How to Thrive When the Market is Down with James Taylor, Particular Audience

Michelle Lomas: Hey, I'm Michelle Lomas and prepared to be informed as we bring you our latest Flex Your Hustle podinar. With financial futures feeling a little uncertain, we thought we should bring you a podinar about what you can do to make sure when things are going down that you are staying up.

Michelle Lomas: James Taylor, founder and CEO of Particular Audience discusses retailing during the recession, and specifically three rules on how companies can adapt to rapidly changing consumer behaviour as the world and markets change. Over to James.

James Taylor: Today, we'll be looking at data from consumers in previous recessions, in the area called consumers in crisis, and then we'll move on to companies in crisis. We'll look at some data from companies in previous recessions. We'll then move on to how to thrive, we'll look at the different mindsets that exist in retail, and specifically the opportunity that exists online.

James Taylor: And finally, we'll close with three rules: how to adapt and how to execute progressive change.

James Taylor: Retail economics. Spending is down. If you look at this data, we can see that over the past four years, purchasing groceries online has grown and grown and grown. Habits form and stick during periods of uncertainty, smart businesses are creating or deepening footholds now.

James Taylor: Companies in crisis, this is where we look at data from companies in previous recessions. We see what's worked and what hasn't. Harvard Business Review put out some research that looked at data from 4,700 companies across three recessions, recessions of 19 90 and 2000, and the results are something that we really need to look at and listen to.

James Taylor: 17% of companies do not survive. 80% of companies do not regain pre-recession growth rates for sales and profits in the three years following recession. 40% of companies do not regain their absolute pre-recession sales and profits within three years. That means they don't get back to where they were before the recession within the three years following the recession.

James Taylor: Finally, just 9% of companies flourish after slide outs by outperforming their rivals. So, how does marketing and recessions impact profits during the recovery? Well, again, we probably will have seen lots of articles that have said spending more on marketing lead to better results for companies. And during the GFC we saw that companies that invested in marketing did see a 4.3% increase in profits during the recovery as compared to companies that did not, who saw a contraction of 0.8%.

James Taylor: And it's not just limited to the GFC, this data, we're also gonna look here at the 1920 recession, the the Great Depression, and it's clear here that even companies that increased advertising spend had a significant outperformance in sales during the recovery. Those that decreased advertising saw a drop off, but is spending more on marketing a solution?

James Taylor: Is cutting costs a solution? Well, from the Harvard Business Review data we know that 79% of firms that cut costs faster and deeper than rivals do not perform better coming out of a recession. And we know that 74% of businesses that invest more than their rivals, do not become market leaders coming out recession.

James Taylor: Finally, 85% of market leading companies before the recession will not stay at the top. So Harvard Business Review splits out the companies and the dataset into all types. They look at prevention focused companies who simply cut costs. They look at promotion focused companies who increase spending and investment in marketing and R & D.

James Taylor: Then they look at pragmatic companies who do a mix of both. They increase spending on advertising and they cut costs, and finally they look at a cohort of companies that they call progressive. Progressive companies find the optimal or intelligent balance of optimising between increasing marketing spend in the right areas, increasing R & D, spending in the right areas, and reducing costs in the right areas.

James Taylor: And just to give you an idea about the difference, I mean, promotion focused companies do perform better coming out of recession than companies that don't increase spending. Promotion focused companies see an 8% growth in post-recession sales and a 6% growth in post-recession earnings, but it's not as good as it could be.

James Taylor: We look at the progressive cohort of companies that do an optimal mix of increasing spending and decreasing spending, and we actually see a 13% increase in post-recession sales growth and a 12% growth in post-recession earnings. So let's take a look at a real world example, during the 2000 recession, Office Depot and Staples both behaved slightly differently.

James Taylor: Office Depot cut workforce by 6%. Staples increased their workforce by 10%. Office Depot couldn't reduce op-ex. Staples contained op-ex and closed down underperforming facilities. Office Depot released an incentive plan to boost sales. Staples adapted, they introduced new high-tech product categories and services, so slightly different behaviour, but what were the results?

James Taylor: Well, Office Depot's sales growth fell from 19% before the recession to just 8% afterwards. Staples sales growth of 13% after the recession was a whole 5% higher than Office Depots and Office Depot saw an overall revenue increase of 50% between 1997 and 2003, as compared to Staples who saw a hundred percent revenue increase between 1997 to 2003, and to boot, Staples was 30% more profitable than Office Depot in the three years following recession.

James Taylor: This is more data from Harvard Business Review, back to McKinsey, how to win in a recession while focused on customer experience. So address customer needs to prepare for the future. What can you do to address new customer needs? You can optimise your stock on hand. You can get your inventory allocation right and you can ace digital product discovery.

James Taylor: You need to reimagine the world. You do need to enact some cost cutting. You need to migrate consumers to digital channels. You can save money with this and boost satisfaction within your consumers. Reassess the utility of physical assets. There's long been a narrative about the changing role of physical assets and retail.

James Taylor: Now is the time to enact these changes. Finally, build agile capabilities, acquire market share, adapt business models to accelerate growth after the crisis. And invest in machine learning and automation. So how to thrive, how to acquire market share? There are two mindsets in retail today. One mindset is one of scarcity, the other mindset is one, one of abundances scarcity mindsets are reflected by the likes of Sears and those victims of the retail apocalypse pre-COVID. The winners of the abundance mindset are the likes of Amazon, Netflix, Shopify, Spotify. Scarcity mindsets look at the rental cost of shelf space. Abundance mindsets look at the low inventory cost through warehousing and third parties, digital distribution. Scarcity mindsets are hindered by limited space. Abundance mindsets may as well have near infinite space. Scarcity retailing has to focus on best sellers. Abundance retailers can sell everything. Scarcity mindsets follow long hierarchical decision-making and ROI forecasting, abundance mindsets, permit experimentation, and learning.

James Taylor: Scarcity mindsets are top down hierarchies. Abundance mindsets are bottom up. I don't mean from the most junior people in the marketing team, I mean from the customer, they are data driven. They react and they adapt based on changing consumer behaviours. Physical retail channels were far from perfect. They were dependent on often opinion led inventory.

James Taylor: They had to stop lowest common denominator items. There were assumptions around popular taste, and typically individual stores at least, would often be subject to poor supply and demand matching. Physical retail is also relatively high cost for relatively low return, store rent costs money in high footfall areas, and the cost of serving walk-ins is high. Stocked items have to earn their keep, they're occupying shelf real estate that costs money. And finally, finite shelf real estate means limited ranges. There's only so much space that you can actually fill with items. So this has created a dependency in physical retailer on reliance on best sellers. And there is nothing wrong with best sellers.

James Taylor: Everyone's taste departs from the mainstream somewhere. The more we explore alternatives, the more we are drawn to them. UBS published some analysis last week, they expect that a hundred thousand stores will close across the US in the next five years. They expect consolidation and the bigger, getting bigger. Walmart, Costco and Target could be among the last left standing. Here are some excerpts from that article in Business Insider, the pandemic to accelerate a trend that was already in motion. The fundamental reason for stores closing down in the future will be the rise of eCommerce. UBS expects that many people will not go back to stores or at least limit their visits. We think people will go back to stores, but we do think that they will limit their visits. Now, this isn't only because of new habits put in place during the pandemic. So what are the benefits of selling online? While there are cost savings, you get your out of town warehouses, your distribution centres you don't have cost of walk-ins.

James Taylor: Having an unlimited catalogue improves your odds of converting someone. You're able to serve more niches, and you're also able to provide a better customer experience. Now, I realise that's a sweeping statement, and of course there is still a role physical retail stores to provide a great customer experience.

James Taylor: But the benefits of online retailing are search reviews, recommendations and consistent and intuitive convenience, being able to buy items anywhere, anytime, and to find those items. The long tail profit opportunity is also greater. The profit threshold for physical retail is high. You have stores that cost money in expensive places that are limited in the amount of space they have for products or retailers that have a hybrid model that sell online and in store that profit threshold drops.

James Taylor: And for retailers that are digital only, that profit threshold is even lower. So, tiered pricing strategies, that is being able to price items differently as you go further down the long term and recommendation engines can drive customers to products they may not have found otherwise. So let's look at this in more detail.

James Taylor: How to adapt, three rules for executing progressive change for futureproof commerce. Your long term market potential is twice the size of your best seller market. The three rules of this, number one, make everything available. Number two, get smart on pricing. And number three, help me find it. Make everything available.

James Taylor: You can have more style variance, but you shouldn't still be selective. You can use data to inform what you should be retailing. That's trend analysis. It's identifying what people are looking at down to an attribute level. You can use data to inform stock debt and assortment, size debt on smart pricing.

James Taylor: You need to forget channel conflict, online should be cheaper. People buy more at lower prices and long term items actually cost less, but it doesn't have to be channel conflict because of course many of the items you stock online don't actually exist in store. Finally, help me find it. Do not become a mess of bad products, lead with best sellers from which further exploring can begin. Guide consumers based on their likes and dislikes, but why people shop online during a crisis. During economic recession, the number one reason is purchase confidence and comparison. Number two reason is the best deal assurance. Number three reason shopping for discount codes.

James Taylor: Overall, people want to save money.

James Taylor: So let's dive into these rules in greater detail. Rule number one, make everything available. I mean, item availability, I mean stock availability as well. 87% of shopping journeys now start online. This statistic is pre-COVID. It's of course going to be higher right now, but what are you doing with all that demand data?

James Taylor: Consumers want to buy, receive, and return goods anywhere if you are not using page views, searches, as well as purchases online to indicate demand for different items in different parts of the country to inform your order management systems, your inventory allocation systems, your stock planning systems, and any in-season reallocation decisions than you are missing an opportunity and you are adding further under-performance to your physical assets.

James Taylor: You should be using your online data to optimise in. Just to summarise, you can use that online demand data, of course, to optimise online journeys, but you can also use it to optimise in-store journeys. You can use it, which I think is very relevant, post-COVID for online to in-store journeys. In fact, buy online pickup in-store has increased 62% in the US since COVID.

James Taylor: You're seeing even things like curbside pickup, drive throughs, retailers are adapting to utilise their physical assets in a way that complies with consumer demands today, but buy online and pickup in store is not new. In the US, 67% of shoppers have used it in the past six months, that was six months prior to COVID.

James Taylor: 88% of retailers are actually able to track incremental in-store purchases from BOPIS customers. Plus retailers can save on shipping costs and cut down on fulfillment times through inventory allocation optimisation. Whether you are allowing customers to pick up in store or whether you are shipping from store, you need to make sure you have the right items available to allow that to happen in that store.

James Taylor: What happens if you don't have the items in the store? Well, again, this is pre-COVID data, but 24 to 30 billion dollars a year of Amazon's retail sales in the USA are attributed to consumers who first try to buy items in store, but the retailer was out of stock. That's 21 to 24% of Amazon sales stemming from challenges in inventory management.

James Taylor: You have a wealth of online data, more so now than ever. You're able to localise that demand data. You're able to break down to a postcode level, who is looking at what, and you can use that for inventory allocation, optimisation, you can use it to move items from distribution centres to different stores, between stores, from stores back to distribution centres.

James Taylor: Rule number two, get smart on pricing. How to increase sales, cash and earnings with intelligent and dynamic pricing. So this isn't all about discounting, this is actually really starting to think on a SKU level about how pricing can help you sell more items. Pricing, of course, you have your recommended retail price at the top, at the bottom you have your marginthat you're able to shed on any given item to turn a profit. But you also have what competitors are pricing at, and this can give you an operating range to be competitive and prices can decline the further down the tail you go. That is to say that you can pull customers down the long tail with lower prices.

James Taylor: Since long tail items actually cost less, you can charge less for them. Remember, even if they come to the site looking for a best seller, do not underestimate the down-sell opportunity. And to reiterate, since most long tail items aren't actually available in store, your channel conflict actually diminishes. So what do we do?

James Taylor: We can develop an AI-based dynamic pricing model. This can start with a long tail module, which can see which items are less popular and which items might be competitive with your best sellers. We can have a competitive response module, which is where price adjustments can either be automated or recommended based on competitor prices through our competitor website price scraping, price crawling. And finally, your elasticity module, which calculates how much a product's price affects demand and price perception. So you can have dynamic prices on qualifying items, or you can use SKU level incentives, not blanket discounts. Blanket discounts are a blunt object. They're sitewide, moving things enmasse into a 25 to 70% markdown in clearance is not the end goal of optimising your pricing, you can get down to a SKU level. Finally, number three, help me find it. Great long tail businesses can guide consumers following their likes and dislikes, if you like that, then you'll like this. Just as lower prices can entice customers down the long tail recommendation engines drive them to products they may not have found otherwise.

James Taylor: And this is key. The more items that you have, the less items will be found. Discovery becomes a problem that can be solved through recommendation systems. Recommendation engines are capable of finding the items in that long tail that are relevant to each customer. Just to throw some data at you from one of the Particular Audience clients that we're working with.

James Taylor: We've just done some long tail analysis on their SKU base and in the control group, so customers that don't see recommendations, just 16.8% of SKUs make up 80% of sales, but customers that do see Particular Audience recommendations actually 33.6% of SKUs make up 80% of sales. And to boot with that, we've seen a 23.4% increase in sales overall.

James Taylor: So, the opportunity in your long tail of items is huge and help people to find them price them effectively and make them available. The overlap where customers looked at both items in a session is something that we can put a score on, it's something that we can calculate. So we're able to calculate how relevant from the wisdom of all of your customers, how similar two items are to one another, or complimentary of you using purchase data.

James Taylor: But what if you don't have any behavioural data on an item? Well, this is where we can use things like computer vision or natural language processing to understand the similarity between items, men's trekking, gore-Tex boot, men's boot hiking, leather sole support, men's walking ankle support boot. There's some similarity in there as well.

James Taylor: And again, we can put a value on that and then we can look at each different customer. It's not just the item they're looking at now and what's similar, it's understanding what have they looked at recently, multiple items, and what are the relevant or related items to those, and that creates almost the universe for each individual customer.

James Taylor: Coming back to that point I said earlier, if you have a million customers, you need a million websites. And this sort of machine learning technology is capable of merchandising your site for every different customer that comes to it. Finally, you've got this amazing relevance that you can have, but you can also meet specific business goals.

James Taylor: You want the journey to be relevant, but you might want to prioritise high margin items, you might want to boost overstocked items, you've got too much of something of course, you want to merchandise it more often. And finally, you may even be charging brands to increase the exposure of their items on your website in the form of sponsored slots.

James Taylor: Key takeaways, the opportunity is online, so don't worry. We can still make good use of physical retail assets using online data and to boot, we can improve the experience online. So number one, make everything available. Number two, get smart on pricing. And number three, help me find it. Remember these three rules?

James Taylor: Increase your chances of conversion and you will acquire market share of tiered pricing strategies, recommendation engines and inventory optimisation is going to be necessary to thrive in a post-COVID world. Meet customer needs to filter your investment decisions, reduce spending on underperforming assets, increased spending on the right R and D and marketing. And I think to mention on that R and D piece, it's not a bunch of siloed digital tools that work. You need to start thinking about all of your data in a loop, you need to start thinking of your data as an ecosystem where technologies such as ours can actually work together using the data to achieve each of the different things in the three rules.

James Taylor: So, quick view on Particular Audience, we're obviously specialists in search and merchandising specialists, specifically in collaborative filtering, which is the behavioural led recommendations, computer vision and natural language processing. We also permit dynamic pricing. This can be within margin and and related to your actual inventory of different items.

James Taylor: You localise data, liquidate unwanted stock and reallocate stock as it's required in different places around the country. And using the computer vision and natural language processing, we can conduct trend analysis, we can help guide your design teams and your buying teams on not just which items are selling, but specifically the attributes and trends on those items that are popular.

James Taylor: And it doesn't have to be a big piece of work. It might sound like this huge overhaul of your business, but in fact, it's actually very simple. Step one, you just need to track behaviour, you need to get a tracking tag on your website that is objectively picking up the right information. You need to process item attributes, this can be done with the tag, but also with product feeds. Your Google Shopping feed, as it stands, is already good enough to start this process. You need to ingest inventory data, localise it, if it's applicable, if you've got lots of stores or lots of distribution centres. Then you can start layering contextual information on your website, similar items, dynamic pricing, SKU level incentives.

James Taylor: Then you can meet business goals, you can boost sponsored items, you can boost overstocked items, you can boost high margin items. And finally, you can really architect a leading inventory intelligence solution. You can set up key reporting and action notifications to make sure that you have the right items in the right place at the right time.

James Taylor: Cool, that's it from me. Thanks everybody for your time, and feel free to reach out to me directly at james@particularaudience.com, if you want to pick up on any of the themes that we've gone through today, figure out how they might apply to your business specifically.

Michelle Lomas: Thanks for listening to this Flex Your Hustle Podinar. Give us a rate or review on your Pod App when you have a moment and make sure you hit follow so you don't miss any episodes. I'm Michelle Lomas. See you next time and keep hustling because no one else is gonna hustle for you.