The biggest economic challenges facing eCommerce — and how brands can survive them
September 9, 2022
Global economic growth is slowing, with growth predicted to be about 0.4% lower than forecast by the UN’s International Monetary Fund in April. Thanks to inflation, geopolitical tensions, and continued COVID-19 outbreaks, some economists feel we’re heading towards another recession — a challenging storm for eComm brands to weather.
Despite the economic uncertainties at play, eCommerce companies should be proactive about how they approach these challenges. By staying aware of the larger trends at play and reducing your risk, you can outperform your competitors and safely position your business for long-term growth.
Inflation and financing are driving the most pressing economic challenges
Most eCommerce companies today are largely feeling the effects of inflation, rising financing costs, and stricter terms. Here are the biggest challenges affecting eCommerce as we enter the end of 2022 and what they mean for your business.
Rising interest rates could usher in a recession
Central banks are raising interest rates to combat and level off inflation, but the move brings its own set of economic challenges — including market corrections and overall hesitancy.
At the end of July, the Federal Reserve, the central bank of the United States, raised interest rates by 75 basis points. That marked the second straight month of interest rate increases — and it signaled it could raise rates again to help fight inflation. The European Central Bank also raised interest rates for the first time in 11 years, with an increase of 0.5 percentage points.
In response to these moves, investors are showing less confidence in the economy, and stocks are falling. The Dow Jones dropped more than 3% after the Federal Reserve announced that interest rates would stay up. The Nasdaq dropped 3.9%, and the S&P 500 closed at 3.4% down. Publicly traded eComm stocks like Etsy and Shopify are at two-year lows, so market hesitancy is definitely impacting eCommerce, too.
But even for companies that aren’t publicly traded, interest rate hikes spell trouble. They can help curb inflation, but they’ll likely spur a recession because market sentiment overall is falling. For eComm brands, it’s hard to predict what’s on the horizon, but we could start to see larger-scale layoffs and drops in sales as consumers have less to spend on products.
Less discretionary spending from consumers lowers revenue
Inflation is at its highest since the early 1980s, so consumers likely already have less disposable income to spend on your products thanks to inflation — a huge factor contributing to today’s economic uncertainty.
Since January 2021, real average weekly earnings have decreased by 4.5%, despite a strong labor market and nominal earnings actually rising over this period. The takeaway? Consumers actually have less in their pockets than they did a few years ago.
And that’s causing them to be a bit more prudent about how they spend their cash. They’re purchasing fewer items and opting for less expensive versions when they can. According to one survey, 64% of respondents say they’re willing to delay minor, day-to-day purchases if inflation continues to rise. Another 56% say they’re willing to shop less overall.
Because consumers are spending so much more on necessities like gas and groceries, your customers might be putting off other retail purchases — including your products. You might already be seeing a slowdown in sales as inflation continues to rise. Or you might see your own customer acquisition cost (CAC) increase, as it takes more marketing spend to get a customer to make a purchase.
Banks and VCs are pulling back financing
As the markets become more volatile, both banks and venture capital firms may not be looking to finance your company. If you’re in need of funding, this can make it extra tricky to come up with the cash needed to finance your working capital cycle, expansion, or other projects.
The process for securing a loan from a commercial lender is notoriously arduous anyways, especially for a startup or direct-to-consumer (DTC) company. But with interest rates on the rise, and lenders even less inclined to take a financial risk, these will become tougher to secure. They might see your company as too risky to lend out to unless you agree to a higher interest rate or massive collateral.
VC firms are also slowing down on funding. Early-stage valuations saw their first decline in 10 quarters in August. And according to CB Insights, there was a 23% quarter-over-quarter drop in global venture funding in Q2 2022.
If your eCommerce company is counting on equity financing, those options may take more time and effort to secure. And you’ll likely be competing for a smaller pool of available funds in the current climate, so it might be harder to secure a fair valuation, or terms might be costlier.
Inflation is driving up supply chain costs
Supply chain woes are some of the most pressing inventory management challenges of the year, and manufacturing and shipping prices pose a huge hurdle to eComm brands and their cash flows. The current Freightos Baltic Index (FBX) for a shipping container is $5,703 as of August 29, 2022. That’s more than 3.5 times the cost of a container in January 2020 and about 1.65 times the cost of a container in January 2021, when inflation started to take off.
The cost of raw materials has also soared thanks to inflation, although specific prices will vary depending on your product and industry. As prices fluctuate, they’ll eat into your profit margins unless you pass the increase on to your customers. That could potentially risk sales and customer retention down the line.
To weather the storm, avoid stockouts, keep cash on hand, and reduce operating expenses
The best eCommerce brands will stay prepared and be proactive about the economic challenges they face, whether it’s manufacturing price increases or a recession six months down the line. That means having enough stock and cash on hand to serve your customers and your business.
Keep 12–16 weeks of inventory to meet demand
In today’s reality of supply chain issues, container shortages, and shipping delays, stock on hand gives you a competitive advantage against your competitors and generates more revenue for your brand.
With COVID-19 lockdowns and container shortages interrupting the supply chain, your inventory shipments may be stuck at ports or delayed for weeks. Keep enough stock on hand so you can always fulfil customer orders, even if your next shipment is delayed.
It’s better to have too much stock than not enough with so much uncertainty, so you don’t have to miss out on sales opportunities.
It’s better to have too much stock than not enough with so much uncertainty, so you don’t have to miss out on sales opportunities. This is especially important with a potential recession looming — you could be competing for fewer customers, and you definitely don’t want to turn them away to competing brands because you’re sold out.
Let’s say a clothing retailer doesn’t have jeans in the right size for a customer. That customer is probably a savvy enough shopper to just look elsewhere and go to a different site, as there’s plenty of competition in the market — they don’t need to wait for your stock to come in. Always keep up with demand with at least three months of stock on hand so you’re making customers happy and making the most of every sales opportunity.
Hold 6–10 weeks of cash in the bank to stay operational
Cash is king in a recession. Saving about two months of cash in the bank allows you to be proactive even when finances are tight.
If sales dropped off suddenly, having 6–10 weeks of cash in the bank would allow you to operate your business for that window. You’ll buy yourself more runway to react even when something goes wrong, such as a sudden market downturn.
But you can also pivot and take advantage of opportunities when your competitors may be pinched financially. You’ll stay poised towards growth while they’re cutting back, which is a huge advantage during economically challenging times. While your competitors may not have the funds they need to make any moves, you can actually go after a larger market share and improve your brand’s positioning for the long term — all while keeping the business healthy in the present.
Let’s say your supplier calls you and asks if you want to order more stock before prices go up. You can place that order without any additional financial pressures to your company because you have extra cash saved up. That puts you in a better position for the next few months because you’re buying the inventory at a lower price point and improving your profit margin — whereas your competitors may be scaling back instead.
Reduce your operating expenses
For many brands, operating expenses are increasing across the board. This puts a squeeze on your cash flow and impacts your profit margins. So it’s time to be ruthless and reduce your operating expenses as much as possible.
In uncertain times you need to be laser-focused on results and know the numbers inside out:
- Dive into every aspect of your P&L to see where you can potentially make cuts and optimizations.
- Go through your ad accounts and cull any underperforming campaigns and ad sets.
- Talk to your suppliers and manufacturers about how you can reduce your costs and offer up an incentive like early invoice settlements or larger purchase orders (if you know demand is rising). Even a 1-2% saving here will have a big impact on your expenses.
Use revenue-based financing to reduce your risk in a challenging climate
In this kind of economic climate, there’s always the risk that sales could drop off — and that could leave you exposed if you don’t have a cash buffer. Revenue-based financing provides flexible terms and downside protection to navigate economic uncertainty.
Your remittance will be a percentage of daily sales rather than paying off a fixed-payment loan or leaving your own assets exposed to fund your working capital. You can then use the funding to avoid stockouts, order inventory ahead of time, and keep your cash invested in your business.
By keeping on top of your cash flow and freeing up working capital with revenue-based financing, you’ll also have more opportunities to experiment and innovate. With challenging times come big opportunities, and the brands that invest in the right areas in the coming months will have the opportunity to win market share from competitors.
Learn more about how revenue-based financing provides an efficient, risk-free way to finance your eComm company.