COVID-19: The Ails of Retail

Article

Q&A with Liz Sarhaddi-Blue, Managing Director, Retail, and Tim Shilling, Managing Director, Retail

Date April 29, 2020

With an increasing amount of European countries and US states reopening their economies, local governments all over the world are allowing non-essential retailers to open their stores in a limited capacity and with health and safety stipulations. Gordon Brothers has been looking closely at these developments and consulting with our industry experts about what store openings could and should look like. We talked to Liz Sarhaddi-Blue and Timothy Shilling, Managing Directors in our Retail division, about the struggles of non-essential retailers, strategies to help them survive the short term, and long-term strategies for stores that are reopening.

Q.: At this current point in the US’ response to the pandemic, foot traffic has been reduced to zero for none essential retailers and significantly reduced for many essential retailers because of delivery, BOPUS, and curbside delivery. How do you do a retail appraisal in this environment and what does that look like?

By and large, we aren’t issuing retail appraisals right now. We are telling our Asset Based Lending clients to reappraise shortly after stores are able to reopen, which won’t be easy due to the regional roll out of the reopen. The only appraisals we are issuing right now are for pure play ecommerce companies or for retailers who generate a large portion of their revenue online.

Q.: Clearly most retail is in a freeze right now with only uncertainty in the immediate future. Are there deals out there that you’re involved with currently? What do those entail right now?

With the exception of one essential retailer, all of our deals have either been wound down or been put into hibernation. Several deals that were mid-stream will hopefully relaunch sometime in June. We will be analyzing the results from the first days and weeks of those liquidations very closely. Learning from those will be critical in helping us understand the behavior of the consumer in the new norm and level set our expectations on things like multipliers and gross recoveries.

Q.: It’s no secret that ecommerce retailers and omnichannel retailers have been taking up more and more market share. Do you foresee the effects of this pandemic creating an even larger and possibly unprecedented divide between retailers with robust and expanding ecommerce and BOPUS platforms and those without?

Yes, absolutely. Pure play ecommerce retailers and those retailers with a robust omnichannel infrastructure will continue to see an increase in online comparable sales even after stores re-open. This will be especially true for retailers who offer sought after services such as curbside pick-up and delivery coupled with a sophisticated digital supply strategy to meet increased demands. This includes ample warehouse space and a proven fulfillment strategy. Returns will be a road block if retailers do not meet expectations of customers who simply expect that option. This leads to a much larger issue of the sanitation of returned goods and the CDC providing guidelines on how they should be handled. Topics such as returned item disclosures, final sale mandates, and isolating returns for a specified period of time are all being debated throughout the industry. Apparel is certainly the heaviest impacted in this scenario but it is important to note that home improvement retailers have done relatively well, and that is expected to continue. It is also anticipated that discount retailers such as TJX and Burlington Coat Factory will see significant spikes once stores re-open, as they will opportunistically purchase spring apparel that other retailers did not sell.

Q.: What about long term? Can retailers do anything to better position themselves for when the worst of this outbreak is over and more retailers are allowed to reopen? What are some of the challenges they’ll be faced with?

They should be preparing for the new norm. Proper social distancing and safety standards may be mandatory based upon certain state reopen guidelines. Retailers should be planning now to outfit their stores with register shields, floor markings, and one-way isles. Retailers should also consider acquiring masks and gloves for employees. They should be trying to make their store environment as safe as possible for both employees and customers.

Given most retailers have not paid rent during this time, they will be forced into a dialogue with landlords. Smart retailers should use this time to evaluate and rationalize their store base or negotiate rent concessions for stores that are on the margin. This is also a great time to assess their ecommerce platforms to ensure they are maximizing that channel of distribution.

Lastly, they should be decisive on what to do with out of season product. Some who don’t have an immediate cash-flow need may pack it away until next year, while others will be forced to liquidate seasonal inventory to ensure they have enough cash to buy fall product.

Q.: When do you think consumer confidence will return?

Based on the surge in unemployment and the fear of returning to physical stores, consumer confidence will struggle throughout quarters two and three. We will see consumers buy necessities only. But COVID-19 has introduced a new series of considerations that must be rectified in order to ease the health and safety concerns that are weighing on the minds of us all. Is the retailer following the CDC’s mandated protocols (which have yet to be announced)? In the apparel sector, retailers must implement protocols for fitting rooms and returns. And stores have to reconsider the entire customer experience. For example, do stores require a re-design that includes more products in stock rooms and the transition to a showroom model? Or are digital fitting rooms and showrooms a safer approach to getting consumers shopping again? Whatever the approach, retailers must prove that a shopping experience is safe before consumers will feel 100% confident again. There is one exception, however: holiday. In just six months we will begin to see consumers begin their holiday shopping, and it is our belief that this will commensurate the return of consumer confidence in an astronomical way.