The biggest economic challenges facing eCommerce — and how brands can survive them
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.