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09/19/2022

Recession? It's Here, Now What Are You Going to Do About It?

An economic downturn requires a different business strategy.
Don Longo
Editorial Director Emeritus
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A couple of weeks ago, the big question was whether the U.S. economy was heading into a recession. With inflation rising at the fastest pace in 40 years, convenience store retailers were already seeing customers cut back their spending. A survey by AAA found that almost two-thirds of U.S. adults have changed their driving habits or lifestyle since March. Nearly a quarter described those changes as "major."

Besides driving less (cited by 83 percent of those surveyed), consumers are counteracting high pump prices by combining errands (74 percent), reducing shopping or dining out (56 percent), delaying major purchases (30 percent), postponing vacations (29 percent) and saving less (24 percent). Another study noted that those consumers who are still spending are trading down from premium brands to lower-priced alternatives and private label products.

The second consecutive quarterly decline in real gross domestic product (GDP) marked the start of the fourth official recession since 2000. The current administration, for obvious political reasons, doesn't want to call this a recession, but semantic arguments aside, the U.S. economy is running on fumes. The Federal Reserve has already raised interest rates four times this year. The hikes increase consumers' and businesses' borrowing costs for such things as credit cards, mortgages, auto loans and business loans.

In addition to the drop in GDP, real consumer spending slowed from 1.8 percent to just 1 percent in the second quarter of 2022. Residential construction dropped at an annual 14 percent rate, and business spending on structures, equipment and technology collapsed from 10 percent in the first quarter to a 0.1 percent annual rate in the second quarter.

Facing this inevitable recession (or whatever term the administration wants to call it), retailers need to "pivot" once again. (Wow, that word is becoming a bit overused, eh?)

The knee-jerk reaction might be to cut spending across the board, but that would be wrong. According to the Harvard Business Review (HBR), retailers in a recession should go after "bad costs." These costs add nothing to what customers are ultimately willing to pay for. Even the best-run companies incur a lot of bad costs, according to HBR. These might result from investments to meet changing consumer needs or to match competitors' innovations. Costs can creep in through operational complexity resulting from growth. Examples could be too much seating in stores where takeout is the primary business, or unnecessarily extended operating hours in certain markets.

In a previous economic downturn, Wawa Inc. enjoyed great success employing what the retailer called a "Blue Ocean" strategy. Based on a book written in 2005 by professors W. Chan Kim and Renee Mauborne, the strategy involves focusing resources on competing in "blue oceans" or new, uncontested markets rather than "red oceans," which are highly competitive markets. That thinking turned Wawa into a foodservice powerhouse.

I've been covering retailing for a long time, from the dot.com/9-11 crash in 2001, through the subprime mortgage crisis of 2008-2009, to the 2020 COVID contraction. Convenience channel retailers have always managed to fare a bit better than other retail channels and, indeed, most other businesses in the country. While not recession-proof, c-stores will continue to outperform other retailers if they react quickly to the market dynamics under which they are operating.

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