The Covid-19 Shakeout
Covid-19 Shakeout - Warren Shoulberg - The Robin Report

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They say retailing is a zero-sum game. For every winner there is a loser. For every Amazon there is a Sears. It\’s all about market share and at no time will that be more accurate than in the period we\’re entering now as consumers return to retail stores and start shopping again.

The survival game will play out in many consumer product sectors but for the home furnishings business it will be more pronounced than most. Entire channels will prosper and within them specific retailers will gain share while for others, the losses will be not only game-changers but possibly game enders.

We\’ve already seen the first impact of how the business of retailing home furnishings products like furniture, housewares, home textiles and home décor will change as a result of the coronavirus pandemic. Big players in the field, like Pier 1, JC Penney and Tuesday Morning, have all filed for bankruptcy — with Pier 1 going straight to liquidation. Within the trade, there is informed speculation that several others could follow, further changing the dynamics of the business.

Even as consumers appear poised to spend more of their incomes on their homes as they move away from traveling, dining out and other experiences, total sales of home furnishings products may not move significantly. It\’s why the winners will be all about gaining at the expense of the losers.

The Winners

1. The Big Two Mass Merchants

The biggest physical retailing beneficiaries of the pandemic will be the two biggest general merchandise retailers in the country: Walmart and Target. Each was able to remain open selling food and household essentials but also getting unexpectedly robust crossover traffic to the home and apparel sides of the store. Just as importantly, each stepped up its game on the online side of the business, showing triple digit gains in some cases and getting so much better at deliveries and curbside pick-ups. Other than some regional players there is no more real competition in the discount store channel and Walmart and Target are taking share from other sectors, notably department stores like Macy\’s, specialty chains like Bed Bath & Beyond and mid-market hybrids like Kohl\’s. Target has the added advantage of being in the best position to capture the business Pier 1 used to get.

2. E-Com Powerhouses

Everyone knows Amazon is going to end up picking up container loads of business when this is all through. But specifically in home, Wayfair showed strong double-digit gains in its most recent quarter and suppliers in the field say second-tier home sellers like Overstock and Big Lots also picked up business. Overall, the online share of the home business should jump from its current 15-20 percent level (depending on the specific product category) to as much as 30 to 35 percent. Omnichannel operations like Williams Sonoma, RH and Crate & Barrel, which already are about half e-com, will tip those ratios even further.

3. Improving Home Improvement

Another sector that remained open during the pandemic, the do-it-yourself retailers including the big two – Home Depot and Lowe\’s – also fared better than retailing in general and stand poised to take advantage of the increased overall spending on home. So, it will be their remodeling and replacement business for sure — but each of these two is also focusing more attention on home décor and will continue to be the right retailers in the right place at the right time.

4. Off-Pricers

With as much as $200 billion worth of merchandise stuck in the supply chain pipeline overall, retailers like the TJX Brands/TJMaxx/Marshalls, Home Goods, Ross and Burlington will be having a field day shopping for goods for their stores. So too will their customers. The only ones not thrilled with all of this are the suppliers who will be suffering severe margin sticker shock. The Tuesday Morning bankruptcy will only drive more business to the bigger players in the space. The bargains will be amazing but read on for the negative impact of another bargain the off-price stores made with themselves on selling strategies.

5. Deep Discounters

With 40 million Americans unemployed, the pursuit of low priced goods is going to be unprecedented, far exceeding what we saw after the Great Recession. But like that crisis a decade ago, once the economy starts to improve and consumers have more money to spend, some percentage of them are likely to continue shopping at dollar stores and deep discounters like Ollie\’s. Again, the problem won\’t be access to goods for these stores, it will be finding the room to stock it all.

[callout]Even as consumers appear poised to spend more of their incomes on their homes as they move away from traveling, dining out and other experiences, total sales of home furnishings products may not move significantly. It’s why the winners will be all about gaining at the expense of the losers.[/callout]

6. Grocery Gainers

General merchandise has generally been an afterthought for most supermarket retailers, but with their newfound strength they may start to look at home goods as welcome additions to both their mixes and their margins. Kroger, which through its Fred Meyer unit has been as far along on this path as anybody, is likely to continue to lead the way — but look for regional chains like HEB and Wegmans to step up their home offerings as well.

7. Kitchen and Cooking

This one cuts across many sectors and channels, but stores selling anything to do with cooking and eating at home have already seen strong gains and those are likely to continue – though perhaps at a slower pace – for the immediate future. Yes, people will start to slowly return to restaurants, but as a share of meals, home cooking is going to gain for the foreseeable future. Witness the renaissance – brought back from the dead is more like it – of Blue Apron and other meal prep suppliers. We saw this home cooking redux after the Great Recession but this will be even more so.

The Losers

1. Department Stores…Sigh

Don\’t you wish you could read one list of retailers doing well and see even one department store on it… leading it? We bet Jeff Gennette does but his Macy\’s operation is the bellwether in this channel and they will be significantly smaller and less of a player going forward. Chances are the other two players in the channel – Dillard\’s and Belk – aren\’t going to fare any better, with the latter particularly vulnerable to the private equity breezes. All three are major sellers of home furnishings – particularly home textiles and housewares – and with fewer locations they will obviously be selling less. Macy\’s has the built-in advantage of a well-developed online business and its burgeoning Backstage off-price unit, which is more than you can say for its two competitors.

2. Penney-less

Some would group JC Penney in the department store camp but it has morphed into something else…and that\’s part of its problem. Without a clearly defined merchandising position or target customer, Penney was struggling before the pandemic and the fall into chapter 11 bankruptcy will only serve to speed up its eventual landing spot in the retail hierarchy. With 240 fewer stores and the ones left sometimes in weak geographical positions, Penney will suffer. Its home business, once a cornerstone of the entire company but more recently downplayed by successive managements, has to be rebuilt. However, time and financial resources are not assets a post-bankruptcy Penney will have its share of.

3. Kohl\’s In the Middle

Stuck in the middle of a consumer marketplace increasingly being polarized to the two extremes (same spot as Penney), Kohl\’s will need to do absolutely everything perfectly to stay successful. Its soft home business has been the foundation of the non-apparel side of the store but it remains a mash-up of private label and captured brands, often second-tier names on both fronts. It does have a fairly well-developed e-com business and it will tell you its off-mall locations are an asset (and they are) but it may not be enough when you\’re in the wrong spot in the marketplace.

4. Off-Pricers…again

As strong as off-price retailers are in physical retailing they are every bit as weak online. The TJX brands are barely in e-com but that still puts them ahead of Ross and Burlington which are virtually nonexistent…literally. All these retailers say they don\’t need online sales to be successful. All of these retailers are wrong. Digital sales will be between a quarter and a third of the home business within 12 months. No business can afford to ignore that large a share of potential business. If Home Goods doesn\’t get its online act together, Wayfair, Target and to some extent Bed Bath & Beyond will eat their e-lunch every day.

The Wild Cards

1. Bed Bath & Beyond

Which bucket this iconic retailer finds itself in over the next 12 to 36 months is anybody\’s guess. It certainly has the balance sheet, physical assets, relationship with its customers and, now, its management group in place to be among the winners. But there is so much work to do to fix problems that have been years in the making that it can\’t be said with any degree of certainty that they won\’t end up on the other side of the list. They need to move fast, strategically and aggressively to get back into the home ballgame. If they don\’t, the results won\’t be pretty.

2. Everyone Else

Yes, it\’s a bit of a cop-out but all the other players in the home space – furniture chains like Ashley and Rooms To Go, their independent furniture store brethren, the TV shopping networks, second-tier regional chains, specialty independents and the countless – maybe endless – e-commerce niche players constitute an entire deck of wild cards. While it\’s safe to say the big home furnishings retailers will get bigger, some of the smaller ones will endure too. The question, of course, is which ones.
It\’s why sorting out the winners and losers in the home furnishings business is at once obvious…and then again incredibly difficult.

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