It’s in the news everywhere: There’s a looming recession in 2023. There’s some disagreement among economists as to whether it will actually happen, but every ecommerce brand is highly aware of some related issues like rising inflation rates, supply chain strain, and a growing number of layoffs. If there’s a recession in 2023, what can ecommerce retailers expect and how can brands prepare for the impact? In this article, explore what the recession means for ecommerce, as well as some of the underlying reasons behind the impending recession and how the COVID-19 pandemic has played a part.
What’s Happening in the World of Ecommerce & the Recession
Many factors have built up in a chain reaction leading to the possibility of a recession that ecommerce brands are facing today. The supply chain strain that kicked off with the pandemic is one such factor.
With all the uncertainty at the start of the pandemic, consumers felt apprehensive about spending their discretionary income. This resulted in high amounts of unsold non-essential consumer goods, which meant retailers had too much inventory that wasn’t being purchased. Many businesses were unprofitable during this time.
Now, consumers are ready to spend again, but acquiring enough supply to meet demand has been a lasting struggle for ecommerce retailers since the summer of 2021. While delays and disruptions have fluctuated and declined in many cases, they haven’t disappeared. We’ve all seen the empty shelves at stores and “sold out” items online for products that aren’t normally difficult to find.
Online sales have also increased tremendously since the onset of the pandemic. In 2020, US retail ecommerce revenue surged 28% after seeing an average of just 9.7% growth in the previous three years. The surge in online shopping added significant strain for freight across ocean, ground, and air. Strikes and worker shortages across all modes of transportation have further contributed to delayed delivery times, especially for the furniture industry.
Disruptions are improving now, but supply chains are complex systems with many simultaneously moving parts. In addition to retailers being unprepared for the surge in demand, a shortage of available materials is also to blame for low inventory levels. Many products, such as cars, involve the production of various components that must be manufactured and transported in many ways, across many borders, and with many different steps. Disruptions have occurred across every step, making the process of easing supply chain strain even more complicated.
Inflation is another key factor in the impending recession. Rising inflation rates don’t have a singular cause, but pandemic-fueled supply chain disruptions and material shortages have played a large role in higher costs. Manufacturers across many industries underestimated how drastically consumer demand would increase in 2021 when pandemic restrictions started to be lifted. These sharp, unexpected increases in demand resulted in decreased supply, leading to higher costs for the items that were still available.
With soaring demand, manufacturers weren’t prepared with the proper amount of workers and facilities on deck (plus, many of these workers contracted the virus). This further contributed to higher costs for shoppers. On top of that, crop failures, natural disasters, and worker shortages have played a major role in the increase in food and beverage prices.
In December 2022, inflation rates were up 6.5% year-over-year, including 10.4% for food and 14.6% for transportation services. However, inflation is expected to slow later this year as the Federal Reserve continues to increase interest rates. In fact, December 2022, inflation was down month-over-month by 0.1%, compared to June 2022 when inflation was up 1.3% month-over-month. By the end of 2023, inflation is expected to be up 2.8% YoY.
The Fed’s goal in increasing interest rates is to make it more expensive to borrow money, which should result in decreases in consumer demand. In return, lower demand should result in more supply, slower price growth, and lower inflation rates.
Like with inflation, there is not one single factor responsible for the potential of a recession in the United States. One major factor, however, is that as the Fed increases interest rates in order to decrease consumer demand, the overall economy could slow as a result of lower consumer spend. One effect of this is the potential for mass layoffs, which we’ve already seen this year from major companies like Google, IBM, Microsoft, Amazon, and Salesforce.
By the end of 2023, unemployment rates are expected to reach 5.6%, up from 3.7% at the beginning of the year. More people without jobs would slow down the economy even more, which could overshadow the potential benefits (i.e. lower inflation) of higher interest rates.
Around the middle of 2023, layoffs and economic slowdown are expected to peak and inflation is expected to come down. However, The Fed isn’t expected to cut interest rates until 2024.
What Your Brand Can Do to Keep Ecommerce Profitable During a Recession
When it comes to a recession, it’s crucial for brands and retailers to find strategic ways to save money, mitigate risk, and remain profitable. At ROI Revolution, our experts have been keeping a keen eye on the state of the economy to ensure our clients can weather the storm.
One key trend that we noted from the results of our 2023 State of Digital Marketing Survey (stay tuned for more content with the results!) is that marketers are not able to increase their budgets this year. As a result, there’s a heavy focus on optimizing what already exists instead of adding more fuel to the fire. SEO, UX optimization, and conversion rate optimization are some of the areas that brands that sell through ecommerce can focus on to get through the recession profitably.
If you don’t have the budget to increase your paid search ad presence, right now is the perfect time to focus on optimizing your SEO presence to make up for that lost paid awareness. SEO is a long-term play, and you may not see results for a few months, but the payoff will be that you have higher visibility on the first page of search results without spending any additional dollars on ads.
The even bigger perk is that once you do have more budget for paid ads, if your organic presence is optimized, then you’ll have the opportunity to dominate the first page of search results and increase awareness even more with customers who are shopping for a product like yours. At ROI Revolution, we call this concept the digital search duopoly. We have an entire series of content on this strategy that you can peruse to learn more:
- White Paper: Optimizing Your Paid & Organic Channels With the Digital Search Duopoly
- Webinar Replay: The Digital Search Duopoly
UX optimization is crucial to ensure that the users you attract to your website are actually enticed to make a purchase – and that it’s easy for them to do so. Make sure important buttons are prominent on your landing pages. When you can, customize your landing pages to fit the customer based on demographic data like location and browsing history. And if you have the tools in place to do so, you’ll definitely want to add A/B testing to your strategy. A/B testing can help you determine the best messaging, placements, and even color schemes for your website to convert the most customers.
The one downside of A/B testing is that it can be difficult to have a winning test result that provides actionable takeaways that you can implement. At ROI Revolution, our A/B test win rate beats the industry average by nearly 3x. If you’d like to explore how we can discover untapped opportunities for your brand to grow through A/B testing, send a message to our team today.
Lastly, if you’re not able to increase your budget this year (and even if it’s decreasing), strategic budget reallocation can be a powerful way to grow profitably without spending any extra dollars. Whether your marketing budget is stretched thin or you have plenty of resources to work with, a smart reallocation can pay dividends.
One tactic to consider is shifting some of your lowest-performing paid advertising dollars to conversion rate optimization. That same amount of investment will create much more growth when applied to A/B testing to drive conversion rate growth across your site.
Don’t worry, we have content to help you with this strategy, too. Read our article on How to Drive More Ecommerce Conversions by Reallocating Your Marketing Budget for more. And as always, if you’d like to explore how we can help you develop and execute an intelligent budget reallocation strategy, start a discussion with one of our ecommerce experts.
Tying It All Together: Ecommerce & the Recession
The digital marketing experts at ROI Revolution are dedicated to staying up-to-date with the latest developments in ecommerce and the recession to ensure your business is resilient in the face of uncertainty. To explore how we can help you save money, mitigate risk, and grow profitably through ecommerce, send a message to our team today.
Sources
- The White House, Why the Pandemic Has Disrupted Supply Chains.
- Statista, Retail e-commerce revenue in the United States from 2017 to 2027.
- FRED Economic Data, Future Delivery Time; Diffusion Index.
- Nationwide Advisor Blog, How Has the Pandemic Impacted Inflation.
- U.S. Bureau of Labor Statistics, Economic News Release: Consumer Price Index Summary.
- Vox, 3 different paths the economy could take in 2023.
- Mondo, Mass Layoffs in 2022 & 2023.
- CNBC, Why everyone thinks a recession is coming in 2023.
