Succeeding Against the Odds in Uncertain Times
Our industry has been blessed with good fortune for the past two years. Unlike many of our competitors, we actually thrived during the pandemic. We had customers flush with cash from federal subsidies and very generous unemployment benefits, and forgivable Paycheck Protection Program (PPP) loans that allowed businesses to pay their workers during the pandemic. We had consumers with more free time on their hands, working remotely or being paid not to work.
And the options on where the consumer could spend their money and on what was extremely limited; they couldn’t travel, eat out or go to sports or entertainment venues. Consumers were looking for activities they could enjoy to fill the void, and our products, fortunately, were a viable option for them. Our sales exploded, and our bottom lines swelled.
Online retail platforms, like Amazon, and retailers who adapted their fulfillment capabilities, such as Target, Walmart and supermarkets, also shared the same successes, showing sales increases of 15% to 30% and more, because consumers had buying power and were focused on buying tangible products.
Our economy was hot, unemployment was down to record low levels to the point where the marketplace was having problems finding workers to keep up with consumer demand. The stock market was on fire, the housing market and home prices were rising meteorically due to the Federal Reserve’s money management policy to stimulate the economy, which was keeping interest rates low and artificially keeping bond prices high. Life was good for consumers and businesses alike … and then came 2022.
We started seeing the challenges in late 2021; consumer demand was so strong, almost superheated, that the supply chain — raw material availability, production, logistics, distribution and freight modes — couldn’t keep up. Production costs rose and freight rates exploded. Many retailers tried to absorb the cost increases, but many had to pass these increased costs on at retail.
Retailers tried to compensate for the supply chain disruptions by placing increasingly larger orders, but because the logistics problems weren’t addressed, some of these orders were canceled and many were delivered late (especially Christmas orders that didn’t arrive until January and later). Corporate inventories grew by 15% to 40% or more, much of it product that arrived after the season it was purchased for, candidates for major price reductions and markdowns to liquidate it.
But supply chain disruption, rising costs and inventory problems were only part of the challenges retailers and consumers faced. Demand exceeded availability, leading to inflation and rising prices. And then there was a confluence of factors beyond the retailers’ and consumers’ control that all seemed to hit at the same time. Among them were:
- Gas prices skyrocketing.
- Food prices increasing.
- Geo-political challenges. Think about the Ukraine/Russia conflict and the resultant bans on purchasing from Russia. For example, the raw materials needed to produce fertilizers originate in Russia, and the supply disruption of sunflower oils and wheat produced in Ukraine. The ripple effect of this conflict is global, as Europe obtained most of their oil and natural gas from Russia and many nations will realize food shortages as a result of the bans and scarcities.
- Shift in the Fed’s monetary policy, from focuses on increasing employment and economic growth, to taming inflation by increasing interest rates and reducing monetary supports.
- Higher credit card/loan rates and higher mortgage rates (with multiple new rate increases coming yet this year), which may depress big-ticket purchases and throw some cold water on the super-hot housing market.
- Insidious inflation, affecting almost all goods and services in some way. Operating costs are rising, even for things like utilities, insurance and rent, forcing prices higher. While wages have seen good increases this year, they have not kept pace with inflation, meaning consumer purchasing power is diminished.
So, what’s the net effect of all this?
The stock market (and 401Ks) has taken major hits as investors see a major slowdown in economic growth. This has a chilling effect on consumers’ view and confidence in their financial futures.
- Consumers are shifting where and on what they are spending their dollars to experiences like travel and entertainment, seeking the human touch they were deprived of during the pandemic, and reducing their spending on tangible products.
- Consumers have turned from a discretionary buying mentality (meaning they were purchasing a full spectrum of products) to one of purchasing essentials. In recent first-quarter 2022 financial reports, major retailers eked out single-digit sales increases (down from comparable 15 to 20% or higher increases last year), with the majority of purchases shifting to food and household essentials. Not only do these categories carry lower margin rates, but also this causes a backup of inventory of higher priced/higher margin categories such as apparel and electronics which will take major markdowns to clearance.
- Because of inflation-driven increased prices, consumers are trading down, purchasing non-branded products, often of lesser quality, and buying less of it. Further, store visits are down. For example, Walmart just announced a 3% comparable sales increase, but the number of store transactions was flat; Home Depot actually saw transactions decrease by 8.2%.
- Credit card usage is steadily rising at the same time consumers are facing increasing interest rates. According to a recent NRF study, nearly three in five consumers stated that they were having to go into debt, borrow money or tap savings to cover their expenses.
- And there’s rising concern about stagflation, a stagnant growth economy with continuing high inflation, possibly leading to recession.
Rising to the Challenge
We’re in pretty scary times, and there’s little indication that things will get measurably better in the next 12 to 18 months. While we can’t control all of these externalities that affect our consumer and our business, we can anticipate them, plan for them and proactively react to them. We’ve got to be even more resilient, agile, flexible and adaptable than we’ve ever been; these are the same traits that served us well during the pandemic.
From an operating standpoint, manage your input, production, labor and freight costs, raising your retails wherever possible. The consumer is becoming conditioned to expect higher retails. And, please, don’t get caught up in the race to the bottom by matching prices with your dumbest competitor, the one who absorbs all of the cost increases without adjusting his retails!
Manage your inventory; don’t let your inventory manage you! Monitor your product mix weekly, watching not only your inventory levels, but your profit mix based on what the consumer is buying, adjusting regularly. With the pressures on profit you’re experiencing, reducing the potential for markdowns and clearance is critical.
We were blessed during the pandemic when the consumer gravitated to the products you offer because they filled a void they were experiencing, and they realized the benefits your products offered them. The uncertainty the consumer is experiencing in the immediate future is more intense than ever; they need our products. We are essential to their emotional, psychological and physical well-being, though many don’t yet realize this.
Now is our opportunity to educate, motivate and inspire the consumer to enjoy the real benefits our products offer. There are very few products that have the power that plants and flowers have on the consumers’ psyche. This, along with a customer-first attitude, is the competitive value proposition that will help our customer and ourselves cope. If we focus on delivering this message to them. In today’s crazy world, promoting stuff at a price won’t cut it.
The economic growth engine is stalling, business challenges abound, and the consumer is hurting. The odds are stacked against us. But we’ve been here before. We know how to anticipate, plan, adapt, be flexible and agile; we’ve proven our resilience over and over! We already understand the real value and power plants and flowers offer the consumer; we have an untapped opportunity to educate, motivate and inspire them to benefit from our products.
Yep, succeeding against the odds. That’s what we do!