Recession: Surviving the Years of Lean Cows, By Olu Akanmu

Nigeria’s recession, our own years of lean cows, is characterised by very high inflation, declining real wages and accelerating unemployment and underemployment. It manifests on businesses in three ways, which are the massive contraction of market demand, rationalisation of demand and the trade–down of market and product preferences as consumers shop for value. There are nine ways a business can respond to recession and pull through this challenging period.

“and the cows that were ugly and gaunt ate up the seven sleek, fat cows.” – Genesis 41:4

“and the thin heads of grain swallowed the seven healthy, full heads.” – Genesis 41: 7

 

This article discusses what businesses can do to pull through the years of recession. The years of lean cows are the years of famine akin to the years of economic recession. When Pharaoh dreamt, in biblical history, Egypt mobilized to prepare for famine or economic recession by building strong national reserves of grains in its years of boom and abundance. With such strong national reserves or savings of grains, the biblical Egypt of Pharaoh was able to minimize the impact of famine on its people even when it lasted for seven years. There was however a country whose Kings did not save its grains in its years of fat cows because these Kings did not dream; they had no vision and lacked foresight. When famine, the years of lean cows, came, there was limited supply of grains available in the country. Grains became so scarce that there were long queues of citizens to buy the limited quantity of grains available from the national warehouse.

The King, out love for his people, decreed that the now scarce and limited national grains should be sold to the people at the same price or close to the price they used to buy in the years of fat cows. Grains had, however, become more valuable in that country because of its limited supply in the now years of lean cows. The queues for grains were so long that millions of the citizens who wanted the scarce grains were willing to pay far higher prices than the official price decreed by the King, reflecting the true value of the scarce grains. This created very significant rent-seeking opportunities in the sales of the scarce national grains. A citizen would also need to be well connected to access the grains even if they are the most economically efficient user of the scarce national grains. This was because the queues for grains were so long that no one was certain when it would get to their turn if they stayed on the queue, as the supply in the national warehouse got depleted.

As the grains supply got depleted by the day, their value to the citizens increased at higher premiums to the King’s official price. The state was now selling its grains at old prices, lower than their real value, at far lower revenue, which constrained its ability to replace the stock of grains it had sold, such that the national grains reserves began to fall rapidly, creating even further scarcity. Meanwhile, there were merchants in overseas countries where there had been good harvest of grains. Those merchants would like to bring in ships of grains to the country to sell in very large quantities. They could see the demand from the scarcity in that country but they lacked the incentive to bring their ships of grains because they had to sell at that large quantity at the official decreed price, far lower than the true value of their grains. Therefore, there was very limited private supply of grains into that country to complement the limited supply of the King. The famine and recession therefore got worse and became unnecessarily prolonged beyond its natural course. Extrapolating this analogy, it is certain that if the biblical Joseph were Nigerian, he would have advised against an inflexible exchange rate policy in our current economic situation.

Nigeria’s recession, our own years of lean cows, is characterized by very high inflation, declining real wages and accelerating unemployment and underemployment. It manifests on businesses in three ways, which are the massive contraction of market demand, rationalization of demand and the trade–down of market and product preferences as consumers shop for value. There are nine ways a business can respond to recession and pull through this challenging period. The first is in re-engineering your product and services for value to keep them at affordable prices for consumers. Toothpastes and packages of consumer goods are now getting smaller to keep them at affordable price points. You can also take out the bells and whistles in your product to keep them at affordable prices. Bells and whistles are product ingredients that may be twenty percent of your cost and deliver only five percent value to your customers. By taking them out, you can effectively shave fifteen percent off your cost, making your product or service more affordable.

…find customers who can replace the import content of their product with your own local product. Today, retail chains, with their shelves getting empty because of their inability to import, are looking for local agriculture processed products to replace previously imported ones. Are there such opportunities in your own industry or in adjacent industries where you can become an effective, cheaper and available local substitute?

The second way your business can respond is to make your route to market more efficient. Find partners who have a wider market reach and plug into their platforms. It will be cheaper than doing it yourself, especially if you are a small business and your scale is small. You may, for example, plug into established digital and e-commerce aggregation platforms to reach a wider market while developing your own websites for more people to reach you at a lower cost. The third way is to find if there are new value segments emerging in your industry or market because of the recession. Enter such value segments early to colonize and dominate them. Such emerging value segments will be usually small and may not be able to accommodate more than one or two brands profitably. The first brands to get in are the ones who can build a minimum profitable scale, while the third and fourth will have very little market left to harness.

Fourthly, your business can identify markets, sectors or segments that are resilient and realign your commercial investments around them. Despite the famine in Isaac’s time in the book of Genesis, Isaac sowed and prospered because he had the skills of finding wells in dry and famine ravished lands. Identify your more resilient markets and realign your commercial investments to focus on those need or geographic segments. The fifth way your business can respond is to rationalise your product scope, offering and store-keeping units, to make them efficient in line with market reality. Are there products or product lines that consume twenty percent of your working capital but deliver only five percent of revenue and have done so stagnantly over a long period? Such product lines are candidates for rationalization to make your commercial programme more efficient. You must however be careful to preserve your core strengths and market advantages, even as you rationalise your offerings to ensure you can take full advantage of next market upturns when the economy gets out of recession.

The sixth is to increase the local content of your product to make your business less forex dependent. This also ensures that you can keep your prices affordable. The seventh way is to find customers who can replace the import content of their product with your own local product. Today, retail chains, with their shelves getting empty because of their inability to import, are looking for local agriculture processed products to replace previously imported ones. Are there such opportunities in your own industry or in adjacent industries where you can become an effective, cheaper and available local substitute? The eighth way is to run tactical promotions to stimulate demand. Lotteries and lottery-leveraged initiatives interestingly become more appealing to mass market customers as economic situation bites harder. The ninth way your business can respond to recession is to explore export opportunities for your products, which will give amplified local currency returns even at relatively small scale.

Best wishes to your business in the new-year.

Culled from the Premium Times

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