Consumer Discretionary

<p style="text-align: justify;">Retail businesses are especially vulnerable to economic tides, so it is easy to assume that fears around inflation and recession drive the layoffs and losses we currently see from traditionally stable companies. However, studying what is under the surface is clear that today's challenges are based on much more than reactionary fear and, in many cases, are simply the inevitable result of years of poor strategies.</p><p style="text-align: justify;">Reasons for the widespread layoffs and earnings contractions we see across all retail industry sectors can be grouped into three basic categories: Past Decisions, Present Conditions, and Future Enablement. What is unusual is that these categories are currently happening simultaneously in a rare time of convergence.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Past Decisions</span></h2><p style="text-align: justify;">This is where layoffs are most frequent, caused by miscalculations, mistakes, and excessive debt. Over time these issues come to a head, with layoffs used as an attempt to right the financial boat. Shopify miscalculated e-commerce growth, GoPuff's rapid delivery business model was never going to generate sustainable profits, Glossier underestimated the importance of brick and mortar, and Office Depot failed to respond to decades of consumer and market realities. Companies in this category need to be able to reset their north star and build around new systems so that more layoffs will be avoided.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Present Conditions</span></h2><p style="text-align: justify;">Most companies are not designed to react at speed. We have had moments in history where events or circumstances happened fast, needing immediate change to navigate; the Covid pandemic lockdowns of 2020 are our most recent example.</p><p style="text-align: justify;">Housing-based businesses like Zillow, RedFin, Remax, and Loan Depot were hit by interest rate-driven market slowdowns. Spotify and Netflix are reducing overhead to counter softening sales from recession fears, plus new regulations restricting their ability to sell first-party data. Companies like CVS, Unilever, and H&amp;M have enjoyed steady sales around recession-proof offerings. However, they are seeing profits drop due to the intersection of consumer trend volatility from social media, new digital marketplace competition from companies like Walmart and Target, and new climate initiatives.</p><p style="text-align: justify;">These companies are still healthy, but pushed by shareholder earnings pressure or lacking a large war chest to ride it out, layoffs and cost reductions are needed to buy time. Unless these reductions are paired with a reorganization to avoid being run over by a future competitor's more appealing offer, these companies may be on a weaker path going forward.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Future Enablement</span></h2><p style="text-align: justify;">This category holds the best reason for layoffs and is a clear indicator that company leadership focuses on long-term success. Like horse sellers who lost their livelihood when cars became available to the masses, almost all business sectors today are nearing the point where innovation has moved beyond the abilities of our existing tech stacks, systems, and business models.</p><p style="text-align: justify;">To position for the best future, companies should focus on removing departmental silos, integrating channels, strengthening brand value, and making every area of operation more flexible. For example, Walmart is restructuring its leadership around a more robust omnichannel model.</p><p style="text-align: justify;">Best Buy is redesigning physical stores to rebalance their online and offline capabilities, Ford and GM are rebuilding for the coming EV market, and Nokia is setting up for a 5G world. These companies understand that new thinking and investment directions are needed. Thus, layoffs and contractions are necessary to align themselves with a new, more flexible future.&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><br /><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/deann-campbell-1b193b12/" target="_blank" rel="noopener">DeAnn Campbell</a></em></span></p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><br /><br />&nbsp;</p>