realm.
5. Sales and Distribution
Rising gas prices are a typical feature of economic shocks. They are also an essential feature of the recession-proofing strategy for your business. During a recession, rising gas prices will reduce suburban families’ trips to stores. On the flip side, fewer trips possibly hints at a higher volume of goods purchased per trip. However, this is not a consistent trend. Price sensitivity and cash conservation is also an important feature of a recession. Families living in downtown areas – that don’t have to make long trips to reach a retail store – will likely make smaller volume purchases. For this cohort, which lives closer to retailers, the trip cost is much lower than the opportunity cost of pantry loading. They will prefer to shop for today rather than store for tomorrow.
So the first step is really to understand from the data and sales teams what trends are taking shape on the ground. Are shoppers taking frequent trips or infrequent trips? If so, which channels are seeing more trips vs. less? Areas with a higher concentration of retail stores are likely to see more frequent trips of low-volume sales, while areas with a low density of retail stores will see fewer trips and a higher sales volume. The next thing to understand is what items consumers buy together. Are there clear shopping patterns emerging at a basket level? These critical strategic questions inform what you produce, where you supply and what price/promo actions you run.
Secondly, businesses should ensure that sales is equipped with the knowledge of the ‘must-sell’ SKUs during these times. As trends emerge in the data, information on which SKUs are seeing uptake will be critical for sales to understand what to sell and how to negotiate their accounts and achieve greater volume. A synchronized sales and marketing effort would help identify top-performing products and marketing alignment to ensure high mindshare and shelf share.
Thirdly, sales teams in CPG will also need to feed back the information that they receive on the impact of store brand products. One of the trends seen during the Great Recession was the increase in sales of private brand food and beverages – which is likely to create risk for CPG companies once again.
Finally, new formats such as 1P and 3P eCommerce will allow CPGs to take a bit more control and understand their consumers at a more granular level. If your company invests in promotional spending on digital channels, a natural action would be to direct consumers to purchase at the online storefront. The level of consumer insights that can be derived through this, if done well, can be a massive improvement over the insights from the traditional channels. An emerging trend in this area would be to deepen partnerships with last-mile aggregators such as Uber Eats. There is a strong chance that consumers might gravitate towards this channel as they provide deeper discounts and faster delivery of smaller orders.
Key Analytics Solutions:
- Market Basket Analysis: A market basket analysis solution will help improve the business’ understanding of how consumers shop and what some of the products are that are purchased together. This understanding will help marketing teams collaborate on price and promotion actions on related products that increase the share of basket for each consumer.
- Field Sales Enablement: Field sales would benefit heavily from solutions such as must-sell SKU recommender. Looking at the data, an MSS solution would guide sales to push solutions that perform best in the marketplace.
- Smart Merchandising: Smart merchandising solutions that use image data and AI can help understand how promotions are performing on the shelf and how much shelf space your business has v/s your competitor
- eCommerce Analytics: eCommerce analytics is a broad subject altogether, but you would be specifically looking for price trends on various competitor sites, loyalty-based rewards that you can provide for longer lock-in (similar to Amazon’s Subscribe-and-Save) and conversion rate of your product listing. Another critical thing to look at is to ensure that there is a consistent customer experience (availability, price) across the multiple digital storefronts where your products are present
The Analytics Imperative
A reliance on data and analytics during these times is very critical. For all the cuts elsewhere, analytics and AI work that helps businesses become more efficient – on cost and in improving sales – will be an essential investment to make during this time.
To reiterate, some of the most critical work you can do during this time is:
- Improve forecasting: Knowing what will happen next is more vital during a recession than usual. Improved forecasting on demand, supply, price, promotions, and cash availability – is a tool that can help your business run leaner and more efficiently. Take this time to review the accuracy of your forecasting models and any additional data that can help the models become more relevant to the current economic situation.
- Improve optimization: Optimization is the name of the game during an economic downturn. Whether it is optimizing risk, logistics, inventory or marketing spending – this is the second important activity to undertake during the recession. By improving optimization, you can find money that can be spent on activities that help your business win during the recession
- Improve adoption: The best analytics is no good if your users never use it. Improving adoption and driving a data-driven decision-making agenda is crucial for all your initiatives to succeed. Modern augmented BI tools like Crux Intelligence can help your users understand and self-explore their data in real-time and take actions quickly that benefit your business.
In summary, recessions are complex, but there are things you can do to help your business tide it. A data and analytics-driven approach will help optimize every business area to help your company tide over this downturn. By applying real-time, always-on analytics, you can support your business conserve cash, reducing the total to serve, identifying products that work, optimizing your spending and ensuring the availability of the most relevant products and SKUs on the shelf.
Is your traditional analytics capable of keeping all your business stakeholders up to date with all their key metrics? Do you worry about the amount of ad-hoc reporting and queries that you will have to work on to help business teams ride out the change?
Augmented analytics might be the right thing for you. Empowering your users to be self-sufficient in their data exploration and understanding can refocus your team on longer-term work that impacts the business. Products like Crux Intelligence can help your business understand its metrics, identify over/under performance, diagnose change causes, and make better decisions.
If this sounds like something you’d like to explore for your team, write to us at firstname.lastname@example.org