Retail markets tend grow organically with increases in population and employment. In 2020 the population didn’t grow as borders were closed to immigration, and Canada, like the rest of the world, saw high unemployment and a drop in GDP. These indicators would typically result in significantly lower retail sales.
However, retail sales, excluding automobile sales, remained robust. What was the difference between the 2020 recession and all other recessions? This time, individuals had money.
In 2020, the Canadian government gave $240 billion to individuals and businesses. This is equal to 15% of the 2019’s GDP. Individuals with secure jobs and higher incomes spent money at home as there were few alternatives options.
The question remains, how long will it take for the Canadian economy to return to 2019 levels and start to grow?
Plan for Three Years
Three Harvard professors Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen analyzed previous recessions. They found that 74% of companies did not return to pre-recession growth for more than 3 years.
They also found that companies that flourished did so by balancing cost-cutting with investments to increase productivity. A disciplined financial analysis is critical.
Sony: In December 2008 Sony announced a cost-reduction target of $2.6 billion. It closed several factories, eliminated 16,000 jobs, and delayed investments in a much-needed LCD television factory. This strategy resembles the approach Sony took during the 2000 downturn when over a two-year period the Japanese giant cut its workforce by 11%, its R&D expenditures by 12%, and its capital expenditures by 23%. The cuts helped Sony increase its profit margin from 8% in 1999 to 12% in 2002, but growth in its sales tumbled from an average of 11% in the three years before the recession to 1% thereafter. In fact, Sony has struggled since then and finds itself bested in product categories by Amazon, Microsoft and Nintendo, and Samsung.
Hewlett-Packard: At the height of the 2000 recession, Hewlett-Packard embarked on a massive restructuring program, made the largest acquisition in its history by buying Compaq for $25 billion, and increased R&D expenditures by 9%. It also spent $200 million on a corporate branding campaign and $1 billion on expanding the availability of information technology in developing countries. When the recession ended, the company found it tough to match the profitability levels of IBM and Dell. HP discontinued the Compaq brand name in the United States in 2013.
Office Depot vs Staples: During the 2000 recession, Office Depot and Staples took differing approaches to their respective cost management. Office Depot cut 6% of its workforce, but it couldn’t reduce operating costs significantly. Although the company created an incentive plan to boost sales, its sales growth fell from 19% before the recession to 8% after.
By contrast, Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced. At the same time, the company contained its operating costs and came out of the recession stronger, bigger, and more profitable than it had been in 1999. Its sales doubled, from $7.1 billion in 1997 to $14.6 billion in 2003.
- Companies that respond to a slowdown by taking the opportunity to closely examine every aspect of their business models—from how they have configured supply chains to how they are organized and structured.
- Companies that chose to cut costs by improving operational efficiency rather than by slashing the number of employees. They reduced their operating costs on a permanent basis and when demand returned, costs stayed low, allowing their profits to grow faster than those of competitors.
- Companies that developed new business opportunities by making significantly greater investments. Investing in R&D and marketing and taking advantage of depressed prices to invest in property, plants, and equipment.
- To pull off a combination of cutbacks and strategic investments, Management has to exercise cost discipline, financial prudence, and detect opportunities that offer reliable returns in reasonable payback periods.
Rather than guess at future sales, companies need to work on business fundamentals, cost control, efficiency, and prudent investment.
“Few business leaders have a master plan when they enter a recession. They encourage their organizations to discover what works and combine those findings in a portfolio of initiatives that improve efficiency along with market and asset development. This agility, even as leaders hold the course toward long-term growth and profitability, serves organizations well during a recession. Companies that use these strategies can ride the momentum after a recession is over. This approach combats a downturn and lays the foundation for continued success once the downturn ends.”
– Ranjay Gulati, Nitin Nohria, and Franz Wohlgezogen for the Harvard Business Review
Comments and questions are welcomed Bob Smith email@example.com