July 14th, 2022

As Storm Clouds Are Gathering Over Retailers, Can Marketing Save the Day? 

Are we headed for a recession in the back half of 2022? Are we in one already? While economists are busy splitting hairs, consumers are feeling the pinch: According to the latest figures from the US Bureau of Labor Statistics, groceries are up 12% in the past 12 months, used cars and energy 16%, and gas 49%.

At the same time, retailers are struggling with post-pandemic supply-chain stress syndrome: labor shortages, factory shutdowns, sky-high shipping costs, and lingering transportation bottlenecks.

With pressure both on the demand and supply side of the business, retailers are going back to the drawing board: reducing product variety, controlling costs, carefully hiking prices, even leasing new warehouses. For the 2021 holiday season, some went through the extraordinary measure of chartering private cargo ships to work around delays at US ports of entry, and many are eyeing the upcoming holiday season with a similar sense of dread.

When markets are highly volatile, retailers turn to their marketing teams for answers. These days, they have access to much-improved predictive analytics tools, and many other martech innovations to improve data quality, customer profiling, and campaign performance. Those capabilities are essential at all times, but particularly so when changes are happening as fast as they are at the moment whether marketing in a recession or not.

But first, they need to have their finger on the pulse of the consumer.

Consumer Storm Clouds

To help retailers get a firmer grip on managing such risk by better understanding consumer spending trends, Neustar parent company TransUnion conducts a quarterly Consumer Pulse Study exploring how consumers’ personal finances have changed, and what changes they expect in the future. The most recent study – which polled 2739 adults over the age of 18 living in the U.S. – measures shifting consumer attitudes and behavior based on the dynamics of income, debt, and identity theft. These analyses and insights give consumers a voice, and can help inform retailers’ business decision-making into the second half of 2022 by better understanding and catering to consumer needs.

Below are three key findings from the survey:

  1. Consumers’ financial optimism has dropped despite income positivity. With a slight drop from Q1 2022 (4 percentage points), 55% of those surveyed reported optimism about their household finances in the next 12 months. Inflation for everyday goods (groceries, gas, etc.), recession risk, and housing costs weighed on consumer confidence, representing Americans’ top three concerns regarding household finances for the rest of 2022. Nevertheless, income appeared strong, with 81% of survey respondents having reported their income stayed the same or increased in the past three months, while 90% expected the same in the coming year. This data juxtaposition could indicate consumer concern about spending power.
  2. Inflation is eating household budgets. Nearly all study participants (95%) reported having some level of concern about inflation, with 38% being extremely concerned (up 11 percentage points from the first time this question was asked in Q3 2021). In fact, the survey indicated that 58% of all participants expected to change their spending habits due to inflation. Of those, 49% said they will cut discretionary spending (dining out, travel, entertainment), while 37% will curtail retail shopping and 40% will cut large purchases in the next three months.
  3. Generational Impact. Despite equally high levels of inflation concern, 32% of Millennials surveyed reported plans to increase discretionary spending in the next three months (compared to 21% in other generations). Meanwhile, 45% of Baby Boomers surveyed planned to decrease discretionary spending (compared to 35% of respondents from other generations.

Retailer Earnings

Meanwhile, recent earnings releases (calendar Q1’22) show that retailers are starting to see the impact on their business, both positive and negative:

  • Mass Market: Lower earnings were evident among general merchandise retailers due to inflationary pressures where they are unable or unwilling to pass on costs to consumers. In addition, longer inventory lead times, combined with changing consumer needs and preferences, has led to significantly overstocked inventory in some categories. This has resulted in the need to enact higher-than-anticipated markdowns so as to free up warehouse and shelf space.
  • Luxury: Nordstrom recently released its earnings report in May. The results showed higher revenue and increased margin, attributable to the company’s wealthier customer base being more resilient to inflation and consumers’ return to shopping for office wear and formal event apparel. Macy’s concurred with Nordstrom’s comments about higher-income customers, while also mentioning its diversification strategy as Backstage, the company’s discount store brand, attracted consumers with household income under $75K.
  • Home Improvement: Home Depot reported strong earnings as home improvement projects tied to contractors remained resilient to inflation. However, Lowe’s, which is geared more to the individual DIY market, is starting to see a pullback due to inflation and rising interest rates.

While some retailers have business models that have mitigated these challenges, all merchants are at risk as inflation affects more consumer households and recession risk grows.

Getting Ahead

The last two years have been chock full of shocks and aftershocks. Now we must contend with the impact that inflation and rising interest rates will have on consumers’ discretionary spending. Retailers should take the opportunity to evaluate portions of their customer marketing program to discover new efficiencies and ways to reduce costs. Below are suggestions on how to get started:

  • Use identity resolution to de-duplicate customer and prospect records, thereby reducing costs from targeting redundant contact points. Read more here.
  • Use effective profiling and segmentation to strengthen audience targeting and media allocations, thereby decreasing the required media investment to achieve goals. Read more here.
  • Use an onboarding partner with data hygiene processes and network connectivity that delivers high match and accuracy rates, thereby reaching the largest audience possible. Read more here.
  • Use a measurement solution to understand which campaigns, tactics, channels, and audiences are most impacting conversions. Read more here.

In today’s volatile environment, marketing teams are getting under pressure to cut costs and preserve margins. But cutting the marketing budget during a recession is about the last thing any business should do. Many studies have shown that a dip in marketing is a gift to the competition. It can take years for a business to recover. Rather, retailers should invest in more efficient systems across their entire marketing ecosystem.

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