Considering the economic forecasts for 2024, many economists are expecting a recession this year with the possibility of deflation. A recession is a significant decline in activity spread across the country, typically lasting several months or longer, and it is usually marked by two consecutive quarters of decreased gross domestic product. Deflation is the opposite of inflation — a fall in the overall level of prices in the economy — but can be trickier for businesses to navigate, as customers hold off on making purchases while they wait for prices to fall. As we look to the year ahead, we want to offer a few suggestions on how co-ops can prepare for either of these economic outcomes.

If your co-op’s revenues soften because of an economic slowdown, deflationary downturn or a demand shock, your co-op will be more nimble and more resilient if you have made considerations and plans for action ahead of time. Adapting to slowing sales is never fun, but to remain profitable and serve your community, change will be inevitable. We recommend 1) engaging in scenario planning, 2) considering where you would invest versus reducing expenses, 3) ensuring your product pricing remains up to date, 4) intentionally increasing liquidity, and 5) inquiring about NCG tools and recommendations.

Scenario Planning

Scenario planning can be a valuable tool in navigating uncertainty, mitigating potential financial risks, and optimizing cash management. If inflation persists at the current rate or continues to climb, what would you do? If prices begin to fall, what would you do differently? If sales begin to slow, what would you do? And conversely, if sales were to surge, what might you do differently?

This exercise can be as complex or as simple as you want to make it, depending on the time and energy you have. A more complex assessment would include a full financial model with variables for inflation and demand and with defined outcomes. And a simpler approach could focus solely on directional strategies tailored for the co-op. Either way, you will want to consider the implications on your store’s net income, EBITDA, cash flow, capex planning and bank covenants to ensure that you have sufficient cash to operate and invest within the confines of your required bank covenants.

Reduce Expenses

If business were to slow, consider ahead of time which investments are mission-critical and which expenses could be reduced, and in what order. Fixed expenses such as occupancy are relatively difficult to impact, but there are many other options to be explored, and you should leave no stone unturned when looking for opportunities to save on expenses. If you make many small adjustments, you could find that these add up to material cost savings. We offer several ideas to consider and questions to ask:

To control personnel costs, delay the hiring of new staff or cross-train existing staff to fill holes in the schedule. Flex the hours for staff receiving full-time benefits who are only working 30 to 32 hours per week up to 40 hours. Or reach out to your NCG resource manager to identify ways to tweak the personnel schedule to reduce staffing costs.

Research bank account fees and change the type of account you use to reduce bank fees. Automate banking receivables and payables processes. Outsource payroll to an HRIS company. Reduce member or senior discounts in a thoughtful way. Re-evaluate vendor payment discounts; maybe it makes sense to take advantage of payment terms.

When was the last time you checked to ensure you’re getting the best deal on credit card merchant fees, garbage services or other services? Are there hidden charges you’re paying that can be eliminated? Are you earning a market rate of interest on your cash balances? Are your insurance policies bundled in a cost-effective way? Are there easy energy-saving investments you can make?

Consider the expense of the packaging for prepared foods; is there a less expensive or smaller packaging option? Are you maintaining too much packaging inventory, and is it tying up cash at a time when costs for those items may be declining?

Be relentless! Question every single service and ensure that you are paying the market price for the product or service you need.

Maintain Pricing

During the pandemic and the subsequent inflationary period, we learned how important it was for food retailers to remain up to date on price increases to maintain margin. Conversely, in a deflationary environment, if your competitors are reducing their prices, then your co-op may need to do the same to remain competitive. In a November 2023 Business Insider article, Walmart CEO Doug McMillon said that he expects some prices of dry grocery and consumables to start to decline in the early part of 2024.¹

Consider these strategies to address pricing:

• Streamline your co-op’s price-updating process to be able to change pricing easily and regularly
• Perform price comparisons with your local competitors to understand price differentials
• Intentionally set your prices based on the level of competition for basic items vs luxury items vs wellness items

To be more competitive, what would it take in terms of price changes and expense adjustments to maintain your sales and margin? Use your scenario planning to perform this type of what-if analysis.

Increase Liquidity

When the economy contracts, it generally becomes more difficult and/or expensive to borrow. Therefore, businesses should plan to increase their liquidity in advance of a recession. Higher liquidity can come in the form of establishing a bank line of credit before it is needed. Or it can take the form of intentionally saving to increase days cash on hand so that your business has more financial flexibility if sales slow. Liquidity planning can also be incorporated into scenario planning.

Contact NCG

Finally, reach out to your NCG resource manager to discuss how your co-op is positioned in the current environment. Your resource manager can assist in scenario planning and identifying opportunities for cost/investment assessment and improvements in price management.

¹ Walmart CEO says food deflation may come soon: https://www.cnn.com/2023/11/16/economy/grocery-prices-deflation-walmart/index.html