What the f**k is going on??
The perfect storm. Have you heard that phrase yet this year? I bet you have.
It describes the coming together of certain factors to create an unprecedented, unpredictable situation. Prime example – 2022.
This year has started like no other in my 12 years working in this sector. And from what I have heard in my day-to-day conversations, it ranks amongst the worst for decades before my career started too.
Mountains of stock. Dwindling online sales. Exceedingly high advertising costs.
Maybe you are experiencing one, some or all – either way believe me you are not alone.
So, allow me to try to provide some clarity, in a world of utter chaos.
Let’s start with what is happening across most of the categories we classify as ‘Home & Garden’? In the simplest of terms: -
(way) ↑ More Supply
(WAY) ↓ Less Demand
But why has it happened?
There are many factors at play, and this isn’t about boring you with the details of each. But it’s critical to understand the major contributors to the current chaos and their impact on your market.
The Covid Hangover
2020/21 saw unprecedented levels of demand for most home & garden categories. Consumers were replacing essentials early and spending more, whilst buying newer products they probably didn’t need (and now regret).
Coupled with record online sales driven by forced consumer buying behaviour changes, most DTC / online brands were growing without really doing anything differently.
This swell of demand brought new players into the market, who bought containers from China to sell on Amazon or through a Shopify store that cost them £25 to set up. Barriers to entry had never been lower.
Furthermore, established brands experienced huge stock issues in 2021 created by the shipping crises and the grounding of the Ever Given. This resulted in missed sales and a collective, enormous headache for Operations staff.
“We don’t want a repeat of 2021” rang across every boardroom in Q4, which opened the taps for . . . enthusiastic ordering.
Now, 3 months into 2022, day-to-day life is returning to some form of normality. We’re commuting to offices, restaurants and holidays are the topic of the day (and we probably all have homes full of new products we regret buying . . .). When we want to buy something, we have the option to visit a real-life store. Look at the ONS graph again - see how online sales have come back down?
Which brings us nicely to our initial summation - demand is down (especially online).
AND there is more competition, most brands are significantly overstocked and discounting to protect cash flow, meaning …
Supply is up (especially online).
2020/21 was an anomaly, and now you are trying to annualise against it!
Cost of Living
Inflation reached 6.2% in February. It’s going to get worse before it gets better – March is expected to come out at 7.3%.
And consumers know this; they are reminded relentlessly in the media, at petrol pumps and on supermarket shelves every day.
This is driving consumer purchase indexes and confidence levels down to 2-year lows.
Clearly the atrocities we are seeing in Ukraine also have an impact, objectively (i.e., fuel prices) and subjectively (i.e., psychological uncertainty).
People have less money to spend and are feeling less confident (and dare I say guilty) about spending it on non-essential items.
Cost of Goods
Shevaun Haviland, Director General at the BCC summed it up well:
“Unabated, the surging cost pressures produced by the cost-of-doing-business crisis will continue to lead to increased prices and fuel the cost-of-living crisis currently being faced by people across the country.”
The fact is that businesses were already experiencing substantial challenges even before the fuel and energy crises began – shipping costs & raw materials to name a few. Price increases are a primary way to offset the increasing pressures, but you do that at the very real risk that consumers won’t buy at all.
So now we have some context for the chaos, but what is its impact on Brands?
Increased advertising costs
You know how I mentioned supply and demand? Well in the world of advertising:
SUPPLY = CONSUMERS & DEMAND = ADVERTISERS
The result of this kind of under supply and over demand? Costs go up.
We have all seen cost per clicks (CPCs) skyrocket - up more than 500% YoY on Google for some of our clients. It’s way more difficult to attribute Facebook because of the Apple IoS14 changes. And not to leave traditional media out – that is also facing similar inflation with TV costs per thousands (CPTs) increasing by c.40%.
You are paying more, to reach less customers.
Overstocks
Heavy buying + Shipping issues + 2022 Demand drop
This trifecta of occurrences has left a lot of brands in an overstocked position.
This puts an inordinate amount of pressure on cash flow, resulting in aggressive discounting to stimulate more demand and steal share from competitors (which by the way there are loads more of).
Discounts are required to sell stock, pay bills, and potentially remain competitive.
Squeezed profits
The two points above paired together are putting a tremendous amount of stress on profits.
Gross margins are down due to cost of goods (COGs) inflation and reduced pricing, and cost-of-sale (CoS) is up due to unprecedented advertising cost inflation.
For brands with a low margin, high volume business model, this is an even greater challenge.
Employee discomfort / unsettlement → “The great resignation”
Whilst our focus at JDS is commercial, it would be remiss of us not to mention the impact of world chaos on employees. According to the Harvard Business Review, the ‘Five R’s’ – retirement, relocation, reconsideration, reshuffling and reluctance” were exacerbated by the pandemic which increased the inevitability of the changes we are experiencing in today’s labour market.
“Workers are retiring in greater numbers but aren’t relocating in large numbers; they’re reconsidering their work-life balance and care roles; they’re making localised switches among industries, or reshuffling, rather than exiting the labour market entirely; and, because of pandemic-related fears, they’re demonstrating a reluctance to return to in-person jobs.”
What should you do now / next?
- Put the above into context in YOUR business. The picture will be slightly different, and always unique. Don’t react without first understanding the root cause issue/s.
- Don’t default to year-on-year comparisons. Look back to years before the pandemic happened.
- Protect profits and prioritise cash flow.
- Scrutinise advertising effectiveness and efficiency. Demand detailed reports and action plans from your performance marketing agencies and reduce spend where there is uncertainty around incrementality.
- Focus on quick & free / cheap wins. Conversion rate optimization (CRO) on both your website and marketplaces is a good place to start. Get the basics right.
- Test new low(er) cost marketing channels if you haven’t already. Affiliates / partner / email etc.
None of us can change what’s happening in the world.
The next 6-12 months may well be about survival for some. Many won’t make it.
But if you do, if you take the steps and measures required to weather the storm, there is good news.
You will be playing in a less competitive marketplace, with a stronger business to fit within it.
Article references
[1] https://www.bbc.co.uk/news/business-59207124
[2] https://www.ons.gov.uk/businessindustryandtrade/retailindustry/timeseries/j4mc/drsi
[6] BHETA Market Report 2021/22
[8] https://mediatel.co.uk/news/2022/03/01/january-cpts-bucked-the-trend/
[9] https://hbr.org/2022/03/the-great-resignation-didnt-start-with-the-pandemic
