Earned Ep. 51: Jefferies’ Stephanie Wissink Talks Consumer Behavior in a Volatile Market

Taylor Masket
Taylor Masket
May 31, 2022

Earned is back with another great episode, this time featuring Wall Street wizard Stephanie Wissink, Managing Director at global investment bank Jefferies. 

We jump headfirst into this episode with Stephanie answering all of our burning questions about the state of the market right now, including: are we entering a recession? And if so, how will that impact consumer behavior, and what will that mean for brands? We explore how companies have responded to market volatility in the past, and Stephanie walks us through the changing state of the economy from pre-pandemic to today.

Next, we unpack the three biggest impacts the pandemic had on consumers and the market, before diving into one of today’s top concerns: inflation. Stephanie shares how COVID-19, supply chain issues, and the war in Ukraine have disrupted the global economy and impacted consumer spending, leaving brands and businesses in an unexpected state of recalibration. We also hear how the market has become increasingly accessible to the average consumer with cryptocurrency and investment apps like Robinhood, before switching gears to the proliferation of social media platforms. Finally, we close the show by discussing the industries and verticals where influencer marketing has had the greatest impact, and Stephanie reveals the retail stocks she believes in.  

We’ve included a couple highlights from the episode below, but be sure to check out the full video above, listen to the episode below, or tune into the podcast on Spotify, Apple Podcasts, or Google Podcasts!

The following interview has been lightly edited for concision.

Are we entering a recession?: Stephanie Wissink on the State of the Market and its Impact on Consumer Behavior

Conor Begley: Right now, the markets are getting a little crazy. I was compiling some numbers and they were surprising to me, even though I knew they were bad. So in the last six months, Amazon is down 39%, Nike -38%, Macy's -46%, Google -25%, Facebook -43%, Target -37%, Lululemon -40%, Nordstrom -35%, LVMH -28%, Revolve -66%, Stitch Fix -71%. I think the DTC brands that have gone to market have really gotten hammered the worst. 

So tell me, based on your understanding of historical downturns—2000 and 2008 being the last two really big ones—are we in one now? If so, how long do you think it will last, and how do you see it impacting the retail and consumer industries over that time?

Stephanie Wissink: Yeah, it's a really good question. It is staggering to see those numbers and realize that the public market has essentially said that Nike is worth 38% less. Those are big haircuts to valuation. I think part of the reason that the cuts are so dramatic is that the market is starting to price in a recession. The market is starting to see signs that the consumer is receding. I am not an economist, I am not going to declare a recession, but when we look at behavioral change, we're seeing the consumers making some discriminate changes in how they're behaving that would suggest that they're a little bit less financially confident about their ability to digest inflation. So whenever that happens in the public market, it's effectively a shock to the assumptions that we all have. All the things we thought were true, we now have to go back and reconsider and rethink. 

What investors tend to do is manage from risk up. So they go and say, “What's the riskiest, lowest level that I could think is even possible, and then work my way back up to what's reasonable?” Right now, we're in a period of everyone trying to assess how bad and how long. I think we had some idea of maybe how bad, but then most recently we got Amazon that reported their earnings, Walmart, Target, Kohl's, and it's been worse than anybody expected, so that's creating an incremental shock. The degree of pressure on these businesses, and the comments that the companies are making about the pressure on the consumer, are more exaggerated than what was expected. 

How long it lasts is also coming into play. Short-cycle recessions tend to last six to eight months. If you look at long-cycle recessions, it can be two to three years. So right now we're in a phase of not knowing how long, and when that happens, everyone again asks, “How much risk do I have exposed right now? How do I mitigate risk?" So there's just a very clear exit of capital from the markets, and that's what's creating these substantial compressions in stock performance. It's scary. It's scary every day to see the level of reaction, and it's not any one thing that's creating the concern, but it's a mountain of things that are building up, that are really challenging things that we thought were certain but that are becoming more uncertain.

Conor Begley: I think one of the things that's been surprising to me as a relative outsider, is that consumer demand is still there for a lot of things. So there's high employment, high demand, right? But we're still seeing these shocks. How do you make sense of that?

Stephanie Wissink: That’s a great observation, Conor. The data points aren't consistently negative. So when you look at some economic measures, they would say, “Well, the consumer balance sheets are healthy, people have been saving over the last couple of years.” The high-end consumer hasn't been spending on services and leisure and travel, and so there's a lot of pent up demand for those kinds of things. And on the low end, we've never seen unemployment levels with this kind of wage rate advancement, so the low end should feel extremely wealthy on a relative basis, and they've got plenty of cash to spend. 

In reality though, what is happening is that even on paper, when it looks like the consumer is healthier, the way the consumer shows up at retail is based on how they feel. Do they feel more financially confident? And if the low-end consumer has wage growth in the double digits, but now inflation is in the double digits for them, they don't feel wealthier. And so they make decisions based on feelings and the psychology of consumerism, more so than the financial algorithm. And the same is happening at the top end, even though the high-end consumer has ample capacity to spend, they're pivoting. They're moving from a goods-heavy economy over the last couple of years into services and leisure, and so there's some motion at the upper end. 

Regardless of how much you make, when it costs you 20-30% more to fill up your car with gas, you're just irritated. So there's a little bit of a psychological bitterness at the upper end and that also affects psychology. So we don't disagree with the economists that on paper—the consumer should be fine—but what we see behaviorally is that when the consumer shows up at retail, they don't feel fine, and that feeling is what's governing their actions right now. 

“We're in recalibration”: Stephanie Wissink on the Economy Pre-Pandemic to Today

Conor Begley: So talk to me about how you've seen retail businesses respond [to economic downturns] in the past. And frankly, we just had possibly an even bigger crisis for the retail industry during COVID, right? So when the markets get volatile, how do you see the retail leaders respond? 

Stephanie Wissink: So I think the best way to think about this is to go chronologically back to pre-pandemic and just remind ourselves that we were in an economic expansion period on the back of the global financial crisis—one of the strongest seven-year cycles of economic expansion globally, but certainly in the U.S. as well. It was really an unprecedented time in terms of consumer access to information, with social media, influencers, content creation, storytelling. Brands were connecting to their consumers in new ways. Many brands were actually taking out old distribution, and inserting new distribution that was directly connected to the consumer—the rise of e-commerce for brands. It really was a very fertile time to build business. And then of course it came into this huge shock. 

The pandemic really had three important factors. The first is that it made everybody digitally fluent in a snap, because you had to be. There was no other way to process your daily activity, work, groceries, your children's events, school, unless you could figure out a way to get connected. So that was big change number one—if you were a late adopter of technology, you ultimately became a quick adopter during that period. 

The second is that the domains of consumption shifted because people were concerned about going into stores—they didn't want to catch COVID. We didn't know anything about this virus, we were wiping down our groceries for the first few weeks thinking that you could get COVID from your groceries. So there was a fear, and it felt like we were going into war times where you bunker, not just hunker, but bunker down. So you have digitization matched with this obsession of hoarding and controlling when things start feeling like they're out of control, and the domains in which that was happening were shifting to online, and some stores were actually closed down completely. 

And then the third factor is that this was a true health crisis. So we started to see very extreme differences between the idea of safety and vulnerability. And it created pretty extreme echo chambers and gaps in consumer and social psychology among wearing masks. Were you a masker or not a masker? Were you a believer in COVID or not a believer? The political establishment, even religious establishment, started getting engaged in this. So if we think about that time, there was a lot of change in how consumers behaved and thought, but then the overall social schema in which we underwrote for decades was starting to become challenged. 

So then take us into 2021, which was our big year of recovery, right? Vaccines. As soon as those shots started going into arms, those feet started walking right back into retail stores. For the U.S. economy, the true enjoyment and entertainment of shopping came back into the picture and that surprised everybody last year. And at the same time, some of the social categories started to come back, but not in full. They were still on this sliding scale back to normalcy. But the biggest surprise of 2021: e-commerce slows, stores bounce back. 

And as we've come into this year, now we start to see some of the long duration effects of the crisis: supply chain issues and the globalization effect, right? The fact that we import so much from China and China's in lockdown, and how the entire world economy functions. Then you add in the Ukrainian war and instability in our political climate, in our geopolitical climate, and then it drives this spike in fuel, which again, is an every-week purchase for people. So when you're filling up two cars in those garages with gas, it's psychologically drum-beating on the inflationary conditions. 

So even in just a short duration of time, we've gone from firing on all cylinders, great economic growth, people feeling very confident, to shock, to what felt like a recovery, to the realization that this is not over yet. There are some real structural impacts. And I would just say from this week, because we're real-timing some of these data points, you have Amazon and Walmart and Target, three of the biggest retailers in the U.S., all facing massive inventory overages at the same time, because they underwrote a consumer that no longer exists. That consumer was supposed to be spending like crazy and building out their goods investment, and what has happened is the consumer has locked up, and that's concerning, especially when it all happens at once. And so there are definitely some things to navigate through that weren't on investor radars, and I don't think were on a lot of companies’ radars either. We're in recalibration right now.

You can watch the entire interview here, or listen to the full episode on Spotify, Apple Podcasts, or Google Podcasts. To catch up on our other 50 episodes, featuring leaders from brands like Milk Makeup, Gymshark, Gucci, and Summer Fridays, visit our Earned Podcast page.