December 15, 2022

Five Steps to Recession-Proof Your Consumer Products Company

By Michael Sacco, Partner & National Consumer and Industrial Products Leader

Five Steps to Recession-Proof Your Consumer Products Company Consumer Products

As 2022 draws to a close, the economic outlook has rarely been so uncertain. Inflation has put a lid on household spending and lifted the costs of many of the goods and services on which businesses rely. Rapidly rising interest rates have raised the cost of borrowing at the fastest pace on record. The market for home mortgages has plummeted, and a string of large layoffs has rippled through the tech sector.

All these factors are raising the possibility of a recession in 2023. In fact, Bloomberg Economics has called a recession “almost certain” next year, and other forecasters such as Oxford Economics have put the chances of a significant slowdown at more than 90%.

With those kinds of odds, now is a good time to prepare your business to weather the economic storm, while also keeping an eye out for potential opportunities when the clouds pass. Here are five key areas to focus on now and action steps you can take to recession-proof your business.

Pay Attention to Payments

Last year was one of the busiest for many consumer product companies. When the economy is booming, it can be easy to overlook the details of payment systems and overhead costs in the scramble to fulfill a flood of orders. But taking the time to understand redundant costs or lags in vendor payments can help companies streamline expenses and avoid escalating financing costs.

Technology can help. While it’s important to scrutinize software subscriptions to identify potential cost savings, investing in payments software can save more than it costs. Programs that automate and speed up the invoicing process can reduce time to payment. Programs that identify late-paying customers and send reminders can also help companies project and, ideally, reduce late payments. Faster payment systems not only increase cash flow but can also save on financing costs to carry the expense of late payments, which will be increasingly important as the cost of borrowing rises with higher interest rates.

Fill Open Roles, but Be Strategic in Your Actions

Has your company fallen into a cycle of “labor hoarding”— over-hiring when it is difficult to find qualified labor? It’s a move that again gained popularity as companies struggled to fill open positions due to a number of factors, including the COVID-19 pandemic, an uptick in baby boomer retirements, and a refocus by many on what they want their “work life” to look like.

When headcount outweighs demand, as may be the case in a slower economy, decreasing that inflated expense may seem obvious. But layoffs, as many have witnessed, come with their own inherent costs — namely reputational damage and lower employee morale.

It’s an outcome that may be diverted by being strategic in all hiring decisions and considering the value of each potential new hire, including how your company may benefit from cross-training and cross-utilizing each employee. This can keep things running smoothly, with pared-back expenses, in leaner times while maintaining employee morale and voiding the productivity loss associated with employee turnover and staff reductions.

Scrutinize Your Supply Chain

While paying attention to your people and payment processes offers solid returns, consumer products companies also need visibility into their supply chain. In good times when consumer spending is on the rise, it might be hard to keep products on store or warehouse shelves. As that spending slows products can pile up, and excess inventory can lead to higher warehouse costs.

Consumers are spending more on travel and experiences and less at the store, leaving retailers with excess inventory. In turn, retailers are canceling or delaying orders. That means manufacturers and wholesalers must be focused on:

  • Managing inventory levels more carefully.
  • Adjusting production schedules to coincide with demand.
  • Implementing strategic flexibility in their supply chain and being ready to pivot when consumer demand shifts.

While it might be too late for the goods already on shelves, consumer products companies that want to avoid future excess inventory challenges and money-losing liquidation discounts should take the time to monitor their supply chain from end to end. This is another area where software can help. Companies should consider implementing technology solutions that give them visibility and real-time data analysis into their inventory levels, open orders, and supply chain. This will allow companies to balance consumer demand and production more efficiently. Understanding exactly where your products are in the supply chain process — from the factory to the container ship to the warehouse — is a crucial step to plan out your purchase calendar and can help company leaders more confidently project future production needs.

Discount Judiciously

As sales slow and inventories take longer to turn over, companies with a strategic approach to liquidation can deepen their connection to their best customers and potentially reach new consumer segments, even during a downturn. While deep discounts on products might be painful to immediate profits, companies can reward their most loyal customers by offering them their deepest discounts. Early or exclusive access to specific lines of inventory can also help strengthen customer loyalty, which can last through a downturn and pay dividends when the economy improves.

Companies that closely follow consumer behavior can also be less affected by a recession. In fact, discounters such as dollar stores often perform better during recessions than in boom times. When consumers look to save money they often seek out these discount retailers, which economists call “counter-cyclical.” Companies that have focused only mid- or high-end consumers might consider which of their brands would be a good fit to place in such discount outlets.

Don’t Lose Sight of Opportunity

Slower economic times lead some companies to hunker down, focus internally, and go on “defense.” But those that have a balance, also go on “offense,” and take a longer-term approach will be better positioned to succeed in the better times to come. In an economic downturn there is an opportunity to take advantage of lower-cost capital improvements and lower prices for inventory and freight costs. You can also recruit competitor talent, invest in strategic acquisitions, and build market share. Companies with enough capital reserves should also take this time to research businesses with complementary strengths. Just as you may have to put your companies’ products on sale, struggling companies that lack infrastructure to weather the storm may also be on the market with decreased value, and a strategic merger and acquisition strategy can help save the seller and bolster the buyer’s strengths.

Count on Marcum

Recessions are painful for consumers and businesses alike, and there is no telling how long the coming slowdown will last or how deep it will cut. Consumer products companies that are prepared for the worst but optimistic enough to make a plan will emerge in the best position. Reach out to your Marcum advisor for further guidance on these and other issues related to operating in the current environment.