The Great Recession Redux
How Companies Dance to the Tune of Economic Uncertainty
Just as we’re settling into our pandemic-era sweatpants, the economic indicators are blaring warnings of a looming recession. The yield curve has been inverted for a while, which always indicates that a recession is coming. But the 2-year yield took a nosedive over the past three weeks and that’s a strong flashing indicator that the recession might finally be here. Companies, especially tech giants, have started trimming the fat in the form of layoffs, amounting to nearly half a million job cuts since October 2022. Cue the ominous music. Yet the dark clouds of economic uncertainty are gathering on the horizon because we continue getting mixed signals as the US economy has remained strong, even adding 311,000 jobs in February.
In these murky times, Direct-to-Consumer (DTC) companies are attempting to adapt, but it’s no cakewalk. Shifting customer expectations and demands have businesses like Crocs reinventing themselves to stay in the game. Brands are scrambling to evolve, improve, and optimize their e-commerce to capture the hearts (and wallets) of increasingly powerful demographics, such as Millennials who plan to purchase more luxury goods online this year than other generational cohorts. Those same consumers continue to push up service inflation as travel demand has been strong because they’re often mixing business with a vacation.
Companies are slashing costs and reevaluating partnerships, like Beyoncé and Adidas AG, parting ways over Ivy Park’s plummeting sales. Fly by Jing, an Asian sauce brand, even treated its dumpling discontinuation like a celebrity breakup. Meanwhile, The RealReal prioritizes consignment over direct sales, and online retailers are starting to charge customers for returns to cope with inflation.
Balancing short-term profitability and long-term success has become a tightrope act. Workforce development, layoffs, and job cuts are rampant as businesses like Signet Jewelers acquire and streamline others. Discontinuing products and navigating corporate defaults require a delicate touch, and companies are seeking solace in technology and automation for cost-efficiency and resilience. But beware of the drawbacks — finding the balance between automation and human labor is a Herculean task. Just ask Walmart, who saw 17% year-over-year growth in e-commerce in the fourth quarter but is still laying off hundreds of workers in its e-commerce fulfillment centers.
Some businesses never find their groove. They chase after one market after another, hoping to strike gold, but end up digging their graves. Curie and GameStop are classic examples of how not to expand. But there’s a silver lining to this looming recession: It forces businesses to face challenges head-on and look for new ways to grow. It makes them more resilient in times of uncertainty. It’s a vicious cycle. When businesses cut costs to survive a recession, they also cut jobs and demand. That makes the recession worse and forces them to cut more.
There are so many mixed signals; the economy seems to be humming along, creating jobs (311,000 in February), and prices are getting more stable. The 200,000 layoffs came from a specific sector and only from 20 companies. There should be nothing to worry about, right? The treasury yield inversion says a recession is coming, but real long-term US Treasury yields are finally stable, which doesn’t indicate a recession is coming. The numbers hide a dangerous truth: every recession since 1985 has been caused by a shock that no one anticipated. A madman who decided to invade his neighbor and send oil prices through the roof. A bubble that popped and wiped out a generation of tech entrepreneurs. A terrorist attack that shook the nation and started a war. A financial crisis that nearly brought down the global economy. Each time, the shock was different, but the outcome was the same: a sudden and steep dive into recession.
Some businesses will see the upcoming crisis as an opportunity. They adapt faster than their competitors and find new ways to grow. They become more resilient in the face of uncertainty, like Ruby. Ruby is a maker of organic sodas that promise to boost your health and mood. They used to sell a still Hibiscus drink but realized that people preferred bubbles. So they ditched their old product and focused on their sparkling sodas. They had a story to tell, and they told it well.
But not all businesses are like Ruby. Some are stuck in their old ways; worse, they automate their operations and eliminate human workers. Take Walmart, which has been investing in warehouse robots and laying off thousands of employees. They say it’s because of changing consumer habits, but it’s also because of their bottom line. They don’t care about the people they leave behind or the economic consequences left in the wake of their actions to prop up their share price unless when it gets more shoppers in the door.
Businesses are like people: They can change for better or worse. And once they change, they rarely return to how they were before unless something big happens to shake them up again.
