RedWhite's 2023 Recession Gameplan. If One Should Occur.

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Disclaimer : The author is not a macro-economist. This blog post is merely to inform the reader about the author's personal outlook on the current economic climate and how that will affect RedWhite Apparel and what the author's plan is to manage risk. Nothing in this blog should be taken as financial advice.

Edit (27th Dec, 2022) : Added a 6th point at the bottom about continuing to invest in the customer's experience with RedWhite and RedWhite's products.

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Back in July, I wrote about how inventory will be managed at RedWhite in a macro environment where the US Federal Reserve is conducting Quantitative Tightening. You can read that blog post here.

In that blog post, I talked about how RedWhite increased inventory levels in 2021 to meet surging demand. The plan was always to progressively reduce inventory levels once we lapped Covid and demand came back down to regular growth rates. 

I also mentioned a possible consumer recession that could decrease demand for RedWhite's bibs and I wanted avoid carrying too much inventory in the event of that happening.

Inflation Appears to be Sticking Around & so will Restrictive Monetary Policy

The Federal Reserve is committed to a goal of getting inflation down to 2%. This is not going to be an easy task and will require restrictive monetary policy for some time. You can listen to the latest FOMC Press Conference here.

The effects of this is materialising with mortgage rates rapidly increasing and consumer spending slowing down. It is natural for consumers to slow down spend when the economic outlook is negative.

The Federal Reserve commented that the labour market is robust (paraphrasing) which indicates only 1 thing - monetary policy can remain restrictive until unemployment rises to a certain level. That level appears to be 4.6% at the end of 2023.

Cycling Clothing is a Luxury & Demand will Potentially Decrease in 2023

When consumers are spending more on food, transportation, housing and are facing the threat of unemployment, the natural response is to cut back on unnecessary luxury expenditure.

Cycling clothing is arguably a luxury.

I do believe RedWhite's Bib Shorts & Tights are competitively priced, but at $85 for the cheapest item and $140 for the most popular bib short, they aren't cheap. Customers will certainly be more wary about making a discretionary purchase when there are other bills to be paid.

I'm generally an optimistic individual and don't wish to be a doomsayer, but when data indicates high likelihood of a recession in 2023, I do have to plan accordingly for it. Since this plan will affect you, it is prudent you're aware of it.

Here's what I will be doing in 2023 :

1) Restrictive Inventory Policy in 2023

RedWhite will be reducing Inventory levels in 2023.

Assuming demand will soften as customers reduce discretionary spending, the logical step is to reduce supply of RW bibshorts and shift more of that capital into cash holdings.

I am taking a "wait & see" approach at the moment.

Typically I forecast 6 months of inventory needs and purchase in bulk. This approach isn't viable if demand is likely to decline. I will be shifting to shorter forecasting windows (3 months) and purchasing in smaller and more frequent cycles.

Not purchasing in bulk means there will be periods where certain products will sell out and simply won't be available for 2-3 months. 

I do ask for your patience when things sell out and to consider alternative products in RedWhite's catalogue.

2) Stable Pricing in 2023

I value price stability just like the Federal Reserve. 

RedWhites have never gone on sale since 2019. My pricing policy is a simple one. Pricing is a function of COGS (cost of goods sold) + a reasonable margin. That margin is relatively low because RedWhite is a structurally low operation cost business. 

RedWhite has no employees other than 1 - Yuva (myself). The business is run out of my home. Because of this, I have the unique advantage of charging a smaller margin since there's no office rent or additional salaries to be paid.

Since pricing is competitive and I wish to keep it stable in a low-demand 2023, RedWhite will be continuing the "no-sale" policy which started in 2019. 

I am getting information from potential customers that many cycling clothing brands are running sales and I am getting questions about RedWhite's pricing changes in 2023. While I have no opinion about what other companies do, my strategy for RedWhite has always been to maintain price stability.

The only actions I've taken lately is a $5-$10 price increase to cover additional shipping costs. I don't forsee needing to raise prices unless shipping costs dramatically increase in 2023.

3) Product Development will Continue with New Product Launches

I recently wrote about RedWhite's 2023/2024 Product Roadmap.

I will continue working on everything I mentioned despite a potential recession. I am a firm believer in product development and invest on a multi-year horizon. Customers can look forward to new and relevant products in 2023 & 2024.

4) Diversify Advertising Spend

RedWhite currently buys advertisement space on Google Search, Youtube, Facebook & Instagram. Pricing for these has gradually increased by over 10% a year since 2014.

I think it is time for me to actively start diversifying advertising spend. For years i've been reliant on Google and Facebook since these platforms offer scale and ease-of-purchase for advertisements. However, with increased pricing, it is quickly becoming uneconomical.

I will be diverting my effort to the following channels :

  • Media partnerships
  • Collaborations with Cycling Youtubers

If you're a content creator and would like to work with RedWhite Apparel, please email me at : yuva@redwhite.cc

5) RedWhite will be looking to make an Acquisition

RedWhite is in excellent financial shape with no debt. This allows us the flexibility of allocating capital towards an acquisition.

We've been in a structural bull market for many years. Prices for acquiring other businesses have been prohibitively expensive. However, in today's macro environment, purchasing a business can potentially be cheap. I'm currently on the lookout for a business to acquire which has the following characteristics :

  1. Has Pricing Power (doesn't need to discount pricing to maintain / grow sales)
  2. Priced at under 3x Seller's Discretionary Earnings
  3. Has a history of growing Seller's Discretionary Earning at over 10% a year

This business doesn't need to be strategic to RedWhite (though that would be nice). I'm looking for vehicles to deploy additional capital into which provides a return above what RedWhite can offer by investing in itself.

If you know of any such deals available, please email me at : yuva@redwhite.cc

6) I will continue investing in RedWhite's customers

I will continue investing dollars into improving RedWhite's customers' experience with the company and with the company's products. Since 2014, i've continuously improved shipping times, product quality and after-sales service.

You can expect more of this in a recession. Specifically, customers can continue expecting :

  1. Rapid delivery times
  2. Excellent after sales support
  3. Generosity from me. While I do have strict policies surrounding returns and exchanges, I am known to be generous on an ad-hoc basis. You can expect more of this.
  4. Continuously improving product quality. I listen to customer feedback and continuously improve my manufacturing processes every year.

Gameplan Summary

I will be exercising greater financial discipline within RedWhite in 2023. I will also be looking for opportunities to grow RedWhite.

 This means the following will likely happen :

  1. Stable pricing in 2023
  2. Reduced Inventory levels = possible short term product shortages
  3. Continued investment in new product development
  4. Diversify Ad Spend
  5. Possible Acquisition (at the right price)
  6. Continuous investment in customers
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Please leave your thoughts in the comment section below 👇

6 comments

Keep me on a " constant contact " email list. They are reasonably priced for customer management.

Jeff December 27, 2022

Very well written – it sounds like you have great business instincts and I look forward to seeing the future success of RedWhite!

Matthew Odom December 27, 2022

Yuva,
I am your #1 fan!
Your bibs are my go to, always!
I currently have 6 pairs, don’t like doing laundry everyday, lol.
2023 is not going to effect your business model, RW is tried and tested.
One idea is to “get into RAAM” mainstream, maybe a booth? I always ask, how do you know if you don’t know.
Anything we can do, fire away.
Here is to a prosperous 2023!
Get Some!!

Curtis December 27, 2022

@MAXIM FROM @GRAVEL.MAFIA : Glad you enjoyed this read.

@WARREN MOORE : Thank you for the kind words. I do think there’s an element of luck involved still. If demand drops off a cliff and cash flow can’t cover my salary and advertising costs, RW will be in trouble. Can’t control that unfortunately.

YUVA, FOUNDER@REDWHITE APPAREL December 27, 2022

Hey this is super interesting. Love the transparency. Love the hustle. Love the resilience. Shows great business acumen! Keep it up!! Fingers crossed that we are not hit too hard and too long.

Cheers!

Maxim from @Gravel.Mafia December 19, 2022

All makes perfect sense to me – a well thought out plan means not having to rely on luck.

Warren Moore December 16, 2022

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