While the fears and worries surrounding coronavirus have been clear for quite some time now, the economic impact of the pandemic has become starkly apparent recently. With staggering unemployment continuing to rise and adequate stimulus or relief support remaining uncertain, our country is now facing a financial crisis on top of the existing public health emergency. As manufacturers and retailers continue to try and figure out how to endure this difficult time, we wanted to take a moment to look back at the 2008 Recession. Is there anything we can learn from it that may help us in the present? Though the circumstances may be completely different, that previous recession does offer a blueprint for how consumer habits shift and evolve in response to financial downturn—and sheds light on what companies can be doing to weather the economic storm.
In the broadest sense, the term “recession” refers to back-to-back financial quarters of significant decline in gross domestic product (GDP). But the National Bureau of Economic Research actually looks to a number of different factors before officially declaring a recession. This includes “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
Over the past nine weeks, more than 38 million Americans have applied for unemployment—a number that is expected to rise to 47 million, or a 32% unemployment rate, as the weeks go on. At the same time, retail sales dropped by a historic 16.4% in April, according to the Census Bureau, following an 8.3% decline in March. With all of these factors at play, experts are predicting a double-digit drop in GDP between April and June—putting the US definitively in a recession.
The economy is expected to struggle for as long as the pandemic continues. But, according to experts, that doesn’t mean rushing to re-open before it is safe to do so will alleviate the problem. In fact, staying closed for longer may minimize the risk of a second wave of the virus down the line. “This is a situation where the more we’re able to respect the need for physical distancing, the need to take care of ourselves and bend this curve, the more we step back from our economic activity, the faster we’ll actually recover and emerge from this,” Cecilia Rouse, an economist and the dean of the Woodrow Wilson School of Public and International Affairs at Princeton University, told CNBC.
Not all that long ago, the United States was facing another financial crisis. The 2008 Recession had a significant and lasting impact on the country’s economy. And while the nature of our current economic crisis is truly unparalleled, it is still helpful to remember how the retail sector handled that difficult moment in time—and who was able to move forward beyond it.
The sleep industry, as many will probably remember, took a serious hit during this recession. According to the International Sleep Products Association, 2008 saw mattress sales drop by 11.7% in units and the dollar value of shipments drop by 11.8%. That trend continued into the following year as well. In 2009, the unit shipments fell by another 6.6%, the dollar value by 9% and the wholesale average unit selling price by 2.6%.
Of course, it wasn’t just the bedding industry that was suffering. Across the board, retail sales dropped to 35-year lows in 2008, with the International Council of Shopping Centers recording declines across every retail segment.
To shoulder the financial burden, many retailers resorted to deep discounts in order to salvage their bottom lines. By selling off large volumes of merchandise at steep price-cuts, these retailers were able to generate cash and reduce inventory levels—even though it meant sacrificing profits. According to a report from Wachovia (now known as Wells Fargo), discounts were up 12% in 2008—the largest year-over-year jump. Certain high-end store retailers were able to successfully stave off some of the financial impact by offering drastic promotions on luxury brands, but for the most part, it was the discount retailers that fared the best during this time. Wholesale clubs, dollar stores and big-box discounters all weathered the recession better than department stores and specialty retailers as consumers looked to pinch their pennies.
Spending habits became more conservative across the board during this time, regardless of whether or not someone lost their job or was otherwise financially impacted by the recession. The sense of needing to be careful with your money was pervasive across all tax brackets, with many high-end consumers opting to hold off on purchasing big-ticket or luxury items, just in case.
With shopping habits trending down the ladder, it is no surprise that stores like Costco thrived during this recession. But the wholesale club’s success was about more than just low prices—it coupled affordability with high-quality customer service. Details like a no-questions-asked return policy helped elevate customer loyalty, as did its reputation for keeping low margins. More generally, wholesale stores were offering consumers a unique type of shopping experience that aligned with the country’s overall mood. ”They have a treasure hunt atmosphere in their stores," explained Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment-banking firm, to TIME Magazine in 2008. "They offer constant newness and incredible value.”
That kind of shopping environment even helped some mid-priced retailers survive during this era. Urban Outfitters and Anthropologie were two stores that weathered the recession relatively well. While their price points were not bottom-of-the-barrel, they were able to still continually attract customers by investing in unique displays, helpful employees—and a thoughtful mix of merchandise that couldn’t be found anywhere else. The thrill of discovery could be a bright spot in an otherwise bleak period.
By 2010, the mattress industry had finally began to bounce back and see some gains again. ISPA reported that bedding sales in the US increased 7.3% that year, with the wholesale dollar value rising 6.6%. Unfortunately, the average unit selling price was not as quick to recover—in 2010, the AUSP dipped 0.7%.
“Experience shows that mattress sales are influenced strongly by trends in the national economy, especially by changes in consumers’ disposable income, sales of new and existing homes, and changes in consumers’ wealth,” noted ISPA President Ryan Trainer in the summer of 2010. “So far this year, the industry is performing significantly better than it did at this time in 2009, but we’re not out of the woods yet.”
Just as it had during previous recessions, the mattress industry has proven to be particularly resilient when it comes to financial crises. Though the numbers will drop alongside a struggling economy, mattress sales tend to rebound stronger in the years that follow. This is, partly, because they are an easily “deferrable” purchase. When money gets tight, most people can hold out with what they have—so rather than resorting to a cheaper mattress option when finances are bad or consumer confidence is low, they can wait until the outlook is better and then invest in something a little better.
While this has always been the party line from the bedding industry, it’s important to also explore how the nature of the marketplace evolved post-recession. In the years that followed, innovation was off-the-charts, with features like gel and latex and smart technology emerging. At the same time, the wake of the 2008 Recession also spurred on the explosion of direct-to-consumer online mattress brands. Tuft & Needle was founded in 2012, while Casper made its debut in 2014.
While it would be easy to say these brands connected with consumers due to their entry-level price points, the truth is they offered something more than that. They promised convenience in the form of boxed delivery, trust in the form of extended no-risk at-home trials—and a new kind of financial transparency with promises of “cutting out the middle-man.” More than anything, these brands tapped into the cynicism and suspicion people were feeling towards established norms—and offered them a new alternative.
Understanding how financial crises affect consumer’s outlook is just as important as meeting their budgets. As Walter Loeb, president of the consultant firm Loeb Associates, said to the New York Times back in 2008: “If you don’t understand the consumer and his mood right now and you’re doing things as usual, you’re not going to get any business.”
With the threat of recession (and even possible depression) looming, it is important for retailers to prepare for how that will impact their business. Even with the possibility of stores re-opening sooner rather than later, a staggering amount of consumers will continue to face economic uncertainties.
Get Inventory Under Control
With much of in-person shopping put on hold, many retailers are struggling with what to do with all their un-sold inventory. According to a recent survey from ecommerce platform NuOrder, “inventory reduction” is one of the top priorities for sellers right now. Deep discounting through off-price retailers, flash sales and ecommerce promotions are all ways to off-load more seasonal inventory and make space for evergreen items.
"We'll start to see retailers and brands tightening up supply chains, pulling back on trendy items, relying on staple pieces, reusing fabrics when possible and applying smarter discounts," a spokesperson at Edited, a retail analytics firm, told Business Insider. "The impact of the pandemic has been significant, but it's forcing retailers to rethink their past processes and create more agile ones in order to survive this crisis.”
Focus On Entry-Level Options
Though many people have been able to retain their jobs through this crisis by working from home, not everyone is so lucky. And the general feeling of uncertainty is likely to affect everyone’s spending habits, not just those who have lost jobs. People will be looking for deals where they can find them. Focusing on more entry-level options, especially ones that are suited to digital sales, will help you connect with the consumers that cannot put off their mattress purchasing until after the economy has stabilized.
Offer Smaller Luxuries And Unique Experiences
People may not want or be able to invest in a full sleep system these days, but a new set of sheets or pillows may feel like a reasonable indulgence. Many consumers are also looking for new ways to assuage their anxieties during this stressful time, making things like cozy bedding or weighted blankets all the more appealing. And while you may not be able to offer your customers a memorable in-person shopping experience right now, you can still deliver that “thrill of discovery” feeling through clever merchandising and thoughtful design on your website.
Rethink Financing For A New Generation
Younger consumers, in particular, are going to be affected by the economic pressures of the pandemic. Most have yet to reach their so-called “prime income years” in their career—and many are already saddled with more student debt than any previous generation. This is going to greatly affect their ability to purchase big-ticket items like home furnishings. Subsequently, financing is going to play a huge role in these retail spaces moving forward. And it’s up to lenders to figure out how to make these programs more accessible. That means offering longer term plans, more affordable monthly payments and expanding ecommerce options. It may also require lenders to rethink things like the traditional credit score, which, due to student loan debt, may not adequately measure young consumers’ ability to handle debt.
Prioritize Customer Service
Part of the reason Costco was able to thrive during the recession was its commitment to customer service. Even more important than low, low prices, the discount retailer made people feel taken care of. At a time when consumer confidence is low, you need to give your customers clear reasons to trust you.
Plan For The Future
Things may look bleak for right now, but this pandemic will one day come to an end. And the economy will begin to bounce back. As you figure out how to manage your business during a crisis, don’t forget to keep an eye towards the future. What will consumers be looking for when things start to settle down? Will more people be moving out of cities and into homes in more rural or suburban areas? After so much focus on health, will they be more willing to invest in higher-end mattress products to help them get better sleep? Keeping these sorts of questions in mind may help you not just survive the economic effects of this crisis—but move forward as a stronger, smarter, more prepared company.