COVID-19: Short-Term Opportunity, Long-Term Problem

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To overstate the obvious, in this understated war against COVID-19 we are trying to hide from an enemy we can\’t even see, smell, touch or hear. Therefore, the suggested default solution for survival is to hunker down in our homes and send invisible digital messages, invulnerable to the invader virus, to resupply our needs. Non-metaphorically speaking, online shopping will obviously spike up during the unknown duration of this pandemic. And from a long-term strategic perspective, pre-virus in-store shoppers who are learning the convenience (and relative safety) of online shopping may not return to stores and malls once the CV war is over. This could result in a significant shift in online grocery sales, which currently accounts for a mere three percent of total sales. In context, online electronics sales are about 40 percent of the total and apparel around 30 percent.

Online Crushes

According to predictive retail analytics platform Quantum Metric, total U.S. e-commerce sales experienced a 52 percent growth lift during the fifth to eighth weeks of 2020 (the time period when the virus began rapidly spreading outside of Asia), compared to the same weeks of 2019. The conversion rates rose 8.8 percent during the same period. Also, a recent consumer survey from First Insight indicates that as a result of the coronavirus, 21 percent of respondents say they are shopping more frequently online. Wedbush Securities Analysts noted that more than one-third of U.S. adults are shopping less at stores and expect the number will rise to over 50 percent. Wedbush along with Morgan Stanley does not believe that e-commerce will fully mitigate the declines in physical store shopping.

[callout]In switching from in-store shopping to online, the potential opportunity is overshadowed by an inevitable conundrum. The higher cost of operating online, including logistics, distribution and delivery/returns has been squeezing the bottom lines of all retailers including Amazon.[/callout]

While this measured spike may not be purely due to indulgence shopping from boredom in home isolation, some of it is stockpiling and buying goods that are out of stock in their local stores. Consumers are purchasing extra quantities of virus-related necessities such as hand sanitizers, bleach, bottled water, toilet paper, canned foods, etc. The convenience of ordering from home, over time, will likely drive a major shift in shopping behavior, particularly among many consumers, who pre-virus, were primarily in-store shoppers.

Challenges Transformed to Opportunities

So, the relatively good news at the beginning of this viral war is the spike in sales of certain product categories along with the overall increase in online sales. The questionable news is whether the rise of e-commerce sales will more than offset the sales shift from the stores to online. Furthermore, the increase in online sales requires an increase in online shopping services and support. The surge in online demand is placing an enormous stress on delivery services to keep up. For example, Amazon Prime Now has notified their shoppers that delivery times may be limited in certain areas, perhaps delaying delivery up to 24 hours instead of the normal one to two hours.

It\’s also spurring some creative thinking. Mindful of the human social distancing rule, Instacart launched a \”Leave at My Door Delivery\” option. When a shopper orders online they can specify that the item be left at their door. When Instacart does so, it takes a photo of the groceries on the doorstep and sends it in real-time to the shopper, alerting them to its arrival. And as online grocery shopping increases, there will also be an uptick in business for other third-party delivery services such as Shipt, DoorDash and Postmates. Grocers will likely promote their \”click and collect\” capabilities as well.

If a major increase of shopping online for groceries sticks following the virus war, grocers should invest in ramping up their services and online marketing efforts to retain their online customers. A big requirement in accomplishing this is mastering AI to proactively personalize those efforts. AI will also lower the costs of e-commerce, which are much higher than operating physical stores. It will facilitate more efficient and effective supply chain operations from sourcing to consumption and a simultaneous cost reduction through inventory optimization.

Another strategy to leverage increased online shopping is to create dedicated landing pages to present cross-category solutions, such as bundled pantry staples. There is also an opportunity to promote generic products and brand names that may not be as popular as well-known national brands.

The Ultimate Conundrum

Having stated the obvious switch from in-store shopping to online caused by the virus, the potential opportunity is overshadowed by an inevitable conundrum. The higher cost of operating online, including logistics, distribution and delivery/returns (now broadly free to shoppers) has been squeezing the bottom lines of all retailers, including Amazon, even before the virus. For example, when Amazon chooses to release earnings results after 20-some years of not making any profits while they grew big fast, they reveal that the majority of their top and bottom line is contributed by Amazon Web Services. So, while I suggest retailers should increase their online marketing efforts, I\’m mindful that this will just lead to lower margins. Furthermore, it is doubtful that any amount of increased topline revenues gained through e-commerce will offset slim and declining profit margins.

At the end of the day (in this case the end of COVID-19), the only brands and retailers who will have successfully struggled through what in my opinion will be the greatest global recession in modern history, will be those who have very deep pockets and little debt.

The last word: my economic prediction is based on the fact that this is a consumer-driven meltdown, not a financial-driven recession (i.e., the mortgage-backed insanity of 2008), which was bailed out by fire-hosing billions of dollars to steady the ship. This time we\’re facing a simple economic collapse due to the fact that no amount of money, even sent directly to consumers, will urge them to go to the store, mall, restaurant, ball games and on and on. And since 70 percent of our GDP is driven by consumers…well, you get the picture.

But, don\’t give up. We are an ingenious, solution-driven species. Some of our most creative thinking and novel innovations have come as a necessary outcome of challenging circumstances. My bet is on the retail leaders who get ahead of the ebb of this pandemic to implement systemic changes to reinvent and reinvigorate the retail profession. Innovation is a team sport, and it\’s going to take a holistic, inventive approach to exit this crisis stronger and more sustainable.

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