If the last several years have been an apocalypse for American retail, the last few months of the coronavirus pandemic can be characterized as a supernova. Stores have shuttered, the supply chain has broken, and shoppers have radically changed their buying habits during weeks of lockdown to stem the spread of COVID-19.
Total retail sales in March dropped 8.7% from the previous month, a steep decline not seen since 1992, according to the U.S. Department of Commerce. The apparel sector witnessed the most precipitous plunge, with sales of clothing and accessories falling by more than 50%. The numbers for April have not yet been released, but experts expect those figures to be even worse because of widespread closures, stay-at-home orders and crushing job losses that kept many Americans from buying anything beyond essentials.
“Fasten your seatbelt, boys and girls, because 8.7% is not as terrible as to what we’re going to see,” said Mark Cohen, a former retail executive who is a professor and director of Retail Studies at Columbia University’s Graduate School of Business. “We are looking at an economic event that we haven’t witnessed in this country or anywhere else in the world…. Unless something beneficial comes from out of the clear blue, this is a long-running catastrophic event whose effects are just beginning to be evident and whose outcome we can’t foretell in any way.”
Even as malls and stores announced plans to reopen this week, the damage is already clear: Mass-clothier J Crew filed for bankruptcy protection on Monday, becoming the first retailer to fall victim to the economic effects of the pandemic. Neiman Marcus is expected to follow suit as it deals with more than $4 billion in debt.
Department stores that have been struggling for years are in the most perilous position. It’s unclear whether Macy’s, which has been closing stores and shedding jobs as part of a multiyear effort to reinvent itself, will survive. The fates of JC Penney, Sears, Von Maur, and Lord & Taylor are also in question.
Wharton marketing professor and former dean Thomas Robertson said retail is in a period of “creative destruction,” a term coined by economist Joseph Schumpeter to describe the constant change brought by innovation that kills off old ideas and makes room for new ones. Retail will be different after the dust settles, he said, and that’s not a bad thing.
“Change is inevitable, and we can think it’s awful, but it’s just nature,” said Robertson, who is also director of the Baker Retailing Center at Wharton. “The effect of the pandemic is to accelerate the demise of retailers that had lost their way and that people no longer had a reason to [visit]. There will be a reconfiguration as we come out of this. I don’t know what it’s going to look like, but there will be new players, some existing players will get stronger, and I expect acquisitions will occur. There will be a shakeout. But, in total, retail sales will come back as strong as ever.”
Barbara Kahn, a Wharton marketing professor whose research focuses on retail, agrees that innovation will shape the final outcome for brands navigating through the pandemic, especially when factoring in trends in technology and consumer behavior. Cashless purchasing has been around for years, but it has soared in recent weeks as customers and store clerks seek contactless transactions. Kahn expects the demand for that will continue, along with demand for drone delivery. Sustainability, a hot topic before the lockdowns, is garnering even greater attention as shoppers reevaluate their consumption habits.
“A lot of people are talking about the death of the department store. I predict the death of bad department stores.”–Barbara Kahn
Kahn pointed to the post-recession era, which saw the emergence of digital-first brands such as Warby Parker, as an example of where innovation can lead. She thinks companies that have been positioning themselves correctly before the pandemic – such as Nordstrom, Nike and Lululemon – will be able to find their footing quickly in the post-pandemic landscape.
“A lot of people are talking about the death of the department store. I predict the death of bad department stores,” she said.
No Straight-line Recovery in Sight
The professors believe that a quick recovery isn’t likely given the unpredictable nature of both the pandemic and consumers. Indeed, some stores are reopening, but that doesn’t mean that shoppers will flock back to them.
“It’s going to be a very long time before consumers begin to participate in the retail economy in any kind of normal way,” Cohen said. “They are going to be fearful about shopping, about the proximity to other people. They won’t have the money to shop, or what money they have will have to go a long way for an indeterminate amount of time just for them to survive.”
Based on that outlook, a V-shaped recovery seems out of the question. A U-shaped recovery could take place, but it’s difficult to ascertain how long the bottom will last, Roberts said. Is it three months, six months, two years? If retailers knew the answer, they could plan accordingly.
A W-shaped recovery would be the worst-case scenario. It’s also the most likely because public health experts are warning of a second wave of the virus, or even a third, before a successful vaccine is developed.
“Retailers are very worried about that,” Robertson said. “That would create such chaos.”
The global supply chain has been disrupted as sellers cancel orders, vendors go unpaid and factories idle. Retailers of nonessential goods now have a glut of merchandise that isn’t moving. When stores reopen, they will need to discount deeply in order to turn their inventories into cash, and they may not have anything new to sell for the fall season. Cohen said some savvy clothing retailers may even hold on to some of their current stock and resell it as “spring 2021” next year.
“Underlying all of this mayhem is the fact that organized retail cannot function without the presence of a plan. You can’t wing a retail business,” Cohen noted. “You have to present your organization with a plan with which to guide people as to how much merchandise to buy. How can anybody plan for near-term events like a reopening, let alone a holiday season?”
Kahn said that while a V would be best, a W may still be preferable to a U because some periods of growth are better than none. Retailers can use the growth periods as time to learn and refine operations.
“The advantage of these hills is that, each time, hopefully we get smarter,” she said. “There’s learning here. Nobody thinks this is the last time this is going to happen, and, hopefully, we will be better prepared for the next one.”
What Retailers Should Do Right Now
The professors suggested some actions that retailers can take now to mitigate the shocks, but they acknowledged that the road ahead is long and bumpy. Robertson said stores should continuing doing what they have been doing since the start of the pandemic: canceling orders, renegotiating rent, restructuring debt and re-envisioning their stores.
That last step is particularly hard given the requirements of social distancing. How many patrons should be allowed in at one time? Should employees and customers wear a mask? If a customer tries on a garment, does that piece of clothing stay off the rack for a certain amount of time for disinfection?
“There will be a shakeout. But, in total, retail sales will come back as strong as ever.”–Thomas Robertson
Kahn thinks some stores can help offset these concerns through greater use of buy online/pick up in store and curbside delivery, strategies that have proven effective during the pandemic. And for companies that haven’t perfected their omnichannel approach – a seamless integration of digital and physical shopping – now is the time.
Kahn said it will be interesting to watch what happens with popular discount retailers TJ Maxx and Ross. “I think they will come back and have tons of inventory, but they were not well-prepared for this because they had zero e-commerce.”
For brick-and-mortar brands, Kahn has long emphasized the need to create new experiences to entice shoppers off the couch and into physical stores. The changes wrought by the pandemic only deepen her resolve about that.
Cohen said company executives should pinpoint two dates on the calendar: one for a near-term reopening, and a second for the end of the pandemic, perhaps in 2022. Leaders should then work from those two points to confront the issues in between, from inventory assortment to consumer behavior to staff size.
Success or failure will depend largely on strong management, he said.
“It’s more than an opportunity. It’s an imperative, and it requires informed, capable leadership,” Cohen noted. “This crisis accelerates the failure of businesses that were struggling going into it. They can’t summon enough cash or enough confidence, between vendors, landlords and investors, to be able to Band-aid their balance sheet long enough for their recovery to become evident.”
What About Amazon?
Online sales have skyrocketed during the lockdowns, as much as 74% in some categories. While the boost has helped Walmart, Target and other retailers with a large digital presence, there is perhaps no seller that has benefited more than Amazon. Sales have lifted Amazon’s stock and put the behemoth back into the $1 trillion-plus market capitalization threshold, according to Bloomberg News.
The professors think the growth in online is a specific consumer behavior that will stick around long after the pandemic is over — another reason for retailers to step up investment into their omnichannel efforts.
“If Amazon [didn’t exist], Macy’s, Target, Walmart, Kroger and Costco would never have begun to invest in ecommerce the way that they have, and we would be in an even worse position today because we would have no access to essentials,” Cohen said. “So, give [founder Jeff]Bezos credit for having created a genre that’s an extraordinary change in the marketplace, in the world. I think the new normal is going to be quite a bit different in every respect, including changing the psychology of shopping.”
Kahn pointed to the sheer power the company has, calling Bezos “a shrewd guy.” At the start of the pandemic, Amazon declared that it would prioritize the shipping of essential goods from its warehouse over nonessential items from third-party vendors. But she also talked about the consumer backlash taking place over accusations that Amazon mistreats workers.
“I continue to believe they will be very strong, but I don’t think they will take over the world like people say,” she said. “Walmart has been doing really well in this, also.”
“Organized retail cannot function without the presence of a plan. You can’t wing a retail business.”–Mark Cohen
What’s Next for Shoppers
With tens of millions of people across the globe sheltering in place for weeks, the pandemic has given the world a glimpse of what widespread sustainability can do for the planet. Air pollution is clearing from some of the most densely populated cities as carbon emissions drop, oil prices have slumped from lack of demand, and the fast-fashion industry – a top environmental offender – has taken a breath as clothing sales dive.
All of that has consumers questioning their own consumption habits, an ethos that is evident on social media platforms. Even organization guru Marie Kondo is seizing the moment to remind people working from home that they can be happier with less.
Kahn thinks the sustainability sentiment will only grow stronger, driven by the younger generation. “Gen Z is reemphasizing their belief in sustainability. It’s not going away. They are doubling down,” she said.
But Cohen doesn’t agree. He thinks consumers haven’t been curtailing their consumption long enough to go “all in” on going green. They may simply shift categories of what they consume more, like from clothing to technology. He also thinks the enticement of deeply discounted items will be too strong for shoppers to resist.
“I don’t think psychologically we’re going to see this kumbaya moment where everybody decides to change their outlook,” he said. “We’re going to be faced with an inordinate amount of really cheap stuff, so there is going to be this orgiastic response to that.”
Robertson’s assessment falls in the middle. He agreed with Kahn, saying that consumers are taking a hard look at their consumption portfolio and realizing they don’t need to buy as much stuff as they do. But whether that’s a permanent resolve or a temporary reaction to the pandemic remains to be seen. If it is permanent, then retail will adjust accordingly, he said.
Robertson reiterated his belief that the pandemic heralds an opportunity for retailers and consumers to reconfigure the future. A new normal is inevitable.
“There’s a Chinese proverb that says, ‘May you live in interesting times.’ It turns out that’s actually a curse,” he said. “You don’t want to live in interesting times. You’d rather live in stable, quiet times. But it’s the innovative players that come along in these turbulent times who change things and succeed.”
This article first appeared in www.knowledge.wharton.upenn.edu
Seeking to build and grow your brand using the force of consumer insight, strategic foresight, creative disruption and technology prowess? Talk to us at +971 50 6254340 or mail: email@example.com or visit www.groupisd.com/story