Rising inflation and supply-chain bottlenecks are two phrases you’ve heard repeated over and over and over again throughout the past year-plus. But mentions of one more not-so-great word are cropping up: recession.
Federal Reserve Chair Jerome Powell said he believes a recession is possible, but not a foregone conclusion, while some economists from Morgan Stanley predict a mild recession is on the horizon for the end of 2022, according to Bloomberg.
- The consumer price index hit a 40-year high in May with an 8.6% YoY increase.
- And Q1 economic growth slowed to 3.5%, down from 5.5% during Q4 2021.
So for retailers, how does the current economic climate compare to the Great Recession? Retail Brew spoke to a few analysts to understand what trends defined the 2008 recession, and how they compare to today.
Good, better, best
In 2008, retailers had to give consumers a price-value proposition, and the “good, better, best” model was a way of doing just that, Suzy Davidkhanian, principal analyst of retail and e-commerce at Insider Intelligence, told Retail Brew. It refers to the idea of multi-brand companies like Nordstrom and Macy’s expanding their price ranges across three buckets, with “good” being the lowest tier.
- For example, products in Nordstrom’s “good” range would be similar to products found in Macy’s “better” range, whose “good” range could be shopped in an off-price retailer like TJ Maxx.
- While the strategy wasn’t necessarily new, Davidkhanian said it became much more obvious.
“If you already have a customer that was buying the slightly elevated price points, but now they’re being a little bit more careful, you just drop them down a tiny little bit, but you still kept them in your brand ecosystem,” she said.
However, Davidkhanian doesn’t believe good, better, best will be a strategy in the current economic environment, because so many retailers have maintained it dating back to the Great Recession.
“There may be people, investors who think that they should be dropping to lower-price brands, but I think that would be a mistake, because that would be a very short-term game, versus ensuring that you keep your brand’s promise and ethos intact through tough times,” she said.
Dollar stores reign supreme
During the Great Recession, a time when consumers had less money to spend, dollar stores shined. Family Dollar, Dollar General, and Dollar Tree already all had thousands of locations, and doubled down with more store openings due to increased sales, foot traffic, and average consumer spend.
- For Dollar General’s FY 2008, company’s sales increased 10.1% YoY, including a 9% bump in same-store sales.
- The company attributed its success to decreased inventory shrink, improved distribution efficiencies, lower markdowns, and higher average markups.
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“That really was just a trend of consumers wanting to go to lower-cost substitutes,” Tyler Higgins, retail practice lead and managing director at global consulting firm AArete, told Retail Brew. “The nature of consumer habits will be eerily similar between the two recessions.”
Foot traffic at dollar stores, at least, is now very similar to 2008 levels. In fact, YoY visits to dollar stores are now outpacing shopping malls, which saw their own boost toward the end of 2021, Ethan Chernofsky, VP of marketing at Placer.ai, told Retail Brew.
- In the week starting on June 27, foot traffic at discount dollar stores was up 3.4%, while at shopping malls it was down 1.1%. It’s been a consistent trend dating back to the last week of April 2022, per Placer.ai data.
“The big question for dollar stores and these value-oriented retailers, like Five Below, is going to be, ‘Can I provide a positive enough experience that when someone tries it because they’re looking to save a little bit now, they have such a good experience that I stay part…of their rotation moving forward?’” Chernofsky told Retail Brew.
Permanently on sale
Back in the day, if consumers didn’t go to dollar stores, or retailers weren’t going to offer less-expensive products, they were on the hunt for deals. Lehman Brothers filing for bankruptcy in 2008 ahead of the holiday shopping season was one of the first signals consumers needed to ease up their spending, which led retailers to cut prices by as much 80% due to excess inventory.
- But shoppers weren’t keen on letting go of those discounts. Higgins said deal-hunting coming out of the recession became “absolutely ingrained in people’s habits.”
The main difference is now consumers can more easily shop for deals on their phone, access product reviews, or find less expensive alternatives.
“The small tweak is if someone posts something on sale, if it’s a sale and gimmick only, it’s not going to work the way it could have worked in 2008. Because now they can go and say, ‘Okay, I can buy it [for] half the price from Amazon,’” Higgins said.