RETAIL FUTURES: The Year of Living Dangerously
About This Blog
I plan to write about future scenarios for retail industry and the interplay with trends in the economy, technology and society – and of course how SAP is playing (or should be playing) a role in the industry. So here goes…
The Year of Living Dangerously
So… it’s not Peter Weir’s 1982 film starring Mel Gibson and Sigourney Weaver, nor the events of 1965 in Indonesia on which the film is based. No, we have to go back more than 70 years before we lived as dangerously as this. According to the International Monetary Fund, in their recently released World Economic Outlook of April 2009, by all measures (and they have many) we are experiencing the worst recession since the Great Depression. We are currently in the midst of the fourth global recession since the end of World War II. By the IMF’s exacting standards not all recessions are global in nature. For example, the bursting of the dot com bubble and the ensuing recession of 2001 does not qualify as a global recession as growth in major emerging markets such as China and India remained robust.
To top it all, this is the most synchronized recession meaning – with almost 75 countries currently in a recession at the same time – this downturn has the distinction of involving the most countries. Although it is clearly driven by asset deflation and reduced economic activity in the advanced economies (G8, Euro Area, etc.), concurrent recessions in emerging economies (BRIC, ASEAN, etc.) are contributing to its depth and synchronicity.
A Whole New World
What constitutes a global business cycle? In the 1960s, it was sufficient to answer this question by looking at cyclical fluctuations in advanced economies, the United States in particular. These countries accounted for nearly 70 percent of world output and the rest of the world was largely dependent on the advanced economies. Today, with the share of advanced economies in world output down to about 55 percent, the influence between business cycles in these countries and global business cycles can no longer be taken for granted. Indeed, in 2007, as the slowdown in economic activity in the G8 economies began, the hope was that emerging economies would be somewhat insulated from these developments by the size and strength of domestic demand and by the increased importance of intraregional trade. This however did not turn out to be the case.
Today, the countries of the world are more integrated than ever before through global trade and financial flows, creating greater potential for spillover and contagion effects. This magnifies the feedback, in both directions, between business cycle developments in advanced economies and those in emerging economies, increasing the odds of synchronous movements and global business cycles.
Déjà Vu All Over Again1
In addition to the IMF, a whole host of high powered think tanks and organizations are tracking this recession closely and comparing it to previous ones. One of the most prestigious is the National Bureau of Economic Research (NBER) which is the nation’s leading economic research organization (16 of the 31 American Nobel Prize winners in Economics and six of the past chairmen of the President’s Council of Economic Advisers have been researchers at the NBER). Their data on Business Cycle Expansions and Contractions goes back as far as 1857 but unfortunately does not include the South Sea Bubble3 of 1720 as the United States did not exist at that time.
A couple of items really stand out – firstly, this is going to be one of the longest recessions (peak to trough) since the Great Depression. The longest recession, which incidentally is known as the Long Depression, lasted 65 months from October 1873 to March 1879 eclipsing the Great Depression’s 43 months. The current recession started in December 2007 so we are currently about 18 months into it and counting (note: the average post war recession lasted 10 months). Secondly (but of little comfort), most of us reading this blog have lived through (and hopefully benefited from) the longest economic expansion on record which lasted 120 months from March 1991 to March 2001, a period of great technical innovation with the wide scale adoption of the World Wide Web (the term Internet was first used in 1974, although the technical foundations were conceived in the 1960’s) and ERP software (again conceived in the early 1970’s but not globally adopted until the advent of 3 tier client server architecture).
McKinsey has put forward some interesting insights in their paper Mapping Decline and Recovery Across Sectors. They show how we can learn from past recessions and how despite claims that the current recession is “unprecedented” it seems to be following many of the same patterns the four previous ones did – patterns that may offer insights into the performance of sectors in the coming months and indicators for recovery. One pertinent fact and of no surprise to retailers is that the Consumer Discretionary industry has always been the hardest hit (and the Utilities industry almost always comes out unscathed). However, in the last four recessions higher consumer discretionary and IT spending have led the way out of the recession.
The Future Ain’t What It Use To Be2
It is sobering to note that recessions not only have financial but also social and cultural effects. In fact the Great Depression changed consumer behavior and shopping attitudes for a generation. In 1952 when Ozzie and Harriet were a model family and Americans had never heard of a grande latte, most people only had a couple pairs of shoes and going out for dinner once a month was a treat. Ozzie and Harriett might seem frugal to us but they didn’t think so. After the privations of the Great Depression and wartime rationing they probably felt that a house filled with matching furniture was downright extravagant. Fourteen years later Ozzie and Harriet’s nuclear family and values were fast disappearing and the show was canceled in 1966 (today it holds the distinction of being the longest running live-action/non-animated sitcom in US TV history).
From a historical (and social) perspective, it is interesting to note that the mantle was taken up by All in the Family (1971 – 1983) – ranked #1 in the yearly Nielsen ratings from 1971 to 1976 and the only show, along with The Cosby Show and American Idol, to top the ratings for at least five consecutive seasons – followed by The Simpsons (1989 – present) which is the longest running American primetime entertainment series. We may explore this further in future blogs… (art reflects life reflects art).
As for timing of the recovery we’ll leave the last word to the IMF who in their World Economic Outlook Update of July 2009 state that the advanced economies are not projected to see a sustained up turn in activity until the second half of 2010. So, if this turns out to be correct the Financial Crisis of 2007-2009 will have lasted about 30 to 36 months, about 6 to 12 months shorter than the Great Depression!
In The Trenches
What does this all mean for retailers who are in the trenches battling at the frontline of consumer spending? At a recent dinner with a select group of retail CIOs in New York there was consensus that retail executives, boards and investors are looking to attain better capabilities to enable them to navigate increased market turbulence and stronger economic headwinds. These capabilities fall into a number of categories:
Transparency – increased ability to identify and measure exposure to and the impact of the worldwide economy on activity in their retail segment and as well as their enterprise. What is the effect of macro economic trends and leading indicators such as commodity and energy prices, asset deflation, consumer spending and unemployment on their business? This will hopefully help them see where and when future storms are brewing.
Clarity – models and analytics to make sense of all the data and trends. So if we now know when the storm is coming (or maybe since we are in the midst of one, when it is ending) what should we do – what investments should we make in our products, channels, people and technology? Where should we scale back and how judiciously?
Speed – the ability to rapidly deploy financial, human and technology assets for efficiency, innovation and growth. This may not necessarily mean acquiring new assets, but redeploying or redirecting assets and getting more out of what you already own. How can our technology partners help us with this?
My apologies for the long missive in this first blog… I would appreciate any comments you may have.
- Quote attributed to Yogi Berra, former Major League Baseball player and manager.
- When Sir Isaac Newton was asked about the continued rise of South Sea stock he answered “I can calculate the movement of the stars, but not the madness of men.”