Key takeaways
- A recession doesn’t automatically mean you should slash inventory or spending. The best approach is to identify which products, services, and tools truly add value and cut only the things your business can live without.
- Research on companies that performed well during past recessions found six common traits: building cash reserves, creating margin headroom, acting aggressively when opportunities arise, entering new markets, reshaping their value proposition, and maintaining customer service.
- Recession-resistant companies focus on staying adaptable rather than simply cutting costs. Strategic investments can sometimes produce better results than defensive cost-cutting.
- There is no one-size-fits-all recession strategy. Staying informed about both your business performance and market conditions helps you make better inventory and operational decisions.
Feeling a little nervous about your business’s future? You’re not alone. The data suggest that overall confidence amongst small business owners was below 50% in May and June 2026. But it’s not all bad news. Even with talks of a potential looming recession, there are steps businesses can take to not only weather the storm but prosper.
Today, we’re taking a look at how businesses might be affected, including what they’re doing now and how to make money during a recession with proper inventory control.
How often does a recession happen?
We hear the terms recession, downturn, and shrinkage a lot, but there is an important difference between the three. So, when does a recession happen? As Santander Bank explains:
“The economy goes through cycles of highs and lows, much like a wave in the ocean…. When it goes down, it’s called “economic contraction” (or “downturn”) …. If the economy shrinks for two consecutive quarters, it is said to have gone into recession.”
However, it’s not always that simple. The US National Bureau of Economic Research explains that there are a range of factors they consider when deciding if the country is in a recession. These include employment as measured by the household survey, real personal income minus government transfers, and wholesale-retail sales adjusted for price changes, amongst others.
What’s more, economists usually determine that a recession has started once they have all the necessary available data for a period. So, we find out we’re in a recession once it has already begun.
High inflation is sometimes a predictor of recession. The World Economic Forum explains that “since the 1950s, every time inflation has exceeded 4% and unemployment has been below 5%, the U.S. economy has gone into a recession within two years”. Today, those figures are 4.25% and 4.3% respectively.
How does inflation impact inventory?
Inflation remains a major challenge for businesses because it directly affects the cost of inventory, transportation, labor, and storage. Even though inflation rates have moderated from the highs seen in 2022, prices across many industries remain significantly higher than they were just a few years ago.
For inventory managers, inflation creates two key challenges. First, rising costs can squeeze profit margins if selling prices don’t keep pace with supplier price increases. Second, fluctuating costs make demand forecasting and purchasing decisions more difficult, especially when demand is uncertain.
At the same time, consumer spending patterns continue to shift. As households adjust their budgets, demand can move unexpectedly between product categories, leaving some businesses with excess inventory while others struggle to keep popular items in stock. Changes in consumer behavior, economic conditions, and industry trends can all influence what customers buy and when they buy it.
Supply chains have become more stable than they were during the pandemic, but disruptions can still occur due to geopolitical events, transportation issues, extreme weather, or supplier challenges. Businesses that lack visibility into their inventory and supplier networks may find it harder to react when conditions change.
The good news is that businesses don’t need to predict every market shift. By regularly reviewing inventory levels, monitoring sales trends, and maintaining accurate inventory records, you can make more informed purchasing decisions and stay flexible as economic conditions evolve.
Should I cut back on inventory during a recession?
Unfortunately, there is no easy answer. Cutting inventory can help protect cash flow, reduce carrying costs, and lower the risk of dead stock. But cutting too aggressively can create stockouts, delayed orders, and missed sales, especially if suppliers become less reliable.
That’s why many businesses are taking a more balanced approach. Instead of simply buying less across the board, they’re being more selective about what they stock. For instance, they might increase inventory levels for fast-moving, high-margin, and essential items while decreasing them for slower-moving or seasonal products .
So, should you cut back? Start by looking at your actual sales data, lead times, supplier reliability, and current inventory levels. The goal is to achieve a perfect balance of inventory so that you’re never missing shipments, but also not storing large quantities of products for too long.
Think of it this way: during a recession, inventory becomes both a risk and a safety net. Too much can tie up cash. Too little can cost you sales.
Advantages of reducing stock levels
In a downturn, inventories can build up as sales slow. Customers may have less money to spend on nonessential items, while prices also increase. Holding large amounts of excess inventory can cause problems going into a recession.
Carrying inventory costs money that cannot be invested in other areas and doesn’t leave room for flexibility in a changing market.
Advantages of raising stock levels
Sometimes, having extra stock can help your business grow, as Forbes explains. Imagine one company has supplier issues and can’t fulfill orders. Customers will likely turn to a competitor who can. Their extra stock can now be sold, cementing new business relationships.
Finding the balance
Order too much, and you could be faced with excess inventory that’s impossible to shift. Order too little, and you could be faced with stockouts. Whichever tactic you settle on, make sure to plan ahead, monitor the market, and do your research.
Making money during a recession
Although it presents a challenge, making money during a recession or downturn isn’t impossible. Of course, each recession will look different, and retail is constantly evolving. But learning from the past can help us plan for the future.
Towards the end of The Great Recession (2007-2009) the Harvard Business Review published an article with five rules for retailing in a recession. Rule two of the article is called: Close the Needs-Offer Gap. In short, this is about getting more customers to shop at your store by offering them what they want.
This sounds simple, but it’s easy to miss the mark. Businesses are often inclined to base sales and inventory strategies on what sells in their stores, not what sells in competitors’ stores. Perhaps they analyze historical data or track what’s selling day to day.
However, this shows you what is selling, not what could be selling. Understanding the needs-offer gap means working out what your potential customers are getting elsewhere in terms of products, services, and experiences, and then offering what they’re looking for in your store. Today, that store might be physical or online.
What does a recession-resilient company look like?
Recent McKinsey research looked at companies that fared well in the last recession: what did they do to survive and how did they do it?
They found that, before the downturn, resilient retailers took important steps that meant they could stay adaptable. The six actions that set them apart were:
- Building cash reserves
- Creating margin headroom
- Going on the offensive
- Moving into new markets
- Reshaping the value proposition.
- Maintaining customer service
Sometimes, this meant taking unexpected but decisive action. For example, T.J. Maxx decided to increase advertising spending by 15% to reach customers outside its core. By 2009, 75% of its customers had not shopped there the year before.
While you might think it makes sense to cut back on spending and inventory during a recession it may not always be the smart decision. It’s all about knowing what adds the most value to your business and scrapping the things you can live without.
The importance of staying up to date
However you choose to weather the downturn, there is no one-size-fits-all approach. Staying on top of what’s happening in your business and the current market will help you make the right decisions.
For more information on inventory management methods, have a look at our latest articles.
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