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How to prepare your business for a recession

Business · 12 min read

Commerce Trends: Recession Edition

As many as 15 key countries are currently on the verge of recession, according to the Washington Post, and many of them have a common issue that could be causing the problems – they’re dependent on exports. Just over a decade after the Great Recession of 2008, Deloitte suggests that we find ourselves with "a weaker retail industry and a potentially weakened consumer base… many customers are still showing the after effects of the Great Recession."

“We are a world away from the 4% (growth) we were seeing back in 2017 when the U.S., Europe and China were all growing strongly at the same time.” - Andrew Milligan, Head of Global Strategy, Aberdeen Standard Investments.

So, the most important question for retailers to answer is how can they weather the recession storm? In this report, we’ll attempt to explain the practicalities of shipping into (and out of) territories in the throes of an economic downturn. Professor Eswar S. Prasad, Professor of Trade Policy and Economics at Cornell University in Ithaca, NY, USA, who has worked with DHL to develop the Global Trade Barometer, noted earlier this year, that "The DHL Global Trade Barometer paints a picture of positive but weakening global trade growth. This is consistent with eroding growth momentum in the major advanced and emerging market economies," – but what does this mean for SMEs?

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Recession explained

According to the National Bureau of Economic Research, a recession is “…a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Others define a recession as two consecutive financial quarters of declining GDP, although it should be noted that the NBER declares a recession retroactively. For instance, it didn’t confirm the Great Recession until November 2008, 11 months after it had begun – so defining the beginning of one can be tricky at the time.

 In 2019, according to Professor Prasad, global trade flows are "...being dampened by ongoing trade tensions and geopolitical uncertainties, which in turn are hurting business and consumer sentiment. These developments could adversely impact consumer demand for durable goods and business investment in physical capital, and also prompt a re-evaluation of the structure of international supply chains." 

Click here to see the countries at risk

Recession-proofing your business

At the end of June 2019, Warren Buffett’s Berkshire Hathaway conglomerate was holding a record US$122 billion in cash, and Business Insider sees this not only as a warning to investors, but also as a sign that a market crash is imminent. With the cash accounting for 60% of the group’s US$208 billion portfolio, it’s the second-highest percentage in its history. And, according to Bloomberg, the only time in the last 32 years when it’s been higher was in the years preceding the financial crisis of 2008.

 In early 2000, an up-and-coming online bookseller called Amazon.com sold US$672 million in convertible bonds to shore up its financial position. One month later, the dot-com bubble burst, and more than 50% of all digital start-ups went out of business – including lots of Amazon’s e-commerce competitors. Had the bubble burst just a few weeks earlier, one of the most successful companies ever might have fallen victim to that recession, according to the Harvard Business Review.

 On top of this, a 2018 report by Bain & Company found that of the companies that stagnated in the aftermath of the Great Recession, “few made contingency plans or thought through alternative scenarios.” Adding that “When the downturn hit, they switched to survival mode, making deep cuts and reacting defensively.”

 Identifying risks in your supply chain will help plan for uncertainty, but it’s never an exact science. Forbes puts forward that “Companies with bloated overhead are the first to drown during a recession. The best companion for low overhead is strong margins. Find the most efficient way to produce, distribute and market your products to maximize your profit on every sale. With thin margins, you’ll need to sell more product in order to stay alive. And when consumers are being stingy, that’s a tall order.”

So, how would a recession affect SMEs?

There are a number of reasons recessions can hit small (and large) businesses hard, but fundamentally it’s due to cash flow. Ecommerce Times suggests that:

“One of the main reasons small businesses suffer so greatly during recessions is because the majority run on a firmly controlled cash flow that the smallest deviation can undermine. Money is immediately handed off from owners to pay for the next most pressing expense. If a customer, or multiple customers, delay purchases or payments, it can cause the whole operation to slow down. For example, small businesses with a few large, high-spending clients can go under instantly, should even one client decide to part ways. The combination of these factors can make it extremely difficult for a business to keep its head above water during a recession.”

The Good News

In an interview with CNBC in August 2019, DPDHL CEO Frank Appel made his thoughts clear on how best to combat recession – staying connected. “This year is a great year, the EU signed a new free trade deal with Japan which is the largest, we signed another one with Latin America, and that is all very encouraging… Europe has to ask itself why do we want to introduce de minimis for e-commerce products, as Europe does, that is hindering trade. I think that’s not right.” Addressing this further, he stated “…do we really need duties for products which are coming to Europe? Is that really necessary? I have some doubts if it is.” Adding that “[trade is] better… when we have open borders – and that is very clearly visible when we look into the statistics.”

Changing consumer habits

For Gen Zers, buying second-hand fashion is often more appealing than turning to fast fashion as it allows them to get big brands at a cut cost. Having been born in the throes of the Great Recession, they’re more frugal and debt-averse than their Gen Y counterparts, so opting for resale over retail just makes good financial sense.

Marie Petrovicka, VP International of P2P shopping platform Depop, notes these digital natives are also savvier to fashion brands’ production processes and marketing strategies. “It’s the access to information, it’s the way they were brought up that makes them very conscious consumers,” she says. “It’s a combination of being informed about what they’re consuming, not buying into big brand advertising and mass consumption, and this frugality.”

In Russia, consumption habits are becoming more cautious, pragmatic and value-conscious. Studies find 36% of Russians plan to cut spending on what they perceive as non-essential goods such as alcohol and ready-to-eat foods, while a once-strong devotion to prestigious brands seems to be fading – only 24% say they see these brands as a good reflection of themselves or their values. 

A blossoming movement of clothing startups are even using innovative textiles that require less washing – aiming to minimize water waste and cut down on people’s laundry schedule. Unbound Merino creates wool travel clothes that can be used for weeks without being washed, while Pangaia's seaweed fiber t-shirts are treated with peppermint oil to keep them fresher for longer. Compared to a regular t-shirt, this eco-friendly alternative could save about 3,000 liters of water over the course of a lifetime.

So, with shoppers now opting for conscious consumption over convenience, businesses should look to do the same. By aligning with your customers' beliefs and habits, you can help to protect yourself, and your future. Identify areas where you can improve your sustainability, and shout about it when you make the improvements – and maybe, just maybe, your customers will too.

The practicalities

“Overall connectedness and open trade is good for everybody – we measure this through the DHL Connectedness Index – and this index clearly shows the countries that are the most open have developed to the best extent as well.” - Frank Appel, CEO, DPDHL

Fluctuating currencies

SmallBusiness.co.uk suggest that the declining value of your country’s currency can actually have a positive impact on your worldwide sales – due to the product or service you offer becoming comparatively cheaper. Although, obviously, purchasing from abroad becomes a lot more expensive. When it comes to paying suppliers for your online goods, Tamebay propose that there are a number of implications that currency can have on your purchase:

- The currency you need to purchase

- The amount you need to buy

- The date of the payment

- The cost of the currency transaction

If you agree to buying in a foreign currency, the cost to you in your home currency could increase or decrease – due to ever-changing exchange rates. Dramatic fluctuations, therefore, could add a significant cost to the process, and this is never truer than in a recession. In the UK, for example, the pound dropped in value by 25% from early 2007 to July 2009  – causing massive difficulties for many UK businesses – so it pays to stay on top of your international outgoings.

Trade war tariffs

 The ongoing 2019 trade war between the US and China has had a knock-on effect around the world, and it’s no secret that tariffs are at the heart of it. The Guardian reports that since the start of the 2017 ‘America First’ campaign, which included imposing 25% import tariff increases on steel from China (as well as the EU, India, Canada and Mexico) the US has since imposed even more tariffs on the Chinese – and has threatened to do so on games consoles, mobile phones and laptops, too. This has been reported as a punishment for Beijing, after they devalued their currency to undercut US goods – although as the Washington Post reports, the President has delayed some of the tariffs so they won’t hit in time for Christmas.

The US’s introspective approach could, however, be a folly – and as much as the American economy is less reliant than others on exports, it still accounts for 13% of its economy. Appel believes “There’s not a single country that has ever been successful with protectionism. None. That’s the reason I believe all politicians will see the right way going forward is open markets.”

The biggest issue? Uncertainty

Staying with the Washington Post, they report that higher prices are still coming, causing more discomfort and uncertainty around the world – and Appel sees this as the biggest concern for businesses.

“At the moment we are seeing a slight slowdown of the economy, but overall the fundamentals are still intact. We have an increasing middle class around the world – they will buy more. We hopefully will get more certainty – that’s the biggest issue, uncertainty.”

 His acknowledgement that we simply don’t know what’s coming was also peppered with an air of optimism surrounding the growing global middle class. And when it comes to attracting them during a recession, Forbes offers the following advice:

 “While it may seem counterintuitive to offer discounts or promotions during low-revenue periods, free trials and other freemium offers ease consumers’ price concerns and may end up being the reason they come back with their wallets open.”

What you can do

When times are good, it’s easy to think they’ll stay that way, but planning for the worst-case scenario is essential – and it can be a good way to evaluate how your business is really working. Are there new products you could offer? New markets you could move into? Or new uses for your product that you hadn’t considered? By diversifying your offering, you can help safeguard your future, and take a deep dive into how to keep your customers onside.

With the potential pitfalls of a tumbling currency, one way to protect your business is through localising your production line. By working with companies in your home country, you’re less susceptible to far-off forces interfering with your balance sheet. Although, of course, these may come at a premium – so make sure you do your research before committing.

Oracle’s John Burke suggested after the Great Recession that businesses need to “Consider the total 'landed costs' of components, including everything from the procurement of raw materials to post-sale repairs.” This is also true for your customers. As the cost of the product they are buying may well have rocketed in price, it’s important that you can offer ways to keep them coming back. Whether that means free international delivery, multi-buys, or something else, the probability of selling to an existing customer is around 60-70% – so keeping your previous purchasers onside could be the difference between staying afloat and going under.

In the wake of the previous recession, DHL Express’ then Vice-President of Sales for the Americas, Andrew Williams, said that “…the global economy has been a challenge but, with those challenges, there are also tons of opportunities, and a big way that a company can climb out of a challenging situation is to open up new markets."This is advice that rings true today, and while at the time, many in Jamaica looked to China for the opportunities, the next big thing for your company could be somewhere completely unexpected.

How can DHL help?

Professor Prasad notes that "All of these factors – which are reflected in the overall, country, and sectoral indexes of the Global Trade Barometer – add up to a softened positive short-term outlook and carry the risk of further deteriorating prospects for world trade."

Predicting the future is a tricky task, and nothing is ever guaranteed. However, the DHL Global Barometer is an early indicator for the current state and potential future development of global trade. Based on large amounts of logistics data, evaluated with the help of artificial intelligence, it can provide an outlook on the worldwide situation, so that you can plan your next move.

As always, your DHL Experts are here to help – supporting your business through changing financial circumstances around the world. Open an account today to prepare your business for an uncertain future.