The Shapes That Model Retail
There has been a tremendous amount of discussion by economists and government experts in regard to the type of recession we are in, as well as the possible ways we could come out of it.
The good news is that it seems to be a fairly unanimous sentiment that we are at or very near the bottom. Plus there are other positive signs such as retail sector sales picking up slightly (with autos excluded) in both August and September. However, there are varied opinions and speculation as to where things go from here.
This is pretty clearly demonstrated in the different models, or 'shapes', that the recovery might take, which have come to be characterized by various letters of the alphabet.
It is likely that many of you have seen these so I will only briefly touch on what they are. We have the classic 'V' shape recession, which is a clear downturn and bottom followed by clear and sustained recovery, the 'U' which is a longer time spent at the bottom and in recovery, and the 'W' or double-dip.
What is interesting is how even the top experts tend to hedge their bets with multiple possibilities (it reminded me of Harry Truman's quip about needing a one-handed economist!)
I started to realize that based on past experience I should be at the point of breathing a little easier. I (and perhaps some of you) would normally feel we had turned the corner and all we would need to do is stick it out until the consumer and business spending made its recovery. Perhaps that would be the 'V' model, or even the 'U' shape.
Instead, I noticed that I continued to have sort of a nagging, uncertain feeling that all is not well, similar to when you know you have think you have something really important to do but you can't remember what it is! Even the threat of a double-dip recession was not what was causing this feeling.
Please don't get the wrong impression - I am generally quite optimistic and not prone to being worried or paranoid. However, I thought it might make more sense to analyze things from a retailer's financial perspective rather than what is coming from the economists and government sources.
They don't have to face the hard day-to-day realities that we in business have to deal with to keep our doors open, such as maintaining profitability and cash flow, cost of capital (or perhaps sources of capital these days!), and what happens if our plans are off the mark. Most of them will continue to get paid whether they are right or wrong in their predictions!
Economists tend to see things from a broader perspective such as by country, region, or industry sectors. Although they may track and analyze a number of economic issues and trends that would also impact retailers, it is from an aggregate level.
So the question is, what will the economic recovery look like at a place where all the trends come together at once - such as in your own company's financials? More importantly, what if the recovery doesn't exactly match one of the models they are using, but instead has a different shape by the time it comes down to your bottom line results?
There are a number of factors that weigh in, and while there is no absolute guarantee that the following may occur, let us assume for a moment that:
• The dollar weakens further, and China stops holding theirs down
• Inflation starts to creep up
• Interest rates go up to keep the inflation in check and to feed the federal deficit
• Oil prices in dollars remain steady or start to creep up
• Energy costs as a whole start a slow but steady increase
• At least some health care costs get passed on to businesses
• Producer prices and shipping costs rise to reflect the energy and transportation costs
• Consumer credit and income does not return to pre-recession levels, and more goes into savings rather than consumption
• Rents may be lower than before, but may not be nearly enough to offset the above
The end result is that while your top line may start showing the upswing side of the recovery, your bottom line may not track exactly with it, and the recovery may look more like an ‘L' than a ‘V'.
Should the above scenario turn out to be anywhere near accurate, a retailer will need to be extremely efficient at every point that makes an impact on the financial results.
Have a question for Scott? Ask or leave a comment below!