Article by Steve Dennis
It’s anyone’s guess how quickly retail will mount any semblance of a meaningful rebound from the COVID-19 crisis. Yet, regardless of the pace and distribution of potential outcomes from such a recovery, five major forces are revealing themselves. I suspect few sectors will be untouched by their impact.
#1: Bifurcation 2.0
As I touched on in a Forbes piece earlier his month, the retail world of the past decade or so has been characterized by a great bifurcation, where success has been found at either end of a spectrum. Going into the pandemic, value-oriented retailers (from Amazon AMZN, to off-price to warehouse clubs and dollar stores) have, by and large, been strongly growing sales and opening large numbers of stores. The same is true for well executed higher-end, more experiential specialty brands. Yet, more and more the middle has been collapsing.
In the first months of the Coronavirus outbreak we saw obvious polarization of retailer results as consumers stocked up their pantries, were restricted from shopping non-essential items and were “forced” to shop online more. But even as physical retail re-opens the bifurcation we saw going into the crisis will become more pronounced. High unemployment and a more uncertain economic outlook will cause more shoppers to seek out value alternatives, particularly given the highly disproportionate impact of the crisis on certain populations.
Many, if not most, of the retailers that were struggling mightily in the middle will either liquidate or engage in major store closings and overall retrenchment with most of their former customers migrating to either end of the spectrum.
The crisis is driving what my colleague Carl Boutet has labeled “the great acceleration” (which you can hear him discuss with Ollie Banks here). The most obvious is the dramatic increase in online shopping. Much of this, of course, has been driven out of necessity, and growth rates are certain to moderate with brick & mortar options opening back up. But clearly some new consumer habits will persist, likely accelerating e-commerce annual growth rates from around 15% to more like 20%.
Many store-level technologies are seeing accelerated adoption. The big one of course is retailers’ new curbside enthusiasm, but we are seeing huge upticks in home delivery as well. Contactless payment looks finally ready for its close up and I think we will be talking a lot more about appointment-based shopping—once largely the domain of luxury stores—in the months ahead.
As quarterly earnings reports are trickling out we are beginning to see how severely impacted most retailers’ top lines are being affected. Even most purveyors of “essential” items that are ringing up big sales increases are taking a hit to profits. As the short-term shackles are loosening, the overall spending outlook remains bleak given potentially Great Depression-like unemployment levels and continuing volatile asset markets.
The path forward will become more clear in the months ahead, but spending is likely to remain muted for the foreseeable future. Clearly non-essential items—or easily deferrable major expenses—will be the hardest hit, but few sectors will be spared from slogging through the worst year in recent memory.
The other major area for contraction will be in commercial retail space. The United States has been significantly over-stored for a long time. Since 1975, retail square footage in the US has expanded at over four times the rate of population growth. In particular, the number of malls has quadrupled since 1970, during a time when the population grew just over 1.6 times. And of course we are quickly getting to the point where about 20% of all retail will be done online. A harsh reckoning has been brewing for some time. The pandemic will make it happen.
# 4: Reallocation
It’s clear that, overall, most of us are—and will be—spending less. It’s also clear that how we are spending is becoming quite different. We are moving past the hyper-distortion of online spending, stocking up for the apocalypse and going wild on hand sanitizers and Clorox wipes. But certain spending shifts will have greater persistency.
The probable sea change is in work-from-home (WFH). Clearly with much of the world in shelter-in-place mode, WFH has not been optional for many millions of people. In turn, we saw a huge uptick in spending on home office supplies, equipment and furniture, along with virtual meeting services like Zoom. All this time at home has also driven spikes in home fitness, other means of self-improvement, home furnishings (and other home-related projects), streaming services and more. Conversely, we’re spending less on automotive and office-related apparel—and almost nothing on travel.
Some of the home project spending is more likely to be one-time or merely pulled-forward. As we start to get back to work more traditionally, spending on bread making starter-kits, scrap books and Pelotons will probably revert closer to pre-pandemic levels. But I suspect—at least until a highly effective, widely adopted vaccine is available—WFH will remain at unusually high levels, leading to material redistribution of historical spending patterns.
In some cases, the impact of the Coronavirus crisis is making the inevitable happen sooner. This is most obvious when it comes to a necessary major reset of retail space and putting quite a few dead brands walking out of their misery. In other cases, otherwise viable companies will not survive owing to their not having the financial resources to weather a Black Swan event.
Companies that entered the crisis with remarkable value propositions and lots of cash will find themselves in the enviable situation of being able to make their strong position even stronger. A righteous shakeout is brewing, where unremarkable brands with weak balance sheets will be gone—or limp along as mere shadows of their former selves. In turn, industry leaders will have unprecedented opportunities to pick up market share as the competitive herd gets culled and/or options to acquire weaker rivals and promising technology become available out of bankruptcy or otherwise at fire sale prices.
So Now What?
To paraphrase Mike Tyson, “everyone has a plan until they get punched in the face.” Right now, most retailers are in crisis mode, reacting, pivoting, operating far more from fear than well-considered visions for the future.
The retail industry is far too diverse to suggest any one-size-fits-all prescription to navigate these emerging forces. Indeed your mileage will vary. But a few things might guide us.
It’s impossible to know with any real certainty what the future will hold, which means we must remain humble. It’s clear that almost nobody, nor any organization, will emerge unscathed from this global tragedy, which means we should operate from a place of empathy and compassion. It’s true that this too shall pass, which dictates that, where possible, we are better served to be relational, rather than transactional. And as Jon Kabat-Zinn reminds us, whether we like it or not, the waves are going to keep coming. We’re going to have to learn how to surf.