Recession Retail

A GPS for Navigating the Downswing

Rick Watson
CEO & Founder RMW Commerce Consulting

Rick Watson chats about the different paths forward for retailers from a strategy perspective. Learn how to manage internal variables - inventory, new opportunities, headcount, and more.

Episode Summary

In this conversation, Rick Watson and Andrew Goodman chat about the different paths forward for retailers from a strategy perspective. Rick shares how retailers should plan for the next 12-18 months and some considerations they should make to future-proof their relationships with brands for the long term.

Subtopics:

  • Are we in a recession?
  • The paths forward for retailers
  • Managing internal variables - inventory, new opportunities, headcount
  • Navigating brand relationships

About the Guest

Rick Watson

CEO & Founder RMW Commerce Consulting

Rick Watson founded RMW Commerce Consulting after spending 20+ years as a technology entrepreneur and operator exclusively in the eCommerce industry with companies like ChannelAdvisor, BarnesandNoble.com, Merchantry, and Pitney Bowes. His work today is centered on supporting investors and management teams incubating and growing direct-to-consumer businesses. Working with private equity firms, Watson performs eCommerce, technology and digital marketing due diligence on acquisition candidates, and creates eCommerce growth plans for post-acquisition growth strategies. Watson also hosts The Watson Weekly podcast where he shares an unbiased, unfiltered expert take on the retail sector’s biggest news and players.

Episode Transcript

Andrew Goodman (00:02):

Welcome to Recession Retail, everyone. We are live from my beautiful basement in Denver, Colorado. I am Andrew Goodman. I'm the head of marketing at Convictional. We are the supplier enablement platform that helps retailers onboard new brands in minutes. It has been 13 years since the end of the great recession in June 2009, 13 years of retail growth, 13 years of e-commerce evolution, and unfortunately, 13 years of muscle memory loss of our retailers who haven't operated in a cash tight environment in a decade or so. So in this series, we'll be chatting with retail experts like Rick Watson who is here with us today. We've got Lisa Amlani up next week, Neil Saunders, Jason Goldberg, and Brian Lang. And we're going to be talking about navigating the current state of retail.

(00:48):

So our guest today is Rick Watson. He is a 20-year retail industry vet with stints at ChannelAdvisor, Barnes & Noble, Merchantry, and Pitney Bowes before recently launching his RMW Commerce Consulting firm. For the audience today, my colleague Nikhil will be watching the chat. Whether you're on LinkedIn or Crowdcast, please use that chat feature generously. We would love for this to be an interactive conversation. We will be monitoring that chat for questions as we go. All right. So Rick, let's dive right in.

Rick Watson (01:21):

Awesome.

Andrew Goodman (01:21):

It's been 13 years since retailers have operated in an environment like this, but top of mind question, are we in a recession? Are we describing it correctly right now?

Rick Watson (01:34):

Wow, that's a great question. I think the answer is I'll give that a strong probably. And I think that's probably the best answer anyone's going to give you. Different economists are different, but a lot of economists have different political backstories that some want it to be a recession, some don't want it to be a recession, but I think we're all in this very complex, non-linear system right now that's affecting everything across the planet. In between government policies changing, the Fed increasing the cost of capital and the cost of trade, transportation, container prices have moved a lot over the past 12 months, last mile costs and the increase in labor, consumer behavior has really changed significantly in the past 12 months with a focus on more essential items versus reprioritizing spending as people tighten up their budgets away from non-essentials. And then there's just these external shocks that we're still recovering from. I mean, not the least of which, COVID.

(02:52):

As recently as three months ago, we still had economies that were shut down from a manufacturing point of view due to COVID both on the... Last year or a year and a half ago, it was the retail stores themselves and more consistently, it's been manufacturing. But the war in the Ukraine has made it much more expensive to do business in Europe and to get certain types of goods, in particular chips and other things, and then the whole oil prices. So all these affect pricing, pricing affects consumer behavior, and all these factors that I mentioned have reinforced each other. And so as the ball turns another tick, prices go up, affect consumer behavior, which affects transportation, which... So we're continuing to roll this forward.

Andrew Goodman (03:42):

Absolutely. Makes sense. It sounds like it's a combination of margin pressure, a combination of macro factors in retail as well, really contributing to a cycle that could perpetuate and really turn into a recession. One of the big signs that a recession is taking place is often the number of retailers or the types of retailers that are really in financial hot water. Retail Dive has recently put out some data from CreditRiskMonitor discussing the number of retailers and how that number has jumped in the past couple of months, who are at risk of default. Wanted to talk about that a little bit. There are retailers on that list, really everyone from decades old retailers like Rite Aid and Party City, to more digital first retailers like Wayfair and Stitch Fix. These retailers are from completely different eras. Obviously, the latter are the digital first retailers, the former are the traditional brick and mortar retailers. What gives? Why isn't there a more stark contrast on those bankruptcy lists between the digital first retailers and the classic brick and mortars?

Rick Watson (04:56):

Now, what I would say is that these retailers were not extremely healthy before the pandemic, but the pandemic also hasn't done them any favors. I would put Kohl's in a similar bucket where both companies have pretty serious activist investors that are going after them. I think a lot of retailers, particularly the up and coming direct to consumer retail models, a lot of those companies are under pressure because of the cost of capital has increased. And this affects software as a service companies as well.

(05:28):

You see companies that are running sort of minus 10 to minus 30 net operating margin because capital is so cheap and they're like, "We'll get to profitability later. We can always stop growing less and we can get to profitability." Well, when the economy changes quickly and the cost of capital increases, then it becomes something you need to solve now. And so I think some of these retailers were caught in this cycle where maybe we have too much real estate, our cost of debt has gone up, and it's more expensive to get capital going forward than it has been in the past. And so as a result, the margin for error is really small, and to me, that categorizes some of the people on the list.

Andrew Goodman (06:21):

Yup. That makes a lot of sense. Shrinking margin of error, of course, is going to force a lot of retailers into situations they didn't anticipate previously due to the higher cost of capital. Absolutely. Completely agree. Rick, wanted to touch on your experience during recessionary climates in the past. So during the last recession, The Great Recession, 2007 and 2009, at the time, you were leading product at ChannelAdvisor, of course working with a significant number of retailers who were all facing a recessionary climate they hadn't really dealt with before. Curious on some of the themes that you saw when working with retailers at the time on what those that really won at the end, that came out on top at the end of the recession did during that period so we could take some of those learnings into this recession.

Rick Watson (07:07):

Yeah.

Andrew Goodman (07:07):

If we can call it that!

Rick Watson (07:10):

No, for sure. I think, look, there's no one winning formula, but I think there are a few principles that makes sense and could apply to anyone. Number one is really being careful about your customer behavior and understanding where your customer's dollars are being spent in the future that might affect where you need to invest and put your time in as a business, and particularly in a volatile time where trends are going up and down, whether it's prices or costs or spending across categories, trends start small. And so if you're just watching the big number at the top and not really intimately familiar with mix, like category shifts, why did we sell 20% less comfortable clothes last quarter than going out clothes?

(08:10):

It's like, well, consumers are thinking something differently going forward than going backward. I would say that's number one, is just being really into your data. Second is taking off the rose colored glasses. I mean, a lot of retailers have had a tough time the past couple of years, and so now, they're like, "Oh, COVID's over. Consumer's going to rebound and we're going to buy into that." And that's not what's happened. And so I think being honest with what's happening is another... Just honesty, in a management team is sometimes hard to find. It seems like a simple...

Andrew Goodman (08:46):

Yeah, absolutely. Two very interesting points you're making here. So one, well, let's take the second first, taking off the rose colored glasses, which seemingly most retailers did not do, forecasting the continued trend of shifting travel dollars to consumer spending dollars, sorry, to goods dollars during the recession was going to continue in perpetuity. And that leading to the situation where lots of retailers have way too much of the wrong stuff and they have way too much inventory, period. And then touching on the first point, really focusing on category mix and product mix. And in a recessionary climate, how quickly can retailers shift pricing levels down, shift categories to more essential goods versus non-essential goods. Very interesting points. Thanks, Rick.

Rick Watson (09:40):

Yeah, no problem.

Andrew Goodman (09:42):

Wanted to touch on lessons from past turnarounds. In the past couple of years, even though we weren't necessarily in a recession. We had two examples of retailers who really turned it around and their success is on display from the past couple of years. I'm curious, what do you think that retailers like Best Buy and Macy's who were in some hot water a couple of years ago are now seemingly coming out of that trench? What lessons can other retailers who are struggling now take away from their turnarounds in the past couple years?

Rick Watson (10:16):

Yeah, I think turnarounds, the short answer is that they almost always have to start at the top. And so I think number one is really a singular simple mission that the company can follow. Really getting back to the why. Why are we in this situation? Who are we trying to serve? Why are they coming to us? How can we serve them better and improve them and become more efficient as a business, at the same time making our customers' lives easier? So I think that's important. And it's not only the mission because a mission sometimes is very aspirational and it's put on a wall in a corporation and then ignored. But to couple that mission with some burning platform.

(11:00):

And it's almost like to me, what that means is if we don't march in this direction very quickly, what are the negative consequences that were going to happen? And the short answer, that needs to be the business is going to keep declining, we're going to lose share to our competitors, we're not going to be as relevant in the future. So creating that, really, motivation, that visceral emotional motivation combined with the sort of more intellectual and far off goals, I think, are important. I think the other thing that's-

Andrew Goodman (11:34):

Just on that-

Rick Watson (11:34):

Go ahead.

Andrew Goodman (11:35):

Sorry to interrupt. Just on that front, in those examples of Best Buy or Macy's, did you see market changes in their missions that they were able to communicate across their employee base that helped fuel the turnaround?

Rick Watson (11:49):

Yeah, I think Macy's was one in particular where it started small, but pretty much at the beginning of 2020 and the end of 2019, they outlined this strategy called Polaris, which it was some strange timing because they announced it like a week before the pandemic, which is, and I don't know, you couldn't time this any better or worse, I guess. But the whole idea is that they're shifting to a much more digital first business and how can we make the customer, how can we make the company a lot efficient in how we serve customers and how customers work with us? So we're really going to lean in to a digital business and working together better as a team, and I think just that simple idea has really served Macy's well.

Andrew Goodman (12:37):

Yep. Makes a lot of sense. I think we're in a climate right now where a lot of retailers are finding that they're, of course, especially during and following COVID, their foot traffic from stores is down and possibly returning in some areas, possibly slowly coming back, but not where it was at pre pandemic levels at this point. For retailers that have a smaller digital footprint, and maybe it's 5% or 10% of their business right now, any recommendations on primary digital investments? Where should they get started program wise? Who are some of the people that they need to think about hiring? Just talk to us about that for a little bit.

Rick Watson (13:17):

Yeah, I mean, I think from a program point of view, a lot of it is depends on your mix of how much do you want to own the direct relationship with the consumer or do you want to be on a third party marketplace or sell through a retailer? So I think thinking critically about that mix is important. Nike has famously pulled back a lot of their wholesale relationships to be a much more direct to consumer brand. So I think that's one.

(13:46):

The second is I think if you're a brand of any size, a chief digital officer is an important role, and what it usually means is how do we digitize all of our relationships with the customer so that we can learn and improve and innovate faster as a business based on a foundation of technology and data. And if a company doesn't have that nerve center in a business, it becomes very hard for... Usually, a traditional IT shop is a project-based organization where they are being pushed projects from sales, marketing, and other areas of the business, and their job is to catch those projects, implement them and send them back. A chief digital organization is intended to be much more proactive organization that is its mission should be to drive revenue through digital technology, period. And that's a much harder mission, and a lot of that requires the cultural transformations that we had talked about before.

Andrew Goodman (14:52):

Yup. Absolutely. In your work with clients, I'm curious, what are some of the first insights they generally gain from having a proactive data analysis team? Are they finding that they need to shift assortments, that they need to make different store investments? Are there geographic considerations? I'm just curious, in your work, what have you found that are some of the primary insights that retailers gain?

Rick Watson (15:15):

Well, I would say a lot of it is, it starts a lot simpler than this. Number one is we don't have all the data in one place. I mean, that's the first thing they find. It's like we just don't have the data. It's not that it doesn't exist within the full walls of the company, but no one's ever thought to organize it. So that's one major issue. The second major issue is just quality. If we have the data, can the sales team and the marketing team trust that data every day without having to ask questions or poke holes in it? That certainly reduces trust.

(15:50):

I think where a lot of companies start is in costs. It's like, do you truly understand your unit costs and how much you're spending on transportation on marketing? And the unit contribution of profitability for every SKU in your catalog is often a very good place to start for a retailer going on a digital transformation because it usually informs things like the category mix you're talking about, where do we invest marketing dollars more or less? What is our primary assortment versus what is our secondary and tertiary assortment that sort of supports that, those things.

Andrew Goodman (16:33):

Yeah, absolutely. On that front, one of the opportunities that you mentioned earlier, or one of the retailers that was using data to make decisions is Nike, who really decided to pull out of a number of retail channels to go more DTC. If you've seen some of the latest data on Nike, it's hard to think that these two items aren't related. Nike's inventory is up almost 40% year over year. So pulling out of several significant retail channels at the same time as inventory is way up, it's hard to think that those two items aren't connected. Curious for your comment there.

Rick Watson (17:11):

Yeah, it's interesting because if you think about last year, why did everyone blame too much inventory or too little inventory? It's been because I didn't order enough or I ordered too much and because the manufacturer screwed something up. So Vietnam was shut down. In the past six months, Vietnam hasn't been shut down. In the past six months, most people haven't had trouble with too many containers on the water or the ports have steadily gotten better as the year goes on. CNN isn't tracking the number of container ships outside of the port of Long Beach for instance, anymore, like they were last year. So I think a lot of that has changed.

(18:02):

So I think the excuses that Nike had was really the result of over ordering. And so if you were ordering earlier in the year, number one, and you bet really high this year, let's say you were ordering in March for the holiday season, for instance, and your last order was still backlogged. I think that's the situation that Nike is in where they're almost having two sets of deliveries for major seasons at one time, and they're the customer, and so they have no one else to blame. Basically, their forecast becomes their order. It's not like, okay, if a supplier cancels a PO, I can... Or if I'm a retailer, I can cancel the PO. Nike's their own retailer. And so if their projections are off, they're off all the way through to the consumer versus Macy's who are like, "Oh, it looks like the consumer's shutting down." I could just cut off my order to whatever fashion retailer is their biggest brand.

Andrew Goodman (19:07):

Absolutely. It's why it's so important to have a great pulse on your data. One of the folks left a comment that chief digital officers are key to transforming, in our experience, basically based on the reason that you really need a horizontal leader across e-commerce, merchandising, and IT who can drive execution. And perhaps those are some of the troubles there. And in other retailers where, to your point, you've got two orders coming in at the same time for different seasons. So perhaps a lack of coordination amongst retailers we're seeing is the problem. Many of the retailers that I've spoken with over the past couple of months have noted that their teams largely are separate, that the team that is responsible for merchandising and inventory in their store channels is an entirely different team that's responsible for merchandising and inventory in their online channels. How do you think retailers can answer this question of, "Well, how should we think about the omnichannel experience in terms of assortment, inventory, merchandising? Should that be under a single umbrella? Should it continue to operate separately?" Just curious what you're advising clients on and what —

Rick Watson (20:16):

Yeah, so what I would say is usually, the CFO is on the driver's seat here and that they understand what are the inventory levels that as a business we want to maintain. Basically, the inventory to sales ratio. That's probably the most important ratio we're talking about here. From there, it spirals into a few different directions. One is your demand channels, which is marketing and merchandising for what your assortment mix will be. And then supply chain is usually the organization which has the inventory planners that in between there and finance, not deciding what the assortment is, but how deep do we want to be in each assortment. So that there's a little bit of a separation between church and state, between the types of skews we want and how much we buy into those skews from a category point of view. And I think all those people need to be talking. And in some organizations, that just doesn't happen.

(21:15):

And so I think to me, the person with enough gravitas to get them all on the table is if you have a CFO, that person needs to be in a leadership role and really getting all the other ducks in a row and ensuring that the supply chain team is listening to the merchandising team, it's listening to the e-commerce team and is really understanding the financial metrics and, okay, if we buy in this way, this is the bet we're making, just to be sure. And then sometimes when, for instance, the marketing team, it's very easy for them to put forward a rosy forecast, but when they see it in terms of inventory dollars relative to historicals, it starts to look a little different.

Andrew Goodman (21:58):

And who better to be at the helm in that position than the CFO?

Rick Watson (22:02):

That's right.

Andrew Goodman (22:03):

To be able to drive those conversations. Curious, with the CFO in the driver's seat, what are you seeing in terms of investment cuts? I've talked to some retailers. Open to buy cuts are on the table, digital cuts are on the table, headcount cuts are on the table. How are CFOs looking at what investments to keep and lose in this climate?

Rick Watson (22:23):

Yeah, look, I think most people, despite the fact that we're starting to see pretty consistent layoffs in the news, we're still, I think, in the calm before the storm phase where nearly every major corporation now has instituted some kind of hiring freeze, if not 100%, but in the 80% range. That's almost always a prelude to outright layoffs if you're spending more than five minutes in corporate America, unfortunately.

Andrew Goodman (22:54):

Absolutely. And just a relevant point is Amazon, of course, just made a very large hiring freeze in their retail sector, so perhaps an early signal of what you're talking about.

Rick Watson (23:05):

Yeah, I think you mentioned purchase orders is definitely one. I think real estate expansion is one where you can go back to Amazon and their supply chain organization, they bet on a pretty big number to double their supply chain organization or the footprint in the last two years, and they've decided to slow some of that. So that makes sense. And then I think marketing generally, and unfortunately, for some of us, folks that are in the marketing profession, marketing tends to be a variable expense that you're not producing the product and sometimes, you're not selling the product. And yeah, you are essential for the sales of the product, but marketing always has a fixed and a variable component almost always to it. And so usually, the variable component is something that you can dial back very quickly and it's almost always the first lever that companies reach for in any tight times.

Andrew Goodman (24:01):

Absolutely, 100%. And often it's a mistake in my experience.

Rick Watson (24:07):

Keep your marketing budgets.

Andrew Goodman (24:08):

Absolutely. So Rick, we have about five minutes left, so a couple questions I wanted to make sure that we hit before our time was up. So we had one from the audience on what categories are buying trends, like buy online, pickup in store, do you expect to occupy a limited share of wallet for the 2022-2023 consumer?

Rick Watson (24:28):

Yeah, look, I think the way I think about it and trying to get in the mind of what's happening in consumers right now is consumers are sort of reverse prioritizing everything, whereas before, it's like, okay, I had $100, what's the flashiest brand I can buy? I want to buy that luxury item. And that was sort of the good times, right? Now, we're almost in the reverse of that scenario where the consumer is starting to think in a few ways. The default is, "Do I need this item at all? Can I defer this purchase?" So I think consumers are deferring purchases that they used to want to do. They used to want to do. You're frozen for me. I don't know if you're frozen for everyone.

(25:13):

So they're deferring those purchases. Second is they're starting at the lowest cost channel, so generally, it's the dollar store or reusing items or secondhand. So they're going from there and then they're going up to other channels. So I think the trend is to assume that if there's a replacement purchase or if there is a way they can get it cheaper, then that's where they start from. And I think we're waiting for Andrew to come back in.

Nikhil (25:43):

Hey, Rick, while Andrew's coming back, I'll share some of the other questions that have been asked by the audience. The second question that was asked was, what retailers are building their supply chain into the customer journey really well? So things like delivery expectations, updates, inventory on hand. Any particular tactic that you think every retailer should employ this year?

Rick Watson (26:05):

Yeah, I think incorporating good promise dates is always a good idea. I'm a little bit of a broken record and sometimes I like to talk about Target a lot, but I think they've done a really good job in the past eight years investing in their omnichannel strategy, using stores as their hubs. As far as I'm concerned, Target is the only retailer that does curbside and pickup in store well. There are a lot of companies that do pickup up in store, but not nearly as well as Target does. And so when I really think about how do you optimize it, not just from a supply chain point of view, going back from to your distribution centers to your stores, making your store associates as efficient as possible down to your mobile and digital strategy.

(26:57):

You can tell Target that I'm going to be... Like, I'm pulling into the parking lot. You tell them what spot you're going to be in, they're already there. It's in your car and 30 seconds later and you drive out. To me, that's a best in class experience and it's one of the reasons why I keep reinforcing that point.

Andrew Goodman (27:19):

Absolutely. Nikhil, thank you for stepping in while I had some temporary technical difficulties. Appreciate that. Rick, we have a couple of minutes left. One question I wanted to make sure that we covered was a topic that you really can't ignore really in retail right now. It is plaguing enterprise retailers and that is the problem of too much inventory. Curious on your thoughts on whether third party marketplaces and virtual inventory are going to play a bigger role moving forward from retailers?

Rick Watson (27:50):

Yeah, I think for retailers, it's interesting. Even before the pandemic, retailers were looking to save money on their inventory carry by pushing some of that inventory risk to their brands. And that has led the trend of marketplaces and drop ship and other relationships like that. As digital accelerated, obviously, those that continue to accelerate in the pandemic, now we're having the reverse, the issue, not necessarily the reverse issue, but a different kind of issue where retailers and brands both have too much inventory. And so what that is, and as a result, what that means is retailers have been canceling first party orders almost across the board and so it's harder to get into stores because retailers may have a lot of inventory that they don't need. And they declare that out before they get the inventory that they should actually have.

(28:49):

And so what I've heard from some of my clients is that there are now brands that are actually asking retailers to drop ship instead. So the request for drop ship is actually coming from the brand now and not being forced on them by the retailer because we're like, "Look, if I can't rely on your purchase orders anyway, just..." At least if I don't have that situation, then at least I know if I have the inventory, I'm going to control my own destiny. So if you're not going to get it and I don't trust you to not mark it down, then I'm going to sell it on Amazon or on Macy's marketplace or on Target or my own website so I have more control over my own destiny.

Andrew Goodman (29:37):

Absolutely. And completely agree. And we had a comment from someone in the chat that they're seeing this in the natural beauty space right now, that brand led drop ship priority instead of retail led drop ship priority, which is very interesting. Well, we are just about out of time. I wanted to thank everybody in the audience for joining us today. Thank you to Rick Watson for being our first guest on Recession Retail, our series this month with guidance on how retailers can operate in this challenging environment. I want to encourage everyone on the episode to follow Rick on LinkedIn. You can see his latest research on rmwcommerce.com, updated regularly, and of course, Rick's wonderful podcast, The Watson Weekly. So please make sure to join him for that. This has been the first episode of Recession Retail live from my basement in Denver, Colorado. Next week, we will be chatting with Lisa Amlani about the need for speed in retail during a recession. Thank you everyone for joining. Greatly appreciate it. Looking forward to seeing you in the next chat.