What’s in Store for Post-COVID-19 Retail?
Date June 18, 2020
On June 5, 2020, the May 2020 jobs report was published, surprising markets with an increase in non-farm payrolls and a drop in the unemployment rate from April. Counter to economists’ expectations of a rate as high as 20 percent, the May rate showed an unexpected improvement to 13.3 percent after hitting the highest level in Bureau of Labor Statistics (BLS) monthly survey history of 14.7 percent in April. The caveat, however, was in the explanation of how the rate was calculated. In a statement, the BLS Commissioner noted, “If the workers who were recorded as employed but absent from work due to ‘other reasons’ (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis).” This meant that the actual unemployment rate was around 16.3 percent, indicating it went up rather than down for the period.
The reality of these unprecedented numbers is that the global economy has entered a recession brought on by the effects of the coronavirus pandemic. To gain perspective on the severity and extent of the virus’ effect on the United States, the U.S. Labor Department announced on May 21, 2020, that one in four American workers had filed for jobless benefits over the previous 10 weeks. To put that into context, unemployment claims during the coronavirus crisis have already exceeded the 37 million claims made over the entire 18 months of the Great Recession.
Although the outlook seemed less dire based on the improved unemployment rates for the month of May, the fact remains that over 40 million Americans remain out of work and consumer confidence has suffered. According to global think tank, The Conference Board, the U.S. Consumer Confidence Index fell to 86.9 in April 2020, the score’s lowest level in six years and a more than 30-point drop from March, but then stabilized in May 2020.
The stark increase in unemployment levels since March coupled with a decrease in discretionary income means consumer confidence will depend on a retailer’s ability to mitigate a number of factors:
- Price Consciousness
Retailers will have seasonal or slow-moving inventory that will need to either be offloaded or sold at higher discounts. There are two drivers for consumer confidence: unemployment and discretionary income level. Consumers will likely be incentivized to purchase highly discounted items as they continue to keep a watchful eye on their wallets, especially those who are collecting unemployment benefits or are living off reduced incomes. Based on the May 2020 Consumer Confidence Survey® of U.S. consumers conducted by The Conference Board, although consumer concerns about financial prospects persist, they are slightly more optimistic about the short-term outlook. The survey found that expectations of improved business conditions over the next six months increased from 39.8 percent to 43.3 percent, while expectations of worsened conditions decreased from 25.1 percent to 21.4 percent. Off-price retail chains will see the most benefit from value-driven consumers. For example, TJX, the owner of T.J. Maxx, Marshalls, and HomeGoods, reported a 52-percent decrease in sales for the first quarter of 2020. But according to TJX CEO Ernie Herrman, initial re-openings have exhibited very strong sales, which is encouraging for the chain. In addition to the chain reaching its e-commerce capacity limits within a few hours of opening each day, Herrman is confident in the company’s ability to offer consumers discounted merchandise because of sharp increases in excess inventory from spring and summer order cancellations or from other retailers looking for liquidity.
- Safety Concerns
Even price-conscious consumers will carefully choose which retailers to patronize according to the level of safety and protection exhibited. Does a retailer require employees and shoppers to wear masks and/or gloves? Does a retailer have protective shields separating tellers and customers? Are social distancing initiatives in place, such as markings for queues and single direction aisles? Consumers will look to shop more often and in larger numbers at retailers they deem safe.
Preliminary trends emerging in the various jurisdictions that have started to reopen show that consumers are less likely to use public transportation and are therefore shopping closer to home. This trend was evident in food shopping pre-pandemic, with eco-conscious shoppers trying to reduce their environmental footprint; data analytics and consulting company GlobalData reported that 41% of global consumers are often or always influenced by ethical, environmental, or socially responsible factors when choosing food. During the pandemic, the shop-local focus, when coupled with issues in the supply chain and safety, will only become sharper. “Localism” will be important for local retailers and mid-brands, as consumers will not want to travel too far to flagship stores. They will look to their local stores or shopping centers, boosting the local economy and small businesses’ income. At present, local options are limited, but as more states open up their economies, more opportunities will become available.
- Digital Alternatives
Retailers must also consider if their products are competing with digital alternatives. For example, media products will likely continue to be purchased and consumed digitally whether outright or through streaming services, keeping physical sales of movies, music, television, and video games suppressed and exacerbating pre-COVID-19 trends. Stay-at-home orders have led consumers to invest more in technology for their homes. For families forced to stay home, the launch of the Disney+ streaming service could not have been better timed.
Retailers will continue to compete with omni-channel businesses that have extensive and well-established e-commerce options. Amazon continues to gain market share, which is not surprising given the company’s expansive product assortment and delivery capabilities. With much of the world forced to stay at home, e-commerce was for some the only option for purchasing essential items, and for many more e-commerce remains the only way to purchase non-essential items. Brick-and-mortar retailers will have the difficult task of reaching consumers who can continue to shop efficiently without leaving the safety of their homes.
During the pandemic, digital sales initially jumped over 100 percent for many grocers. Instacart, the largest third-party provider to most grocers reported volumes up as much as 500 percent since the pandemic began and reported first-time profits in April 2020. With many online delivery slots reserved for the elderly or more vulnerable, the biggest change in e-commerce may be the addition of the elder demographic who have been forced to overcome anxieties about using technology to shop online.
Traditional retailers that were deemed essential businesses early in the pandemic have seen positive trends. Big-box stores including Walmart, Target, Home Depot, and Lowe’s experienced sales surges as consumers panic bought food and supplies in preparation to stay at home for an extended period. However, the bottom-line results were not always positive. Home Depot’s revenue increased 7.1 percent in the first quarter of 2020 compared to 2019 even as its net income fell 10.7 percent over the same period, a result of additional costs related to the coronavirus. Target’s net earnings fell and comparable store sales increased just 0.9 percent in the first quarter of 2020. However, e-commerce sales jumped an incredible 141 percent, driving an overall 10.8 percent increase for the quarter. Target stated that sales fulfilled by Shipt were up more than 300 percent, and those through Drive-Up up more than 600 percent compared to the previous year.
Even where sales increased, additional expenses related to customer and employee safety and, in some cases, increased wages hurt many retailers’ bottom line; however, going forward it is anticipated that many of these stores may retain new customers who purchased items for the first time because other retailers remained closed.
Early reporting has shown that brick-and-mortar retailers in certain segments have bounced back well as a result of pent-up demand for their products. Youth-apparel retailer American Eagle Outfitters reported that its re-opened stores were averaging 95 percent of pre-pandemic sales levels as of the first week in June. Management also reported that the company is gearing up for a strong back-to-school season.
As far as store closures and going-out-of-business (GOB) sales are concerned, as of late May 2020 Gordon Brothers had re-opened stores that were part of ongoing dispositions when non-essential business closures began in March. Some of the first data points around customer trends and GOB sales performance in the newly opening marketplace have set a positive precedent. The first day stores opened for a recent GOB sale saw an exponential increase in sales volume over the historical average, even exceeding sales volumes seen during historical peak holiday sales. Stores opened to customers lined up outside, while practicing appropriate social distancing, and lines were sustained throughout the day. Dramatic increases have been seen in buy-online-pick-up-in-store (BOPIS) orders. Although many are likely to be opportunistic buyers, the vast majority appeared to be loyal brand customers. In early June, comparable store sales at two large sale events encompassing hundreds of stores directly managed by Gordon Brothers have exceeded all expectations up to this point, even with social distancing requirements and limitations on store occupancy in place. In addition, average ticket size has been healthy, and the disposition events have been performing positively.
Despite the challenges posed by ongoing fears around the pandemic coupled with social distancing mandates in most states, there is still room for certain business models to grow and flourish. Asset-less businesses offer a benefit to investors and businesses that are looking to lock in permanency in restructuring a retail chain or brand. Given recent challenges for some traditional brick-and-mortar retail models, more companies are looking to monetize intellectual property through licensing models and leasing a brand’s name, logo, or other intellectual property. Gordon Brothers is looking closely at this asset class as a means of generating revenue for, and extending the global reach of, certain brands.
Gordon Brothers recently acquired the global Laura Ashley brand with a strategy to expand its portfolio of licensees and franchisees and to develop the e-commerce presence and strategic wholesale relationships for the brand. Additionally, Gordon Brothers provided a term loan to Brooks Brothers on the strength of its iconic brand, allowing the company to better execute on its operating plan. These types of models allow brand owners and their investors an opportunity to restructure brick-and-mortar retail models and modify how consumers approach brand loyalty. Through strategic licensing arrangements and specialist companies, a brand can delegate many of a retailer’s complexities, obligations, sourcing, distribution, and logistics.
For retailers, it is unpredictable what level of sales will be achieved over the balance of 2020. For some it may be accurately described by Charles Darwin, who stated: “It is not the strongest of the species that survives, nor the most intelligent; it is the ones most adaptable to change.” In addition to connecting with consumers through social media, many retailers have also changed their mobile and website strategies. Examples include virtual wine tastings, craft breweries and luxury fragrance houses utilizing their facilities to make hand sanitizer, and professional hair color-at-home kits complete with stylist tutorials. Before the pandemic, structural changes in retail were already evident. The popularity of BOPIS services were extended to include curbside pickup in the wake of the implementation of social distancing protocols. Following the widespread adoption of curbside pickup for restaurants, many retailers including Best Buy, Target, and others began offering the service in March as stay-at-home orders expanded across North America. What will be interesting to see going forward, is what companies continue offering curbside pickup after their stores re-open. Retailers utilizing curbside pickup when others return to BOPIS could have a competitive advantage in sales gained from consumers that remain cautious about reentering stores or that simply prefer the convenience of the expanded service. The pandemic has accelerated these types of changes. It is likely that this push will drive 10 years of innovation in as many months as retailers look to boost sales and remain relevant in a new economy.
While the COVID-19 closures, unprecedented unemployment, and declining tourism and travel have impacted retail heavily, the reopening of the economy should bring some rapid relief. U.S. Retail sales rose 17.7 percent in May as stores and restaurants reopened after the lockdown. Predictions in the United States are for a V- or U-shaped recovery, with the Congressional Budget Office predicting 4.2 percent growth for 2021 (fourth quarter 2021 versus fourth quarter 2020) on May 19, 2020. Similarly, the International Monetary Fund projects that Canada will see a partial rebound from 2020 lows, with expectations for the economy to grow 4.2 percent in 2021. Although 2021 may well come in below 2019 in absolute dollars, these projections are signs of a recovery we hope to see.