An All-Digital Retail Space: Lessons from COVID-19
Date August 28, 2020
On March 19, 2020, California Governor Gavin Newsom ordered the first COVID-19-related statewide mandatory restrictions in the United States, stating that residents in non-essential roles were not allowed to leave home except to obtain essential items and services such as food, prescriptions, and medical care. New York followed the next day, and by April 4 the majority of states had enacted similar mandates . As retail store activity came to a grinding halt amid the restrictions and closures, consumers - some of whom had not previously shopped online - began to shift their purchasing to e-commerce. The reallocation of consumer demand has not been distributed equally among close competitors and has not translated on a one-to-one basis from brick-and-mortar retail to e-commerce channels. The current conditions, although expected to be temporary, have given us a glimpse at how store performance would look in the absence of in-store consumers.
In this piece, Gordon Brothers reports the results of its analysis of how consumers have moved from physical retail to online shopping since the spring of 2020. The study examined the quarterly earnings results of 24 publicly traded companies with at least 15 days of COVID-related store closures . This sample set included multi-brand retailers and single-brand retailers (including retail brand holding companies). Sales growth in the second fiscal quarter of 2020 was compared to the same period in 2019 for all companies to pull out trends for retailers in a nearly all-digital sales environment . Data referenced includes information sourced from each company’s quarterly reporting for quarters ending from March 31, 2020, through May 31, 2020.
Digitally Native Retailers Outperformed
- As a whole, top-line net sales - including wholesale, brick-and-mortar retail, e-commerce and licensing - fell by an average of 24.8 percent year-over-year across the surveyed companies. Unsurprisingly, retailers with online-only sales channels outperformed. Single-brand retailers declined by an average of 21.3 percent, versus 29.6 percent for multibrand retailers. In stark contrast, net sales for all-digital retailers Peloton Interactive Inc. and Revolve Group Inc. increased by 66 percent and 6.0 percent, respectively. Stitch Fix, an online-only subscription retailer, declined by 9.0 percent due in part to fulfillment center closures as part of state-ordered mandates to manage the spread of COVID-19. The relative muted revenue declines or even revenue growth at online-only businesses highlights the advantages of an online-only business model during a pandemic or in other environments in which retail businesses are ordered to close physical stores.
- Among non-digital-only retailers, companies with a significant existing online presence have been more resilient than those with less advanced digital platforms.
Conversion Rates Were Encouraging
- In a pre-COVID-19 world, there was a general consensus that consumer shopping preferences were shifting towards e-commerce. The ongoing pandemic has significantly accelerated this shift. Of the 24 earnings reports surveyed, 23 reported e-commerce sales separate from store sales. On average, e-commerce net sales for the quarter grew 42.6 percent compared to the same period in 2019. Of the companies surveyed that provided explicit nominal sales figures by channel, Foot Locker Inc., L Brands Inc., and Lululemon Athletica Inc., converted 4.4, 7.9, and 57.7 percent, respectively, of lost sales to e-commerce sales. The significant conversion rate at Lululemon is representative of the continued demand for athleisure products and the brand’s resiliency through the crisis.
In general, e-commerce net sales have grown significantly as a share of total net sales. As of the most recent earnings reports, e-commerce represented an average of 40.9 percent of total net sales for the quarter, which is a significant increase from the 23.0 percent average in 2019. These trends could prove to be challenging for brick-and-mortar retailers, as consumers become accustomed to online shopping and remain concerned with the health hazards of in-person shopping.
Multi-Brand Retailers Outperformed Single-Brand
- Net e-commerce sales at multi-brand retailers increased by an average of 53.0 percent as compared to 34.6 percent for single-brand retailers, when comparing 2020 versus 2019 for all periods. However, for single-brand retailers, e-commerce sales remained solid in sectors that remained in high demand during the pandemic. For example, sporting goods and athletic footwear retailers Hibbett Sports and Dick’s Sporting Goods more than doubled versus 2019. This may correlate with increased demand for exercise equipment and athletic sportswear due to gym closures and work-from home orders. NPD Group noted a 130-percent increase in fitness equipment sales and triple-digit growth for multiple categories of sporting equipment in the month of March 2020.
Wholesale Channels Were Also Impacted
The closure of physical retail stores has negatively affected not only owned-store performance, but also the wholesale channel. On average, wholesale sales declined by 32.0 percent. Notably, wholesale sales at Levi Strauss & Co., Nike Inc., Guess? Inc. and PVH Corp. declined by 62.9 percent, 50.0 percent, 44.0 percent, and 41.0 percent, respectively. This is a result of canceled orders from wholesale customers that had to close their doors due to the pandemic. With regards to the fee income from licensing and franchising, brands saw an average decline in royalty income of 26.9 percent.
The COVID-19 pandemic has accelerated the shift to e-commerce and will likely bring the permanent closure of thousands of physical stores nationwide. However, the potential exists for several retailers to become multipurposed at both stores and fulfillment centers. For example, some businesses have transformed their stores to micro-fulfillment centers that ship locally to customers or offer curbside pickup. Whether these trends continue into the next quarter is expected to be highly dependent on the success of containing the virus and making consumers feel comfortable with in-person shopping once again. In the meantime, the current crisis reveals that the conversion from brick-and-mortar retail to e-commerce will not be a simple or immediate one-to-one conversion, as different segments of the retail industry will fare better in transitioning to digital-first operations.