Brief

Six Ways Retail Can Soar Through the Macroeconomic Clouds

Recession or a milder downturn? Retailers can accelerate without knowing for sure.

By Marc-André Kamel, Kurt Grichel, Christian Fenner, Stephanie Koszyk, and François Vayleux

First published on Μαΐου 08, 2023
min read


At a Glance Amid recession fears, retail executive teams are carefully scanning incoming macroeconomic data, but the downside potential is too big for them to sit on their hands until clarity emerges. Bain analysis of 100 retailers in the aftermath of the 2007–08 financial crisis illustrates how some companies repeatedly manage to gain a competitive advantage by taking decisive action during downturns. Winners will act now to free up the funding required for continued investment in their points of differentiation and the drivers of long-term growth. As they wrestle with macroeconomic turbulence, retailers in the US and Europe can be certain of one thing at least: Now is a terrible time to wait and see. It might take months for economists to clarify the precise nature of the current slowdown in many markets. Recession? A soft landing engineered by a skilled tightening of monetary policy? Or something else entirely? Executive teams can’t sit on their hands as an answer solidifies. For one thing, galloping inflation has been masking serious demand challenges. In 2022, strong retail sales growth in key markets was powered mostly by price rises—instigated in large part by rising input costs for suppliers—rather than increased volumes. In the UK, 100% of retail sales growth in 2022 was due to inflation; real retail sales, which exclude the impact of inflation, fell in most subsectors. The gap between headline sales and volume trends was only slightly less marked in Germany (with 88% of retail sales growth attributable to inflation), the US (84%), and France (68%) (see Figure 1). Figure 1 Inflation has masked serious demand challenges in retail across the globe It remains to be seen how badly sales will be affected by the consumer squeeze caused by the rising cost of living, higher interest rates, and other negative factors. Likewise, industry profit margins will depend in large part on the extent to which retailers can pass on to consumers all or part of the ongoing cost increases that they are receiving from their suppliers. Other live threats to their profits include the lingering upward pressure on wages and higher borrowing costs. Yet even without knowing the full impact of increased costs and the daily trade-offs that stretched consumers must make, it’s clear that the downside potential is substantial. We estimate that, for grocers that don’t take preventative action, a recession could make a serious dent in their earnings before interest and taxes (EBIT) margin. Factoring in likely cross-border variations in downturn severity, we think grocery EBIT margins could fall by 1–4 percentage points across the UK, Germany, France, and the US (see Figure 2). In a low-margin sector such as grocery retail, that would amount to a big decline. In the US, for instance, a 1–2 percentage point dip would wipe out up to approximately 60% of a typical grocer’s EBIT margin. Figure 2 In key markets showing declines, grocers' profit margins could fall 1–4 percentage points if they don't respond These threats are real. But the urgent need to respond isn’t just self-protective; it’s also about embracing a growth opportunity. Past downturns have seen retailers pull away from the pack through bold strategic moves in extreme uncertainty. Clear winners should emerge again this time, not least because some companies will fixate on immediate challenges and stop investing in longer-term sales and profit opportunities. And the rare mix of disruptive factors seen today—including the post-Covid acceleration of e-commerce, macroeconomic flux, and advances in artificial intelligence—could magnify the advantage on offer to those that get it right. The upshot? The next 18 months could determine which retailers succeed over the rest of this decade. Lessons from the 2007–08 global financial crisis In our work with leading retailers around the world, we have repeatedly seen how some companies manage to bolster their competitive position during downturns. The aftermath of the 2007–08 global financial crisis—and its associated recessions around the world—is just one example. Bain analysis of 100 US and European retailers with revenues of more than $1 billion each in 2007 shows a big gap between top performers and the chasing pack over the ensuing decade. When we looked at those in the top quartile for total shareholder return (TSR) between 2007 and 2017, their ability to improve earnings before interest, taxes, depreciation, and amortization (EBITDA) in recession and (crucially) recovery was striking. These leaders managed a 6% compound annual increase in EBITDA over the decade, having achieved solid growth in the dark days of 2008–09, before accelerating postrecession. Conversely, the rest of the cohort saw average EBITDA weaken as economies shrank—and then struggle to bounce as the macro situation improved. Between 2007 and 2017, the compound annual growth in their EBITDA was zero (see Figure 3). Figure 3 After the 2007–08 global financial crisis, elite retailers in the US and Europe surged thanks to bold moves in the face of uncertainty What these downturn outperformers have in common is that they spent where it mattered most and cut where it mattered least. The Home Depot was one of the TSR stars in the decade after the global financial crisis thanks to prescient moves it made while some other rivals paused to take stock. For a start, it maintained the supply chain investments needed to facilitate future growth, building a network of rapid deployment centers that added distribution capacity and both accelerated and streamlined the movement of products to the stores that needed them most. In addition, the US home improvement retailer boosted the proportion of capital expenditure allocated to technology, from 6% in 2006 to 34% in 2010. Against a backdrop of tough decisions to limit other forms of capex, this meant that, rather than just protecting absolute spending on tech, The Home Depot substantially increased it. In 2008, it appointed a former eBay chief technology officer to transform its IT infrastructure and approach to software development. Walmart’s strong TSR performance between 2007 and 2017 reflected its investment in store tech such as self-checkout, radio frequency identification (RFID) tracking, and in-store wireless networks, which improved store operations and the experience of both customers and store associates. It was an early adopter of e-commerce technology, such as mobile apps, paving the way for strong e-commerce growth as digital shopping gained popularity. Overall, Walmart still cut capital expenditure but focused reductions on new store openings, not innovations in technology vital to the success of the whole company. Costco, a fellow 2007–17 winner, improved supply chain capacity and efficiency by expanding its cross-docking depot operation, which rapidly distributes goods from container-based shipments, while minimizing storage and labor costs. The square footage of these depots grew almost 70% between the start of the 2007 and the end of the 2017 fiscal years. Costco also pulled back on the pace of new store openings. Before recession hit, it had been expanding the number of its stores by about 6% a year, which slowed to about 3% during the recession. It was then well positioned to accelerate the pace of expansion back to about 5% in the years following the recession. On the merchandising front, successful moves included a greater emphasis on private label products. Six imperatives for today’s uncertainty While the right response to the heightened recession risk will vary by individual company, we think six broad actions will enable retailers to both weather the storm and emerge stronger on the other side. Double down on your differentiation ... Now isn’t the time to be all things to all people. Tomorrow’s winners will pinpoint the differentiating factors in their businesses that really improve customer lifetime value, loyalty, and share of wallet. Then, to widen the gap with competitors, they will focus investment and ad spending in those areas. Amid the UK’s cost-of-living crisis, for instance, Tesco has been doubling down on its commitment to value by investing in its Aldi Price Match and its preferential Clubcard prices, as well as launching successive campaigns to lock the price of more than 1,000 everyday products. Retailers might need to sell nonstrategic assets to fund their differentiation push. ... but merchandise for the current environment. With consumers under pressure, it pays to simplify assortment, emphasize value-for-money pricing tiers, and extend private brands across both lower-end and premium products. Real-time data analysis will be crucial to assessing the impact of pricing investments in known value items and other traffic drivers, while personalized promotions can ease the pain of unavoidable price increases for customers (see the Bain Brief “How Retailers Can Rediscover the Skill of Taming Inflation”). Winners will make supplier negotiations data driven and proactive to ease cost increases and supplier funding cuts; adopting such an approach tends to yield savings of 2% to 4% on cost of goods sold. Create flexibility through targeted tightening of spending and cash management. With some elements of cost control likely having loosened during the scramble to keep operating during Covid, it’s a great time for a back-to-basics reset of goods-not-for-resale spending and a full return to lean cost structures for selling, general, and administrative expenses. Above all, analyze potential moves through the customer’s eyes: Will it damage their experience? TJX, the owner of T.J. Maxx/T.K. Maxx, gauged it right in 2009, with a more than $150 million cost reduction initiative that compromised neither its customer appeal nor its industry leadership. Downturn outperformance can also be fueled by freeing up extra cash through a shortening of net working capital cycles and a reevaluation of capital allocation and overall capital expenditure plans. Prioritize long-term resilience. Even after all the short-term actions taken in the wake of Covid-19, there’s still more to be done by retailers to deepen their resilience—and the downturn has made this task even more pressing. As online penetration grows, retailers need to address the poor (or nonexistent) profitability of many e-commerce channels; new fulfillment models or revenue streams can help, and it might be worth rethinking online pricing and/or fees. Automation can bolster the supply chain. Networks of distribution centers and stores may need to evolve to reflect altered shopping patterns. Tighter coordination between operations and commercial teams will be key. Crucially, executive teams will need to quickly harness artificial intelligence to make the economics of retail more robust. Don’t lose sight of the drivers of future growth. Tomorrow’s winners will be ready for attractive M&A opportunities to emerge, both to extend local relative market share and add capabilities through scale and scope deals. They will aggressively pursue talent—particularly from big tech-led companies shedding staff amid tighter funding. With industry growth likely to skew away from the traditional core activities of retailing, it’s a great time to accelerate investments in nontraditional areas such as marketplaces, advertising, and financial services (see the Bain Brief “How Engine 2 Expansion Can Power the Future of Retail”). Downgrading environmental, social, and governance (ESG) initiatives would be a mistake, given customer and regulator interest. Build 360-degree stakeholder confidence. Purposeful leadership and timely, empathetic communication can keep customers and employees onside in a downturn. Amid widespread equity market nervousness, investors can be reassured by a rigorous narrative about disciplined investment through the downturn that will enable the company to emerge stronger on the other side. Our previous five imperatives can be the building blocks of that message. The view from 2030 Retailers, like the rest of the corporate world, will keep a close eye on macroeconomic updates until the prevailing uncertainty dissipates (see Bain’s rolling selection of key indicators, “Global Recession Watch: The Latest Data”). But they can’t let themselves be paralyzed by short-term movements in inflation, GDP, yield spreads, consumer confidence indices, and other data. One thing that unifies the actions outlined above is their focus on building toward a strong strategic position at the end of this decade. The view from 2030 will be filled with more possibility if retailers make the right moves today rather than hunkering down—just as past recession winners have shown. The authors would like to acknowledge Alison Berg, Liz Vargo, Taylor Glor, Emmanuel Kalu, Saumya Malhotra, and Yue (Jane) Yang for their contributions to this brief.

At a Glance

Amid recession fears, retail executive teams are carefully scanning incoming macroeconomic data, but the downside potential is too big for them to sit on their hands until clarity emerges.
Bain analysis of 100 retailers in the aftermath of the 2007–08 financial crisis illustrates how some companies repeatedly manage to gain a competitive advantage by taking decisive action during downturns.
Winners will act now to free up the funding required for continued investment in their points of differentiation and the drivers of long-term growth.

As they wrestle with macroeconomic turbulence, retailers in the US and Europe can be certain of one thing at least: Now is a terrible time to wait and see. It might take months for economists to clarify the precise nature of the current slowdown in many markets. Recession? A soft landing engineered by a skilled tightening of monetary policy? Or something else entirely? Executive teams can’t sit on their hands as an answer solidifies.

For one thing, galloping inflation has been masking serious demand challenges. In 2022, strong retail sales growth in key markets was powered mostly by price rises—instigated in large part by rising input costs for suppliers—rather than increased volumes. In the UK, 100% of retail sales growth in 2022 was due to inflation; real retail sales, which exclude the impact of inflation, fell in most subsectors. The gap between headline sales and volume trends was only slightly less marked in Germany (with 88% of retail sales growth attributable to inflation), the US (84%), and France (68%) (see Figure 1).

Inflation has masked serious demand challenges in retail across the globe

It remains to be seen how badly sales will be affected by the consumer squeeze caused by the rising cost of living, higher interest rates, and other negative factors. Likewise, industry profit margins will depend in large part on the extent to which retailers can pass on to consumers all or part of the ongoing cost increases that they are receiving from their suppliers. Other live threats to their profits include the lingering upward pressure on wages and higher borrowing costs.

Yet even without knowing the full impact of increased costs and the daily trade-offs that stretched consumers must make, it’s clear that the downside potential is substantial. We estimate that, for grocers that don’t take preventative action, a recession could make a serious dent in their earnings before interest and taxes (EBIT) margin. Factoring in likely cross-border variations in downturn severity, we think grocery EBIT margins could fall by 1–4 percentage points across the UK, Germany, France, and the US (see Figure 2). In a low-margin sector such as grocery retail, that would amount to a big decline. In the US, for instance, a 1–2 percentage point dip would wipe out up to approximately 60% of a typical grocer’s EBIT margin.

In key markets showing declines, grocers' profit margins could fall 1–4 percentage points if they don't respond

These threats are real. But the urgent need to respond isn’t just self-protective; it’s also about embracing a growth opportunity. Past downturns have seen retailers pull away from the pack through bold strategic moves in extreme uncertainty. Clear winners should emerge again this time, not least because some companies will fixate on immediate challenges and stop investing in longer-term sales and profit opportunities. And the rare mix of disruptive factors seen today—including the post-Covid acceleration of e-commerce, macroeconomic flux, and advances in artificial intelligence—could magnify the advantage on offer to those that get it right. The upshot? The next 18 months could determine which retailers succeed over the rest of this decade.

Lessons from the 2007–08 global financial crisis

In our work with leading retailers around the world, we have repeatedly seen how some companies manage to bolster their competitive position during downturns. The aftermath of the 2007–08 global financial crisis—and its associated recessions around the world—is just one example. Bain analysis of 100 US and European retailers with revenues of more than $1 billion each in 2007 shows a big gap between top performers and the chasing pack over the ensuing decade.

When we looked at those in the top quartile for total shareholder return (TSR) between 2007 and 2017, their ability to improve earnings before interest, taxes, depreciation, and amortization (EBITDA) in recession and (crucially) recovery was striking. These leaders managed a 6% compound annual increase in EBITDA over the decade, having achieved solid growth in the dark days of 2008–09, before accelerating postrecession. Conversely, the rest of the cohort saw average EBITDA weaken as economies shrank—and then struggle to bounce as the macro situation improved. Between 2007 and 2017, the compound annual growth in their EBITDA was zero (see Figure 3).

After the 2007–08 global financial crisis, elite retailers in the US and Europe surged thanks to bold moves in the face of uncertainty

What these downturn outperformers have in common is that they spent where it mattered most and cut where it mattered least. The Home Depot was one of the TSR stars in the decade after the global financial crisis thanks to prescient moves it made while some other rivals paused to take stock. For a start, it maintained the supply chain investments needed to facilitate future growth, building a network of rapid deployment centers that added distribution capacity and both accelerated and streamlined the movement of products to the stores that needed them most.

In addition, the US home improvement retailer boosted the proportion of capital expenditure allocated to technology, from 6% in 2006 to 34% in 2010. Against a backdrop of tough decisions to limit other forms of capex, this meant that, rather than just protecting absolute spending on tech, The Home Depot substantially increased it. In 2008, it appointed a former eBay chief technology officer to transform its IT infrastructure and approach to software development.

Walmart’s strong TSR performance between 2007 and 2017 reflected its investment in store tech such as self-checkout, radio frequency identification (RFID) tracking, and in-store wireless networks, which improved store operations and the experience of both customers and store associates. It was an early adopter of e-commerce technology, such as mobile apps, paving the way for strong e-commerce growth as digital shopping gained popularity. Overall, Walmart still cut capital expenditure but focused reductions on new store openings, not innovations in technology vital to the success of the whole company.

Costco, a fellow 2007–17 winner, improved supply chain capacity and efficiency by expanding its cross-docking depot operation, which rapidly distributes goods from container-based shipments, while minimizing storage and labor costs. The square footage of these depots grew almost 70% between the start of the 2007 and the end of the 2017 fiscal years. Costco also pulled back on the pace of new store openings. Before recession hit, it had been expanding the number of its stores by about 6% a year, which slowed to about 3% during the recession. It was then well positioned to accelerate the pace of expansion back to about 5% in the years following the recession. On the merchandising front, successful moves included a greater emphasis on private label products.

Six imperatives for today’s uncertainty

While the right response to the heightened recession risk will vary by individual company, we think six broad actions will enable retailers to both weather the storm and emerge stronger on the other side.

Double down on your differentiation ... Now isn’t the time to be all things to all people. Tomorrow’s winners will pinpoint the differentiating factors in their businesses that really improve customer lifetime value, loyalty, and share of wallet. Then, to widen the gap with competitors, they will focus investment and ad spending in those areas. Amid the UK’s cost-of-living crisis, for instance, Tesco has been doubling down on its commitment to value by investing in its Aldi Price Match and its preferential Clubcard prices, as well as launching successive campaigns to lock the price of more than 1,000 everyday products. Retailers might need to sell nonstrategic assets to fund their differentiation push.

... but merchandise for the current environment. With consumers under pressure, it pays to simplify assortment, emphasize value-for-money pricing tiers, and extend private brands across both lower-end and premium products. Real-time data analysis will be crucial to assessing the impact of pricing investments in known value items and other traffic drivers, while personalized promotions can ease the pain of unavoidable price increases for customers (see the Bain Brief “How Retailers Can Rediscover the Skill of Taming Inflation”). Winners will make supplier negotiations data driven and proactive to ease cost increases and supplier funding cuts; adopting such an approach tends to yield savings of 2% to 4% on cost of goods sold.

Create flexibility through targeted tightening of spending and cash management. With some elements of cost control likely having loosened during the scramble to keep operating during Covid, it’s a great time for a back-to-basics reset of goods-not-for-resale spending and a full return to lean cost structures for selling, general, and administrative expenses. Above all, analyze potential moves through the customer’s eyes: Will it damage their experience? TJX, the owner of T.J. Maxx/T.K. Maxx, gauged it right in 2009, with a more than $150 million cost reduction initiative that compromised neither its customer appeal nor its industry leadership. Downturn outperformance can also be fueled by freeing up extra cash through a shortening of net working capital cycles and a reevaluation of capital allocation and overall capital expenditure plans.

Prioritize long-term resilience. Even after all the short-term actions taken in the wake of Covid-19, there’s still more to be done by retailers to deepen their resilience—and the downturn has made this task even more pressing. As online penetration grows, retailers need to address the poor (or nonexistent) profitability of many e-commerce channels; new fulfillment models or revenue streams can help, and it might be worth rethinking online pricing and/or fees. Automation can bolster the supply chain. Networks of distribution centers and stores may need to evolve to reflect altered shopping patterns. Tighter coordination between operations and commercial teams will be key. Crucially, executive teams will need to quickly harness artificial intelligence to make the economics of retail more robust.

Don’t lose sight of the drivers of future growth. Tomorrow’s winners will be ready for attractive M&A opportunities to emerge, both to extend local relative market share and add capabilities through scale and scope deals. They will aggressively pursue talent—particularly from big tech-led companies shedding staff amid tighter funding. With industry growth likely to skew away from the traditional core activities of retailing, it’s a great time to accelerate investments in nontraditional areas such as marketplaces, advertising, and financial services (see the Bain Brief “How Engine 2 Expansion Can Power the Future of Retail”). Downgrading environmental, social, and governance (ESG) initiatives would be a mistake, given customer and regulator interest.

Build 360-degree stakeholder confidence. Purposeful leadership and timely, empathetic communication can keep customers and employees onside in a downturn. Amid widespread equity market nervousness, investors can be reassured by a rigorous narrative about disciplined investment through the downturn that will enable the company to emerge stronger on the other side. Our previous five imperatives can be the building blocks of that message.

The view from 2030

Retailers, like the rest of the corporate world, will keep a close eye on macroeconomic updates until the prevailing uncertainty dissipates (see Bain’s rolling selection of key indicators, “Global Recession Watch: The Latest Data”). But they can’t let themselves be paralyzed by short-term movements in inflation, GDP, yield spreads, consumer confidence indices, and other data. One thing that unifies the actions outlined above is their focus on building toward a strong strategic position at the end of this decade. The view from 2030 will be filled with more possibility if retailers make the right moves today rather than hunkering down—just as past recession winners have shown.

The authors would like to acknowledge Alison Berg, Liz Vargo, Taylor Glor, Emmanuel Kalu, Saumya Malhotra, and Yue (Jane) Yang for their contributions to this brief.