The Retail Recession with Lorraine Hutchinson, Bank of America

Speaker 1: Three, two, one.

Vern Tremble: Welcome to another episode of Individuality Unleashed. I'm Vern Tremble, senior director of marketing here at Wunderkind, and I am joined today by Lorraine Hutchinson. It's so great to have you today, Lorraine. Lorraine is an analyst with Bank of America. I think I have your title right? I'd love for you to introduce yourself and make sure that I have it right.

Lorraine Hutchinson: Yes, you do. Thank you. I am, I'm an equity analyst at Bank of America and what that means in real terms is, I look at a specific sector, which for me is retail and I try to value the public company stocks within that sector. So what I look at is their strategy, their earnings power, and try to predict how they'll do in the future. From that, we derive a value of the stock and we give advice to investors on how to invest in the space.

Vern Tremble: That's great Lorraine, I imagine that it's a very important role to hold right now, considering what a lot of retailers are experiencing as far as retail recession that they're facing.

Lorraine Hutchinson: Look, I mean, it's never easy to be a retailer. I think the past three years have been the most challenging, most in the sector have ever seen. I've been doing this 22 years. I've never seen anything like it.

Vern Tremble: It's wild. And considering we just got through a global pandemic, to now be faced with an economic recession and again, retail recession it's tough. So the hope for me, for this conversation, and to our listeners and viewers out there is really to get your expert analysis on what's going on in the market, to kind of help them make sense of just the onslaught of challenges that they're currently facing to hopefully face these headwinds and come out victorious.

Lorraine Hutchinson: Maybe we could talk about some good opportunities too.

Vern Tremble: Oh yeah, I'd love that. We are all about adding insight and value to our marketer's playbook. So hopefully they take away some actual insights from this conversation today. Great. So Lorraine, I'd like to understand why it's important for brands to first understand the current state of the economy holistically.

Lorraine Hutchinson: Look, I think it will really change your strategy depending on how healthy the consumer is. And that's something that we really focus on, at Bank of America we have a lot of data and try to use a lot of insight into the customers to look a little bit more strategically at retailers. And unless you understand the state of the economy, it's hard to plan your business. Whether you're planning your inventory levels, your marketing budget, you don't really know what that'll look like until you can really get a feel for what the demand looks like.

Vern Tremble: And how does one get a feel other than talking to you of course? What are some of the first things and steps that they can take to do that?

Lorraine Hutchinson: I mean we publish a lot of insight. We have a whole team that just does macro economic research. And so, they look at tons and tons of data and work with the Fed and talk to a variety of different stakeholders to try to figure out what happens. So they have a broad view on the economy. And then what I have to do is try to translate that to what it'll mean for retail. So for example, you may have a surge in consumer spending, but if everybody's using those Dollars to go on vacation and go out to eat instead of buying clothes, that's bad for my sector, it's bad for the retailers or vice versa, if nobody's bought anything for two years because of the pandemic and suddenly they're vaccinated and they got a big stimulus check, they buy a lot of clothes. So if we can try to predict that, it helps really for us to chart the path on where earnings and cash flow will come from.

Vern Tremble: Really unpredictable right now. Is that what you're telling me?

Lorraine Hutchinson: Really unpredictable right now. I mean week by week, the trends are really changing week by week. And I think what's hard for retails, there's been some really abrupt changes. So if you look back to March, we were lapping a great time in retail from the stimulus last year and all of a sudden you lap that and at the same time gas prices spike and then Ukraine goes into war and food prices spike. The low income consumer just stopped. It was like a sharp intake of breath, they just stopped spending. And then it slowly trickled up into the middle income consumer. So we didn't really see much in the data until mid- June, where we first saw it was people who had bought some really nice Spring fashion, started returning it and it's like you got your card statement and you saw, " My grocery bill was high, my gas price was high, I probably can't afford this dress." You send it back. So that, was the first tell. And then we started to see retail traffic and sales start coming down. So it has been extremely volatile. Maybe a little bit of good news, is we've just gotten through back to school and during times of economic duress or real stress on the consumer's wallet, it's really the times of need based purchase that are the best. And look, you're not buying size seven for your eight year old this year. You have to buy new clothes. So if there's a time of need, you absolutely go buy. So we did see demand trends really start to stabilize during the back to school season and now we're in a little bit of a lull probably till Black Friday.

Vern Tremble: So a little behavioral economics versus traditional microeconomics. So with that in consideration understanding inflation and what's happening with unemployment rates and just considering behavior economics and how people are choosing to spend their money right now. Can you shed some light on the current market landscape and what you think it means for retailers today?

Lorraine Hutchinson: Sure. I mean, I'll give the good news first. The checking and savings account balances for the average consumer are above pre pandemic levels.

Vern Tremble: Oh, that's good.

Lorraine Hutchinson: And the reason for that, is they got a lot of stimulus, unemployment's very low, wages are up. So I think the really good news is people have used the past couple of years to really improve their situation. There're some savings, delinquencies on credit cards are down, so you have a little bit of fire power to cushion. And that's a good thing, because as you indicated, inflation is really rising and things are starting to tighten up. So you have seen some change in spending behavior. You have seen things get a little bit tight for the paycheck to paycheck consumer. But the good news is we have a bit of cushion. The bad news is, the Fed continues to raise interest rates to try to get rid of that inflation and that's going to make things a little tough. So as you said, it's a pretty tricky macro environment. Our economists are calling for continued weakness into the first half of next year. So I think we will have to really get creative, the retailers really have to get creative on how they navigate this environment.

Vern Tremble: That's excellent. That's such a good perspective to give us, because it's filled with a lot of truth. We don't want to sugarcoat, we want to be optimistic, but it's like we want to be truthful about the situation, because it only will give marketers the ability to plan appropriately when considering how to drive more revenue during this kind of precarious time. What's your perspective on consumer spending and shopping behaviors now, especially leading into Black Friday, Cyber Monday, which for us marketers is the Super Bowl of Super Bowls for consumer shopping.

Lorraine Hutchinson: I think there's a real focus on value where there hadn't been last year. And I think there's a little bit of other change in behavior. Think back to last year, all we talked about was the supply chain. And I talk about it at work a lot, but then I'd go out, see friends and everybody's talking about the supply chain to the point where I was telling my sales force in September, " Go buy what you need for Christmas or you're not going to get it."

Vern Tremble: Exactly.

Lorraine Hutchinson: And there were a hundred ships sitting outside the port of LA. A lot of things didn't make it, so everybody bought early. So you didn't have that same October lull in spending, because people were buying and they were buying at full price. The backlog's cleared, the supply chain's moving, everybody bought in. The retailers brought their product in early, a couple months early to avoid what happened last year and then demand slowed. So you have a lot of inventory sitting out there. Now unfortunately, the media is out there this year saying, " Wait, the deals are going to get better and better." And they're probably right, but I think you will see a bit of a dead zone in October, because there's no call to action, back to school's over. And the consumer's savvy enough to know that if he or she waits, the deals probably get better. So I think there's a challenge in that period. And then you no holds bar Black Friday or Cyber Monday, really the Thanksgiving week, will be a time when I think more people shop this year. Because, remember too, we also still had a lot more COVID fears last year. There was less in person shopping. So I think it will be a shorter holiday season and that means it'll be crazy for all the retailers to try drive kind of sales volume throughout those days.

Vern Tremble: So from what I'm hearing, it's imperative to plan ahead and to have the resources in place in order to be more proactive as opposed to reactive. And not only from the brand side, but also from my consumers. From what I'm hearing, I need to start shopping now. Is that what you're telling me?

Lorraine Hutchinson: You'll probably get better deals if you wait. I shouldn't probably say that, but look, remember last year was a totally different ball game. We still had a lot of traffic limitations in stores. You had Omicron hitting right around Christmas week. So Christmas week, the week after was really tough for retailers. So there were a lot of challenges last year. I think this is kind of a year where you could really let it rip. But the message has to be more focused on value than it was before. Because, the consumer is just feeling pinched in every other aspect. The things they need to buy are more expensive. So the things they want to buy have a little bit less budget available for them.

Vern Tremble: Exactly. And they are prioritizing what they need.

Lorraine Hutchinson: Have to.

Vern Tremble: As, opposed to what they want. So that, should be a clue to our listeners and to our viewers that when we're thinking about marketing and driving loyalty and just overall affinity for your brand, focusing on those things that your customers need. But you first have to understand what that is and you have to listen to your customers. So finding opportunities to listen, I'm certain are imperative right now.

Lorraine Hutchinson: And I don't think it has to necessarily be here is the price and it's 50% off. That's always the way I think people love to try to market value. I think the consumer has gotten sufficiently savvy that they want quality too. So if there's a way to promote a really sharp price point and highlight the quality, I think that works great in this kind of environment. Because, you can't afford to buy something for$ 10 that falls apart. You'd rather spend$ 15 on something that you can have for a couple of seasons, you can hand down if it's a child's garment. So I think there's a lot of nuance that can come in rather than everybody go straight back to the old pre pandemic promotional cadence, which they're all trying so hard to avoid.

Vern Tremble: Yeah, totally. Personal scenario, I have a very specific brand of cologne that I like to wear. I will always get it, because it works for me and I like the brand and it will take a lot to ever get me to shift away from that. So it's really important not only from the position of understanding your audience and driving value via discounts and opportunities, not all consumers think about it in those terms. They think about it from a perspective, I align with your brand values and I align with the quality of your products. I'm going to stick with you. So I would imagine that it's important that brands do that or leverage that frame of thought as their driving engagement with their customers. Which leads to my question around just thinking about how retailers that you're personally working with are taking this new state of the economy and the strategies that they're deploying in order to stay above water.

Lorraine Hutchinson: So I think right now, they're in a little bit of a pickle, because all that inventory just came in and remember 2021 it's a banner year for retail. There was so much pent up demand, there was stimulus, everybody was just getting vaccinated, they were treating themselves. So their wardrobe was stale and there's a lot of new fashion trends. So people really went in and refreshed their closets. And so, it was a great year for a lot of the apparel retailers in particular. As, they were planning'22, many of them thought it would continue. And really what we've noticed now is that it was a lot of pent up demand and we're back to a more normal level. So what happens when they're forecasting, is they buy inventory to that level so we have too much inventory in the system. And we started to see that flush out over summer when we saw that sharp pullback in spending. And I think we'll have to see that also happen over holiday, because by the time the consumer stopped spending the inventory was already on the boats, everybody brought it in early. So I think we have to contend with some excess inventory and some promotions and so they need to do that in the most brand defensive way possible. You don't want to get everybody excited about your promotions when you've really kind of weaned them off it over the past year. So I think that will be the difficulty of this fall and winter season. The good news though, is that when spending really pulled back in the Spring, most of them were able to cut orders for next Spring. So by the time we turn the year, you will have a much more normal operating environment. So I think for now it's near term, it's just kind of fix this problem, figure out what the consumer wants. But really I think there's a great opportunity for next year when inventory normalizes. That's when you can really think strategically about how to defend or take share in a more difficult environment. We have more lead time, we know it's a tough macro environment and you can plan your assortment, you can plan your strategy, you can plan your marketing to that with that in mind.

Vern Tremble: That's really good, because one thing that we as marketers can sometimes miss is like, yes, we're planning for the Super Bowl event, which is Black Friday, Cyber Monday, but are we also thinking about Q1 and Q2 of the following year? How are we building moments of joy and affinity with our brands now to get customers to return during the first half of the year? So that, makes a lot of sense. I also hear that you're telling brands they shouldn't be offering like 70% discounts anytime.

Lorraine Hutchinson: Look, everybody has to do it at the end of the season. You just hope it's not too much. So it's just a fact of life. If you've made a little fashion mistake or you have too much, that'll always happen. But to the extent that everyone can hold off a little bit, that's fine, but nobody wants to do that. It's more you get nervous, because spending's going to be later this year. So I think that's going to be the big question. But you mentioned joy, and I think that's something that's really important during recessions or tough macro times, is giving the customer some real pleasure from their purchase. And that's hard if your customers faced with rising costs and maybe a trickier job situation or something like that, she will often shop for need, but then if it can be a little bit joyful or fun, it makes the brand affinity last so much longer.

Vern Tremble: Experience, like creating those brilliant experiences to bring joy and engagement. I love that. And sometimes those things aren't quantifiable. Sometimes it's difficult to measure those, but to your point Lorraine, it's important, you want to do those things. As you know there was a major shift to E- commerce during the pandemic, obviously, how sustainable is that and what strategies do you think retailers can use to maintain their share slash inaudible their omnichannel capabilities to better serve their customers?

Lorraine Hutchinson: So there was clearly a huge shift in 2020, because nobody wanted to go into inaudible. Well the stores were closed,

Vern Tremble: We couldn't.

Lorraine Hutchinson: Once you could, the traffic was really very light, because people were nervous about being in person. I think we've now come down to a more normalized level. So most of the mall based apparel retailers are kind of the mid 30% penetration, and I think that's normal. They peaked at 45 for the year of 2020, they're back down to the mid thirties. And I think that's a healthy level to have the store base and the E- commerce at that level. What they're trying to do now, is take share or use their store base as a way to bring joy or pleasure to their customers. So you can search online and do your research, but then you want to come in and touch and feel it. You want the service provided by an associate, maybe you just want the knowledge that'll be there when you order it and pick it up. So there's a lot of things that retailers are doing to try to gain share because they have stores. For the digitally native retailers, you're providing the best possible experience so the customer doesn't want to go to the stores. And so, free shipping and returns is always a big one. Events, differentiated marketing, things like that are always important. I think the thing that I look forward to coming back, is more in- store events, because that is a great way to differentiate yourself. If you go to a cosmetics store and there's somebody there who can give you a tutorial on a new product, you'd probably buy it and you have a lot of fun. And so, we used to see yoga classes at athletic stores and demos and champagne and sit and shops at boutiques and those all went away during the pandemic. And I think that's something that the store- based retailers can really do a good job of bringing back to differentiate things and create some more fun.

Vern Tremble: I totally agree. What we lost was that in- store experience, but now what we've gained is a better understanding of our consumers, because we had access to them digitally. But now, it's trying to figure out how to blend that digital and in- store experience into one consistent cohesive experience, which can be a bit of a challenge. You have a lot of systems to tie together to make that work. What I think it should be, it should be a priority I imagine.

Lorraine Hutchinson: I think it should. And I think it's so different generationally. So you really have to target the right customer the right way, which is probably one of the bigger challenges of personalization, is I think the older cohort tends to think it's creepy if you know too much about them. And the younger cohort is like, " Why don't you know this by now?" I think it's a real challenge for marketing professionals to figure out how far to go, because it can get a little creepy, but also it's convenient. You want somebody to serve up something that you didn't think that you needed. And that's probably the greatest way to get that attachment, I think that's so hard online. I think the data and the capabilities are getting a lot better these days. But I remember 10 years ago we'd hear from a lot of retailers and they'd say, " Oh, we've personalized." And what that meant was the email title said Lorraine, and it was the same email selling the same stuff, but it just said Lorraine and my whole team is on the email list. So we'd compare all the same, it just said your name. And now, it's gone so much further, but I think there's a lot of opportunity out there for them to really, I think you make a good point. They have the data now. They have a lot more data than they ever did and now it's time to really unleash that and kind of scale it to making a difference. And the bigger, better capitalized retailers have a real opportunity. To me, if we're talking about opportunities in a recession, that's one thing that really stands out as a way to differentiate, is you can afford to collect and analyze that data. You can afford to use it and others can't.

Vern Tremble: Exactly. And I love the fact that you said this particular word, which is also the name of the podcast, unleashing, I didn't pay her to say that, but unleashing an individuality, which is essentially an understanding your customers is being able to serve up more customized personalized messaging to ultimately drive more affinity for your brand and therefore more loyalty, which then drives to return, repeat customers, more lifetime value, and of course more revenue for their brand. But it's to your point, identifying who your customers are and what they need and what they want or don't want. Well, really what they need versus what they want during this.

Lorraine Hutchinson: Well, want too. I always think about, I shop online for my son's baseball cleats, 10 year old kid baseball cleats. That's all I'm coming from. I'm purely transactional, but you know what I also need, clearly I'm going to be on the sidelines in October. I need a fleece, I need a nice chair. I might need a cooler. Nobody serves you up the other things that come with that, and I think there's just so many things like that, that you could say, " Oh, I'll throw that in the basket." Meanwhile, they serve up boys athletic socks that are$ 5 and I don't buy them anyway. So I think there's still a lot more kind of exciting things you can do from a personalization standpoint and I think that's what will really stand out. Because, we're coming into a time, and this depends on how long this recession lasts. But you will see marketing budgets cut from the under capitalized retailers. You will see store closures. You'll probably lose a few competitors, which is great and healthy for the guys who still exist and thrive. And it's a really good way to establish your brand. And if you can keep that marketing budget to really take a lot of share, because there will be many who have to cut, not because they want to, but they have to.

Vern Tremble: And even with those cuts, realizing taking that spend and really prioritizing communicating to your target consumer. No batch and blasts, spray and pray. It's like, " No, we know these are our loyalists. We're going to communicate to them. We're going to drive value from these folks because we know that they're loyal to our brand." And we certainly believe that here at Wunderkind. I wanted to ask you, can there be any positives for retail other than what you just mentioned for retailers during a recession? Are there any opportunities that you see in this current climate?

Lorraine Hutchinson: I mean, I think the being better capitalized is a clear positive, being able to spend more. But there's also always been a big opportunity for trade down. So the consumer's a little strapped. They might shop somewhere different. They may trade from a full price store to a discount store. And so, there's a lot of opportunity for some of those retailers to really wave in the share, highlight value, get that message out to the consumer. And then I think within some of the more traditional retailers, it'll just be a real focus on value, really providing that for the customer in a way that she needs. And that will also engender a lot of loyalty.

Vern Tremble: That's phenomenal. Can you talk about the kinds of things retailers have historically done to sustain business and marketing performance and even grow in a challenging market?

Lorraine Hutchinson: I mean a lot of it has to do with how you're positioned as a retailer. If you are expanding categories, if you're launching new products, if you're opening new stores, those have historically been the types of concepts that have grown through a recession, because there's something else, you're going there for your black stretchy pants and you're buying a tennis outfit for the first time. There are places where you can actually extend the basket. That's always been a good way to go. And then younger, newer, fresher concepts have really been able to make a lot of headway even during tough economic times versus some of the incumbents.

Vern Tremble: Absolutely. That's phenomenal. Lorraine, I feel like I could talk to you for hours, absolute hours, but I think that we've had a very healthy conversation. I think that the value that you have shared with our listeners and viewers today, certainly things that they can take home and take back to their marketing teams, I should say, to really help them in not only preparation but just battening down the hatches and surviving these economic times. Are there any final thoughts that you would give to marketers and brands out there during this time that you feel they should walk away with from this conversation?

Lorraine Hutchinson: Yeah, I think we talked about most of it, just to focus on your core, your customer, try to really provide a value message. And I think that's the best way to go.

Vern Tremble: That's awesome. And for our listeners out there and our viewers, if there's more information that you'd like to learn from Wunderkind, you can visit us on wunderkind. co, that's www. wunderkind.co where we have tons of resources and information that will ultimately help you with your performance marketing strategy. And we're certainly happy to chat with you anytime if you have any questions. Again, Lorraine, absolute pleasure. Absolute pleasure talking with you today. I hope we can have you back. Will you come back?

Lorraine Hutchinson: Sure.

Vern Tremble: We will have you back anytime you're ready to talk.

Lorraine Hutchinson: Thank you.

Vern Tremble: You can call me up directly and we will come back here and have a conversation.

Lorraine Hutchinson: Thanks a lot.

Vern Tremble: Awesome. So guys, again, thank you so much for your time. That's Individuality Unleashed.