This article first appeared in the summer 2019 issue of the Journal of Business Forecasting. It didn’t anticipate a global pandemic but did anticipate a slowdown in a global economy approaching the end of an expansion cycle. It provides an excellent blueprint for effective planning during an economic recession, written by a veteran Demand Planning Director who has planned for 3 of them. – Ed.
When I wrote this article at the end of 2018, the equity markets were plummeting, threatening to enter a bear market. We’ve since bounced back but that dramatic drop serves as a warning shot, letting us know we’re approaching the end of the current economic cycle. With economic expansion cresting, unemployment at historically low levels, and with the Federal Reserve considering interest rate adjustments to extend the span of this historic GDP growth, it is only a matter of time before the economy cools off.
And with two-thirds of the US economy based on consumerism, the impact of any economic decline will disproportionately impact consumer products and brands. I have worked three recessions during my career in demand planning, so I know a little about what to expect. I also know that each recession is unique. The recession of 2008 was different from 2001, and both were different from 1991.
Some are bubble-influenced, like the housing bust of ’08, while others are simply soft-landing hangovers from rapid expansion like in 2001. Despite differences in the underlying causes, there are common recessionary themes that impact the demand curves of most companies. Knowing these commonalities may help you prepare for the next downturn.
We’ve Been Here Before
There are some common themes and generalizations about the way products, consumers and retailers interact during a recession. One way or another, a recession will alter your demand curve. Your customers—whether large retailers or OEM parts suppliers—will cut their forecasts, reduce their inventory, and become more pessimistic in their forecasting of the future. Like you, they will not get the timing right, and the result will be fits and starts in their ordering patterns.
And if you use point-of-sale data (POS) to help you forecast demand or estimate trade inventory, you will start to see a disconnect or a divergence between POS trends and orders from your customers. There will be a lot more “noise” in the data and a true demand signal will be harder to discern.
So why the noise? Well, to start, if history is a guide, activity relating to discounting and other retail trade will increase, and customers will offer more frequent pricing reductions, or other ways to stimulate demand on either the virtual or physical shelf for the value conscious consumer. Of course, your competitors will do the same, and the result will be a much more volatile demand pattern, which will make planning for both supply and demand more suspect. As you try to navigate these rough waters, it will be helpful to openly discuss the potential impact of scenarios such as these. This will allow for at least some understanding of shifts in key performance indicators (KPIs), such as buffer inventories increasing to handle the greater demand volatility and forecast error.
During a recession, value becomes a dominant consumer theme. Cash stressed consumers will seek the best price. Generally, this results in both private and store brands, as well as off-brand or commodity products, picking up market share as consumers and customers move towards value. From a planning and S&OP perspective, your units might stay the same, but your revenue may decline due to a shift toward lower-priced goods.And with a mix shift in the products consumed towards value, strategies for competing or participating with products offering better value to the end consumer should be part of your S&OP decision-making process.
Managing new products will present a challenge as consumers are less likely to expose limited financial resources to try a new product. When my employer launched a new hair coloring product in 2008, it began to founder. Our initial demand sensing of POS results reflected a serious gap to expectations. We realized we had to take drastic measures, so we gave away free product—offering “free-bates” to help stimulate trial activity among our consumers. It worked.
Noting the economic downturn with historically high unemployment, we also focused our advertising creative on how this product might help in a job interview, to directly appeal to the unemployed segment. This too also helped drive trials and interest in the product. The key learning is that in anticipation of a sure-to-come downturn, it is reasonable to expect your customers or consumers to be hesitant to shift to—or even buy—new products without some compelling reason to do so. And to the extent possible, it would be wise to anticipate this type of dynamic throughout all your new product planning processes.
It is not just the consumers that are averse to new products—traditional brick and mortar retailer acceptance of new products will also be a challenge. These retailers tend to “batten down the hatches”, preferring to lean into known brands and products and lower-priced store-brand or private-label offerings during recessionary times. Not only will this make obtaining new product distribution more difficult, but it is likely to result in some marginal items being delisted. Such activity indicates why examining risk in your product portfolio is central to planning before and during a recession.
Similarly, you are likely to notice a shift in your product mix. While lower priced offerings might sell better, so too will larger-size/better-value offerings. Bonus packs, upsized offerings, on-pack couponing, multipacks, and similar strategies will prove themselves to be smart, tactical alternatives for increasing consumer interest at shelf, and for holding ground against private-label offerings. Being prepared for this potential mix of shifts—if only on paper—will help you improve your reaction time if and when response tactics are called for.
And finally, trade inventory will drop – if only because your customers will lower their forecasts. For example, if your customer keeps four weeks of supply based on weekly demand of 100 units, then normal inventory would hold 400 units. If the forecast is cut to 90 units per week, however, the inventory target will drop to 360 units. In short, you should be prepared to address unexplainable drops in your customer’s inventory that are not aligned with historical trends.
Channels Will Shift
In what is probably the most obvious of statements, sales volume levels with mass discounters, club stores, and dollar outlets tend to swell during a recession, while specialty outlets will see a decline. Estimating and improving relationships in recession-friendly channels—prior to a downturn—may help you weather the economic storm. Consumers have always been less willing to pay a convenience-level premium during tough times. When I worked with Snapple during the 2001 recession, fewer people made street-level lunch time purchases, preferring instead to buy multipack offerings of our product in grocery stores as they “brown-bagged” their lunches as a way to reduce day-to-day expenses. Interestingly, these multi-pack products were very sensitive to price-based promotions and sold tremendously well in discount grocer and big boxes outlets when on deal, a huge channel shift away from convenience stores and local delis. As we were constantly digging deep into our point of sale and shipment data, we were able to react and alter our sales and promotional strategy during that particular recession. And while we are discussing channels it remains to be seen the impact a recession will have on the emerging e-commerce channels. These have vastly expanded since the last downturn and the impacts are hard to anticipate. Because of this unknown impact, more so than ever it is imperative for consumer goods companies to sense any shift in channels with consumers.
6 Rules When Planning For a Recession
While some of these recessionary effects may seem like broad generalizations, they are merely the most common impacts. The reality is that recession hits each business in unique ways. So where can you find guidance to determine how to plan better? What can you do before a recession? Here are some action items to consider.
Dig into your own data: Burrow deeply into all institutional data retained from prior recessions and try to curate the facts into an economic narrative of sorts. Find old S&OP content, consensus reporting, or ask veterans of the business their opinions on the subject. These will all offer some guidance for the future. But make sure your analysis is not simply “What happened?” Try to incorporate all the dynamics of your firm’s reaction—an assessment of what worked (and didn’t), an assessment of competitor activities and reactions, and maybe even a snapshot of economic indicators before, during, and after the recessionary period. If you don’t expand your analysis to paint a complete picture, you will be short-changing your own research. Wade neck-deep into your own data lake and immerse yourself fully into the past.
Reset your thinking: While most forecasters have a tendency toward a positive bias, force the stakeholders of your operational processes such as S&OP and financial planning and analysis (FP&A) to look at most plans with greater levels of scrutiny and skepticism. Use the results of your own historical data dig to enlighten the discussion. Make upside forecast moves based only on hard facts, not conjecture or opinion. Expect mix shifts in products. Use shorter trending metrics to forecast forward. Work on building different demand scenarios to estimate impact on the business, both top-line and bottom-line.
Examine your product portfolio: Are you thinking of launching a high-priced premium offering sometime within the next year? How will you propose to punch through the economic noise and gain acceptance of your product when consumer dissonance for anything “new” and expensive may be heightened during a recession? Do you have products already at risk that may go under during a recession, or is there some way to make such items more desirable to retailers or resellers from a margin perspective? Ask yourself tougher and harder questions about your product portfolio to prepare for the inevitable downturn. Prepare your commercial innovation backlog with tactical options such as bonus or instant redeemable coupons, so you can be agile in the wake of declining economic results.
Use predictive analytics (PA) tools to see how your demand curve reacts to differing economic stimuli: Some of the PA products leverage large econometric databases. Prepare to align emerging economic factors against your own POS or shipment histories and look for correlations, latency, and inflection points. Look for products or product families that are counter–cyclical and may see an uptick and plan to leverage this dynamic. Understanding the leading economic indicators and their latency on your business will help you plan better in good times and in recessionary times.
Monitor key indicators of economic activity: During both the 2001 and 2008 recessions, my planning group provided an informal analysis of 25 or so key economic indicators—from housing starts to unemployment to consumer confidence. We looked for the aforementioned correlation and latency impacts to determine what items were impacted by specific economic indicators and how long it took these results to manifest themselves within demand Start tracking these indicators now.
Bring it to S&OP—now: Sooner than later, proactive planners should escalate conversation about recessionary contingencies to the executive review phase of their S&OP processes, since the topic is a strategic issue that needs to be part of the executive conversation. Create a one-slide summary of key factors likely to have the greatest impact on your business and track them in each meeting.
There is no magic to understanding and navigating the potential impacts of a recession, whenever the next one may come. The solution is the hard work of becoming intimately knowledgeable about past impacts on your business, tempered with updated knowledge of changes in your business model (such as the growth of e-commerce) and in your product offerings.
When you’ve weathered as many recessions as I have, you learn what to look for and you recognize promising responses that have worked in the past. Some of the most interesting dialogues I ever had in the S&OP process occurred during difficult economic times. Demand planners and S&OP leaders should take action now to initiate forward-looking conversations about recessionary impacts. It is a fiduciary responsibility of the planning role to facilitate this difficult discussion.
This article was first published in the Summer 2019 issue of the Journal of Business Forecasting. To get the journal delivered to your door quarterly and a host of other benefits including free workshops, discounted events, and access to the entire IBF knowledge library, become an IBF member. Join the IBF tribe here.