Coronavirus Shakes Up and Reshapes the Retail Ecosystem

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The pandemic that took the U.S. retail market by storm in March changed how consumers shop and will have long-term effects on the retail industry. Some of these behavioral shifts were a long time coming for an industry that is not known to be agile and nimble. The industry had been put on notice for some time that the real CEO in charge is the consumer, and the nimbleness of the industry will be thoroughly tested through the holiday and into the next few years. With the benefit of hindsight, let\’s take a look at how retail has been reshaped over the past seven months.

[callout]The pandemic literally leveled the playing field for retail. The strong got stronger, and the smaller more vulnerable brands fell by the wayside. One could argue that this is a natural selection shedding of too many stores selling too much stuff. [/callout]

Performance Audit

The season-to-date retail sales through September 2020 are up .9 percent (excluding automotive and gasoline), however the results show a sawtooth performance among categories. Grocery stores are up 13.2 percent, discount stores and warehouse clubs are up 7.8 percent, home Improvement is up 14.1 percent and digital is up 22.1 percent. Apparel and accessories stores were hit hardest, down almost 36 percent, and department stores are down 19.4 percent. While women\’s apparel has improved since August, shoe stores and men\’s clothing continue to struggle dropping over 40 percent in both categories.

 

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Essential Retailers Excelled

The impact of Covid-19 can be broken into two major categories: essential and nonessential retailers. Essential retailers had to adapt quickly to new in-store safety standards including occupancy limitations, social distancing protocols and physical changes to customer flow inside the stores — including aisles and checkout areas. Retailers that had already invested in the IT infrastructure to support an integrated system across the physical stores and online platforms did well in accommodating the new shopping preferences of curbside and pick-up in store. Target and Walmart experienced digital sales growth in the first half of the year ranging from 74 percent to 195 percent with the average ticket rising between 13 percent to 27 percent. Grocery, which typically has between 2 percent to 4 percent of sales attributed to digital, experienced significant growth. Kroger increased digital sales by 127 percent in the second quarter and 92 percent in the first quarter.

The shift to online shopping, curbside and pick-up in-store put further stress on the supply chain, logistics and fulfillment. The consumer shift in category demand also impacted retailers causing supply chain congestion, out-of-stocks and low inventory. Further challenging retailers was the spike in online demand creating additional labor requirements in warehouses and fulfillment centers to process and fill orders. Retailers had to achieve a balance between following new protocols to keep workers safe and fulfilling the influx of orders. Many distribution centers were not able to function at full capacity. Prior investments in warehouse robotics and automation paid off for some brands, and in the aftermath of the pandemic future investments in this technology will accelerate. AI will continue to grow as a tool to create higher fulfillment efficiencies across retailers and brands in the areas of picking, packing, and shipping stock (both to stores and to customers).

Nonessential Retailers at Risk

Nonessential retailers had store closures from mid-March through mid-May resulting in an immediate revenue stop for a large portion of the business. Physical retail represents about 85 percent of sales for most retailers although the range can vary greatly by category. Even with the shift to online shopping, the amount of revenue generated from online sales did not make up for the sales lost from brick-and-mortar stores. The immediate focus for nonessential retailers was cash flow and reducing cash burn rate. Inventory position was also problematic since stores had unsold spring inventory, late spring/early summer products en route to stores and goods in production for orders placed six months earlier. Inventory position for fashion brands was more challenging with the short lifespan of products and consumer demand that shifted immediately over to essential products. Online commerce helped lessen the financial burden of many closed stores but nonessential fashion apparel and accessories retailers struggled throughout the first half of the year.

Digital Retailers on the Rise

Digital retailers were significantly impacted by the shift from physical retail to online retail, particularly in keeping up the pace with orders. Digital brands also experienced major shifts in category demand making it difficult to plan inventory and monitor safe working conditions for warehouse and distribution staff. Other initial challenges were fulfillment and last-mile delivery, plus keeping up with the sudden increased demand for certain products during the early part of the pandemic.

Online surged: Amazon reported sales growth of 26 percent and 40 percent for the first and second quarters respectively. With more people at home, demand for entertainment streaming services grew substantially — subscriptions increased 30 percent in the period from April through June. While many apparel and accessories retailers were struggling, online millennial and Gen Z favorite ASOS had an increase in sales of 10 percent and a social media engagement increase of over 90 percent.

Winners and Losers

What the winners shared during the pandemic: strong financial performance coming out of 2019, significant investments in IT infrastructure and integration, a loyal customer base, diversified business models and a strong customer ecosystem. The stalwarts were able to pivot quickly and respond to changing customer demands, convert to a digital-first strategy, adeptly resize inventories and significantly reduce cash burn or fund high demand areas of the business.

The losers (companies that fell behind or are continuing to struggle) all had an unfavorable financial position either through heavy debt or low cash coming into 2020, an unclear brand positioning, a miss in the target market alignment, insufficient investment in digital prior to the pandemic and issues with legacy leadership.

Acceleration

As widely observed, the pandemic accelerated emerging changes in consumer behavior. Ecommerce, curbside and in-store pick-up, and expedited shipping will continue to grow. Self-checkouts, contactless commerce (including delivery of goods) and mobile wallet technologies will expand across more retailers in response to customer demand for a frictionless, contactless and digitized experience. The use of mobile apps will accelerate in-store wayfinding, payments and two-way communications between customers and brands.

Business models will evolve with the rise of dimensional commerce, a more agile and robust supply chain, and a frictionless shopper journey. Less retail square footage and fewer products being manufactured will result in positive environmental impacts.

However, the industry will find itself in a have/have-not dichotomy. Ubiquitous digitization has its downside as many small businesses will struggle to keep pace with technology. The gap between big-box retailers and small specialty stores will widen and the list of bankruptcies will continue to grow into 2021.

The pandemic literally leveled the playing field for retail. The strong got stronger, and the smaller more vulnerable brands fell by the wayside. One could argue that this is a natural selection shedding of too many stores selling too much stuff. American retailers are a creative bunch, and optimistically we can look forward to seeing what rises out of the ashes of CV-19 into a more relevant, better managed, more environmentally sensitive and consumer-responsive retail ecosystem.

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