Businesses are implementing layoffs, freezing salaries and delaying bonuses. Student loan repayments will soon resume for millions of Americas. The money consumers accumulated during COVID, when they were stuck at home and the U.S. government issued stimulus checks, is beginning to dwindle. Meanwhile, the cost of financing debt is way up, and consumer confidence hit a six-month low. The June 2023 Consumer Goods Index from Alloy.ai shows sales beginning to decline as consumers pull back.
There was a lot of talk during recent retailer earnings calls about how consumers are trading down – going from premium to cheaper products, purchasing store rather than name brands and switching to more value-oriented retailers like Walmart. But not every discount retailer is doing well. Dollar General, the discount giant, just reported disappointing results.
All in all, it’s a little confusing parsing where the economy is and where it is headed.
But despite the uncertainty, some things are clear. We all just lived through two years when most goods were going up in price, brands would pass that cost on to shoppers and consumers kept buying. Those days are over.
Consumers today are watching their dollars more closely. They are shifting their spending away from discretionary items like appliances, clothing and TVs and toward essentials such as food. And even further pullbacks are likely in the coming months. That means brands need to unlearn the lessons of the last couple years.
Fortunately, supply chain costs have come down following spikes in components, logistics and packaging costs. The oversupply of goods in brands’ distribution centers and retailer networks is also starting to come down, meaning there is less excess inventory waiting to be sold.
Yet despite decreasing supply chain costs, brands have been reluctant to start cutting prices. And although brands and retailers don’t have the excess inventory they once did, our June 2023 Consumer Goods Index indicates that inventory is still far from normal levels. Here’s what brands and retailers can do to lower their risk and increase their opportunities.
Introduce new SKUs
The only way a business can lower prices without sacrificing margin is by becoming more efficient and reducing waste. Allbirds, Amazon, Best Buy, The Container Store, David’s Bridal, Dollar Tree, Gap, Nordstrom, Walgreens, Walmart, Whole Foods and many other businesses have announced layoffs this year. Employment service Challenger, Gray & Christmas found that retail’s April layoffs led all other industries, jumping 270% from March.
At the same time, Walmart is pressuring its suppliers to bring down prices. One way that brands can respond is by creating new SKUs. Brands don't want to cannibalize their more expensive products by selling them at lower prices, but a brand may be willing to create a new product that is a pared down version of a popular product. If the product has fewer pieces or is built using cheaper materials, you can sell it for $19.99 rather than $29.99.
Every brand should be reviewing price points and looking for opportunities to introduce more budget-priced offerings without compromising its core products. And with the long lead times involved with creating new products and bringing them to market, you need to get started now to not miss the window of opportunity.
Be more aggressive with promotions
Promotions are one of the most common levers for adjusting prices for a more budget-minded consumer. Running promotions will cost you in margin. But if you can get the attention of customers, who are looking for a deal now, you may be able to preserve your business and drive revenue.
Don't over-promote, but do be more aggressive. Lots of promotions don't have a positive return because people don't measure them very well, so make sure that you run good promotions.
Understand what’s working and what’s not
While adding some additional budget-oriented SKUs make sense, it’s also important to simplify your supply chain to control costs.
When times are good, businesses tend to create more and more products to sell. The thinking is that the more stuff a brand or retailer has in the market, the more money it can make. And while introducing new SKUs can be a profitable strategy, you will also want to remove some of your lower margin products that are harder to manage. The 80/20 rule generally applies in retail where you make 80% of your revenue from 20% of your products.
Making these decisions will require you to understand current supply and demand. That might differ month to month because change happens fast in today’s world. So, you need to keep a pulse on what's working and what's not – and adjust to it as quickly as you possibly can.
The bottom line is that the consumer products that have been selling well, and those that haven't been doing as well, over the last couple of years will probably change.
The general expectation now is that we're going to see a much more constrained consumer. That means you can’t base your decisions on what has happened the last couple of years. The brands that move fast to understand and act on things that are going to work, and move away from those that are not, will be best positioned to survive and thrive in any environment.
