The Lipstick Effect
Planning for a recession is one of the best things you can do for your business.
It’s important to recognise that we have no official definition of a recession in this country, or even among economists worldwide. A decline in economic activity can only paint a broad picture. Most commentators’ rule of thumb for a technical recession is two consecutive quarters of reduced/negative GDP, often paired with rising unemployment. We have reduced GDP (down 0.2 percent in Jan-Mar 2022, according to Statistics NZ), but record low unemployment. This makes for a complicated situation.
However, we are preparing for a recession because we believe that this is the correct thing to do. In our last Beyond Better Business , we provided some tools for recession planning. It’s time to take those further, because we know what we need to do now to once again lead with strength.
Recessions aren’t terminal, nor permanent. Since the Great Depression, the USA has seen a technical recession (two quarters of GDP decline) every four years on average. Since WWII, NZ has seen six recessions, with the most recent being the six quarters across 2008-2009 (aka the GFC).
The effects of a downturn on business are common enough. People will have less money to spend, but still need to pay their mortgages. This is especially challenging at current times, when interest rates are going up – rather than being pushed down as they have been in previous recessions. That means less liquidity, and less purchasing. (Cheaper items will still be purchased, meaning those businesses providing low-cost items will continue selling, albeit at a slower rate.) However, an overall reduction in liquidity tends to see the middle to high-end products and businesses dry up first. This ‘Lipstick Effect’, as it’s called, indicates that consumers will spend less on fewer large luxury items – fur coats, as the example goes – and instead on smaller luxury items (i.e. the lipstick). People still buy products that provide an emotional benefit, but that also meet the budget. Today, that might mean that the overseas holiday gets postponed, but the new TV still gets justified. The dinners out might become less frequent, but their emotional place is replaced with a premium bottle of wine.
From a business perspective, we look at how our target market customers are going to be affected by having less money to spend – what impact this is going to have on our portfolio of products and services – and what ‘lipsticks’ you can move to generate some cash.
Make the call
Your clients are probably expecting a call about increased prices soon enough. Make that call. As we saw at the outset of the first lockdown, one of the best things we can do is communicate with our industry partners, suppliers, and clients. Build rapport. Discuss the things that matter – and how you can help each other out.
Hone your advantage
If you feel that you can’t raise your prices for whatever reason, then you need to address why you’re not in the position to do so – and what strategies you can be taking to redress that.
Focus on what you’re excellent at, and develop your competitive edge so that the market can’t say no to you.
Spending money in good times is easy. In bad times, you need to have a budget. That’s going to be a challenge, especially in a high employment market where you’re going to have to offer more money and better development opportunities than the competition. Consider raising equity by bringing on fresh investors, or selling your offices and leasing them back for a quick cash injection.
Negotiate with suppliers, get new suppliers at competitive rates, and be disciplined about your quotes. Shift stock from your warehouse – especially the slow movers – and free up cash to invest in fast-moving stock.
Look after your peopleHelp your people with their finances. Fuel cards and grocery cards are a way of paying bonuses in kind, and they tend to be tax deductible (although your FTB goes up).Additionally, if you are providing pay and provide performance raises, offer them to your lowest-earning people first. They will feel the impact of inflation first.
Sweep the stairs from the top down
You need to know which employees are worth retaining. There needs to be a match of culture, a clear career progression plan, and an environment that fosters pride in where they are and where they’re going. If someone’s meaning and purpose doesn’t align with your organisation’s and your team’s, then they should be allowed to pursue their own goals – and leave with dignity. Start at the top of your organisation and work down. The people at the top are most accountable.All these considerations are on the table for our clients. But recession doesn’t have to be a bad word. It’s also an opportunity.The businesses that crash tend to be the ones who run out of business after a recession. When the new cash cycle hits, demand shoots up – but if they’re low on cash and can’t afford to buy stock or finance the next cycle, then their time is up.That’s the start of a new upswing, and a chance for the strongly positioned to gain new ground. We’ve seen this happen first-hand. One client made strategic decisions centred around operational excellence; they automated their streams, made their quoting systems more accurate and efficient, and made their work operationally watertight. Their competitors were doing the same undisciplined, unscalable work they’d done 20 years ago – and when the economy picked back up, they were bought out by our client.Today, you can’t ignore the need to have a long-term plan.Recession planning puts energy, cash and power back into your hands. By contingency planning, you know what action points trigger a change of tack, who’s in charge, and what needs to be executed to stay in business and keep having an impact. Set your aspirational goal – and then find a path to it.We’ve included with this article a new tool to help with recession planning for your business, where you’ll determine what key actions you need to take and who’s going to own it. Start by considering the main areas that you want to focus on. Finance will naturally be high on the list. Then identify the main areas that need attention, such as budget control, cash management, etc.From here, it’s up to you to lead the way and define the specific actions in these areas. Under budget control, you might add an action item such as a review of all non-essential costs – and then choose whether to cut certain items. Crucially, each action item has a timeline and an owner to deliver on it.Own your future and make the right decisions to lead. Now is the right time.