SUMMARY: I don’t think that a recession is coming this year, but next year when the holiday bills hit consumers, I think consumer spending could slow down. Particularly troubling is the rising level of consumer debt along with the slowdown in capital spending by companies. There are some things companies can do to prepare now.
Harvard Business Review analyzed businesses that managed to not only survive during the last downturn but actually thrive. They focused on companies that delivered exceptionally high total returns to shareholders (TRS) within their industries. These companies, which they dubbed the resilients, returned between 6% and 8% more in TRS (depending on the sector) than industry peers did. Their performance dipped less overall during the downturn, and they were able to significantly widen their leads in their respective industries during economic recovery.
Companies willingness to move early made the resilient companies far more likely to successfully weather economic shock. As the effects of the downturn became more and more apparent, resilient companies focused on building more flexibility into their investment-planning and operations in addition to pursuing continued earnings expansion. By the time the economy was in full-on recession, the resilients had reduced their debt by more than $1 for every $1 of total capital on their balance sheet. By contrast, non-resilient companies had added more than $3 of debt. The resilient companies accomplished this partly by divesting businesses and other assets more often than industry peers did: Our data show that 25% of all deals that resilients struck between 2007 and 2009 were divestitures, compared with 18% for non-resilients.
Apart from this emphasis on operating costs, resilient companies also focused on maintaining loyalty among high-value customers that were central to the company’s growth post-recession. Too many brands spend too much time and effort to acquire new customers that they lose sight of their more profitable customers.
Good, loyal, customers are frequent flyers. They trust your business, and they trust you. With that being said, they are much easier to upsell or cross-sell to. Trust has already been established. That’s why it’s no surprise that many small businesses have found loyal customers spend close to 67% more per transaction than new customers.
40% of an eCommerce store’s revenue is created by only 8% of its customers. This 8% is made up of your repeat customers, making it clear that they are extremely profitable.
If you could run your business with a steady inflow of revenue every month versus trying to grow with highly volatile revenue why shouldn’t you do it? Because too many companies are focused only on stock prices and Wall Street’s increasing sales expectations. Facebook earns billions every year in ad revenue but the only thing that Wall Street cares about is the number of Facebook users.
Economic indicators all say that we are headed for a recession. The final straw will be a slow down in consumer spending. Company sponsored health insurance premiums are set to rise again next year and the trade war with China is costing us all more money. Smart brand will prepare now to better serve their current customers rather than focus on continued growth.