Operations   //   August 24, 2022

How young brands are shoring up their businesses ahead of a potential recession

While an economic downturn isn’t guaranteed, brands are increasingly starting to prepare for worst-case scenarios in the coming months. Record-high inflation rates, coupled with unstable market conditions, have led emerging brands to map out new business strategies should the U.S. enter into a recession. 

For some consumer brands, this entails strengthening financials to extend their runways and ensure enough cash flow to survive a dry fundraising climate. For other startups, preparing for a recession means accelerating retail distribution as they wean off the increasingly-expensive DTC-only model. Others are also locking in existing and new production contracts to ensure affordable manufacturing in the near future, as prices for raw materials continue to increase.

All in all, these brands are preparing for the worst and hoping for the best as they execute upcoming growth. 

Inking key retail deals 

Men’s grooming brand Bravo Sierra, which closed a $17 million Series B this month to support its Walmart debut, rolled out in over 4,500 Walmart locations, and is counting on the increased availability to survive a potential economic downturn.

Co-founders Justin Guilbert and Benjamin Bernet told Modern Retail that hygiene and personal care tend to stay essential for most shoppers, even when they’re tightening their budgets at drugstores and big box retailers. 

“We decided to raise funding at a time that nobody was raising,” said Guilbert. “But we were able to raise from both previous investors and new ones because they understood that we delivered on the promise despite Covid and the market crashing in the last six months.” 

Bravo Sierra launched in 2019, as a direct-to-consumer brand. Ahead of its big-box expansion, the brand largely grew through retail presence on U.S. Army and Air Force bases across the world.

But given the changing economic climate, this year the brand has quickly expanded to “key accounts,” said the founders. These include both off and online channels, such as an official Amazon store, Target, Ulta Beauty and now Walmart. “This allows us to directly reach Americans where they live and shop,” Bernet said. The brand also touts its affordable price point and American-made status as a growth strategy, which it’s counting on as it competes for shelf space. “We also made a pledge to our customers a few months ago that we would not raise prices for the foreseeable future,” Bernet said. 

Protecting future manufacturing 

Snack brand Partake Foods is also attempting to recession-proof its business through additional distribution, but also by securing long-term supplier partnerships. 

The company, which was founded in 2016 as a cookie brand, and debuted at Trader Joe’s last year. To prepare for a potential economic crash, founder Denise Woodard said Partake has signed year-long contracts with its suppliers who provide “crucial main ingredients” for its allergy-friendly recipes.  

Woodard noted that as the brand adds more categories — such as baking, pancake and waffle mixes — Partake is emphasizing product development and ingredient sourcing that fits within its label promise; Partake products are free of the top eight allergens: peanuts, tree nuts, eggs, wheat, milk, soy, fish and shellfish. “So we’re always thinking ahead as ingredients are a big part of the planning process for us,” Woodard said.

Shoring up future production is on a number of founders’ minds, even for brands that are so-called “recession-proof” because of how essential their products are. 

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Infant formula brand Bobbie, which experienced major growth during the ongoing formula shortage, announced a pediatricians-led innovation hub this week. The new venture, called BobbieLabs, will help develop organic, FDA-compliant products as Bobbie adds more SKUs and grows into new channels. The DTC brand launched at Target nationwide in July, which the company said was in the works for the past year. 

Co-founder and CEO Laura Modi told Modern Retail via email that generally, infant formula is considered “recession-proof.” However, she explained that this year’s formula shortage showed that now is the time for brands to invest in innovation and diversification in the category. “As the crisis eases up, we’re really excited about dialing up our R&D arm of the business, BobbieLabs, which will fuel our scientific research and innovation, as well as new products we have on the horizon,” Modi said. 

Keeping an eye on cash flow

As the saying goes, cash is king, and unsurprisingly, improving cash flow is top-of-mind for smaller startups.

Arrae, a DTC brand that sells digestive health supplements, is one such brand taking a close look at cash flow at this time. 

Arrae co-founder Nish Samantray said that with the current macroeconomic climate, making sure that Arrae has at least 12 to 16 months of runway is crucial. This is largely because raising funds in this environment “is harder than ever before,” he said. Add to that the increasing customer acquisition costs in the DTC space, raising capital is quite challenging in general, Samantray said.

“We’re expecting interest rate hikes, which means the cost of securing debt is going to go up,” Samantray said. As a result, the company is talking to existing debt providers to lock in favorable rates. “We’re also asking our manufacturers to be more generous with their payment terms to give our working capital as much runway as possible.”

One bright spot about this specific recession, Samantray noted, is that customer spending is still relatively strong due to financing tools like BNPL services. “We’ll continue to focus on core products and bettering the basics of our business, like retention rates, website conversion and cash flow management,” Samantray said. 

“We are really optimistic and excited about the time we are in,” Samantray said, adding that the challenging period will test various businesses’ strengths. Samantray concluded that “the circumstances have forced founders to be more disciplined with spending.”