As Recession Looms, Retailers Face Pressure to Quickly Diversify Suppliers

With too many indicators pointing to a recession in the second half of the year, merchants and brands already struggling with inflation, inventory and a nervous consumer base have their work cut out in riding out what may be an insulting economic episode after an injurious pandemic.

In a conversation with PYMNTS, Mike French, vice president of partnerships and alliances at eCommerce solutions platform Digital River, said if you’re not diversified, watch out.

Saying that making “more granular decisions more frequently” is a strategy fitted to down economies, French noted that “the other thing that I see successful brands do is another old adage, it’s about diversification.”

“If you’ve got all your eggs in one basket when it comes to your supply chain or your retail channel, you’re going to be a lot more vulnerable to the changes of the decisions that other actors that you’re so closely tied with may make when they’re responding to this instability,” he said. “It’s those three things: Be conservative, plan to re-plan and, if you aren’t diversified already, get about diversified.”

As larger players with deep pockets have the supply chain management in place to use scale as a counter to inflation and its impact in certain areas, he said “they have the capacity to deal with these uncertainties with a couple different fallback positions.”

“Target has the ability to say, ‘I’ve bought up a whole bunch of inventory in this category. It isn’t relevant right now, but I have a place I can put it until it becomes relevant again,’” he explained. “Not everybody has that freedom.”

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French also sees big-box players refocusing their inventory around merchandise categories that are moving now — which weren’t what was moving during the pandemic. They also have a developed good visibility into “categories that consumers are going to spend money on.”

“When you have less money to spend, what are you spending your money on? You want to make sure you’ve got enough of those to sell,” he said. “It’s really those three levers I think that you see the large retailers playing [with], and if you are a brand [and] you’re not very diversified, it’s movements like those large players that could potentially put you at a whole lot of risk.”

The Pandemic ‘Hangover Effect’

French talked about “the hangover effect” on inventories, using large supplies of pandemic-era pajama wear that’s going out of style as people reengage with a world where COVID-19 no longer seems to be anyone’s concern or planning priority — although that variable remains.

However, anxieties have shifted from infection to inflation. French told PYMNTS, “At the rate things are going, and with some of the other factors like the instability around what we’re seeing with some geopolitical situations now, we’d be almost naive to think that we’re not going to see some recession in major world economies. So, how do you plan for a recession? A lot of firms that have been around for a while have some playbook around that.”

Peeking inside that playbook, he said wallet size retreats fast, and you have to grab it.

“You’re probably going to get a smaller share of it,” he said, but explained how some brands and merchants will now be able to use supply chain dynamics to their advantage.

“If you’re doing eCommerce, as an example, and say you’re a supplier to Target, do you have an opportunity where you can participate in the Target marketplace, fulfill directly out of a distribution center that you’d otherwise be fulfilling Target from,” he said, “and does that give you an avenue that you can get directly to the consumer and maybe have some more direct control over your product availability or pricing?”

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Direct channels give brands more control over merchandising and payment methods, like buy now, pay later (BNPL), that can make them more attractive to budget-conscious consumers who may be so cash strapped that they’re reluctant to turn to traditional credit offerings.

His current favorite? Social commerce.

“The one I’m most interested to see is how brands, how retailers think about getting to consumers on the consumer’s ground,” French said. “What I mean by that is some of these newer or emerging channels, like social, like video, gaming, entertainment — the places where people are spending their time and coming to them, as opposed to just trying to draw them to you.”

Those intimate settings give retailers an opportunity to better understand affinity groups — and capture more of their wallet share.

“If you’re going to get any spend that is in that margin above necessity, the closer you are to that center of interest or affinity that that consumer has,” he said, “I think the better off you’re going to be.”

When Times Get Tough …

As for Amazon’s attempt to head off a recession with an early Prime Day and the somewhat underwhelming responses from big-box rivals, here again, diversification is at the heart.

Noting that marketplaces, merchants and brands pulled back ad spend for the 2021 holiday season because of malingering pandemic uncertainties, French said the pendulum is swinging the other way now to some extent — but, to mix metaphors, that may not move the needle.

“One of the approaches a brand can think about taking — and again, it depends on your product category, the appeal that you may have in different country markets — is thinking about a strategy that’s a little bit more cross-border oriented, where you’re getting your inventory at effectively an order level from country A to country B,” he said.

Using distribution and eCommerce partners in-country is a way to “shortcut or end run-around in terms of diversifying, [by] leveraging where you have that existing inventory to get it pushed through different channels than just brick-and-mortar retail,” in addition to cross border.

The beauty of this is, “If you have a direct channel, you’re going to have the most control over the consumer experience, on how you want to price different categories based on what kind of inventory you want to move, and you have the opportunity to be a lot more creative with how you do merchandising, and how you can offer different payment instruments,” French said.

“If I can get six months same as cash, or I can get a pay-in-four kind of arrangement with a buy now, pay later, if you have that direct channel — whether it’s through your eCommerce site or going through social commerce — you’re going to have more control to make decisions there.”