Will Covid-19 be the End of Retail — Or Mark an Overdue Reset?

The COVID crisis has fundamentally altered the retail landscape. Consumers are changing what they buy, how they buy, and ultimately where they buy goods and services. Many of these behavior changes were an acceleration of longer term trends, but others are new.

We have talked to major retailers, brands and startups around the world to understand how they are reacting to the crisis and what they are doing to plan for the future. We detail our findings below, but our big takeaways were:

• Many retailers and brands will fail in the coming months due to weak balance sheets, dated business models, unsaleable inventory, and the financial pressure from months of lost physical store sales.
• Store closures are creating an incredible opportunity for market share gain (or loss) as consumers shift buying and consumption behaviors during the crisis.
• Retailers that have, and continue to, invest in strong eCommerce capabilities are well positioned to gain share as a result of this crisis.
• We will see an acceleration of investments in a few core areas of retail technology including eCommerce infrastructure, virtual retail operations operations, frictionless checkout and technology to enable safe and efficient physical store operations.
• The retailers and brands that emerge from this crisis will be far better equipped to address the needs of the modern retail customer.

Three Waves of Impact from COVID Crisis on Retail

The COVID crisis will impact retailers and brands over three different waves as depicted in the figure below. In the first wave, retailers will cut costs, liquidate inventory/assets, and take every action necessary to address the liquidity crunch driven by store closures. Retailers that survive will slowly re-open stores, but will rationalize store count and staffing to account for a post-covid economic reality. Long-term winners will capitalize on the shift to eCommerce, investing in infrastructure and core capabilities to drive traffic and conversion through digital channels.

Changing Consumer Demand, Store Closures and the Liquidity Crunch

The consumption shock that sits at the heart of the first wave has been driven by forced shutdowns, rising unemployment, and consumer uncertainty. These changes have been significant, but are anything but uniform. Restrictions on travel, dining, and non-essential physical retail have already triggered countless restaurant closures, bankruptcies for storied names in retail (J-Crew, Neiman Marcus), and are pushing other retailers to the brink of bankruptcy (J.C. Penny, Lord & Taylor). At the same time, CPG and Grocery are seeing record growth as consumers stock up on essential goods and are forced to dine at home.

Sources: IATA, Wall Street Journal: Coronavirus Crisis Reveals Retail Haves and Have-Nots (March 24, 2020)

Sources: Nielsen: Tracking the unprecedented impact of COVID-19 on U.S. CPG shopping behavior (March 30, 2020). Reuters: Kroger comparable sales surge 30% in March, borrows $1 billion (April 1, 2020). Wall Street Journal: Walmart’s U.S. Store Sales Jumped 20% in Past Month (April 1, 2020).

Stores are beginning to open as states and counties lift shelter-in-place restrictions. For some retailers, the openings will not happen soon enough, and we expect that many of those chains will never re-open. For most retailers, however, we expect a temporary reopening of most stores with a skeleton crew of employees (Phase 1 below) as they evaluate consumer demand and liquidate in-store inventory. Once retailers are able to assess the “new normal”, we expect a second wave of closures as they rationalize costs to match the consumer demand (Phase 2 below).

Sources: Coresight research; Forbes: List Of Retail Companies On Bankruptcy Watch Is Growing Fast Amid Coronavirus Crisis (April 3, 2020)

While retailers scramble to re-open stores, they also are renewing their focus on eCommerce in an effort to drive sales during the crisis and beyond. For some, this shift will provide an opportunity to grow customers and revenue. For others, falling sales and market share will create liquidity crises that will threaten their long term existence. Many of the most well known retailers could be out of business in less than six months if the current condition persists. Physical retail will come back, but sales in physical channels will be substantially lowered as consumers buy more online, and less overall.

The post-covid crisis winners will utilize their eCommerce capabilities to win consumers during the crisis and as physical retail re-opens, find creative solutions to keep them. We’ve already seen market share shifts as pure-play eCommerce retailers have seen online orders rise 34%, compared to a 14% increase in online sales for omnichannel retailers.

The Elephant in The Room — Inventory

While store closures and bankruptcies take most of the headlines, one of the most often discussed topics inside of retailer organizations is what to do about inventory that is stranded in stores, warehouses, and in transit from suppliers. Traditional liquidators such as TJX have completely stopped taking orders from retailers as the TJX stores and eCommerce channels are shut down. Online liquidation sources such as RueLaLa and used goods sites can not absorb enough volume to reduce the market’s inventory glut. We expect retailers to take one of two approaches to address their inventory concerns.

• Box up inventory for next year: Many retailers are simply putting away spring/summer merchandise and plan to sell it in 2021. However, this may not be an option for retailers in need of the short term cash boost from inventory liquidation.
• Mass liquidation: We are already seeing discounting at record levels online (luxury discounting is up 123% and general retail discounting is up 43%). The most visible discounting may happen in stores as retailers use liquidation sales as a source of cash and lure consumers back to physical stores.

While all eyes are on the glut of current season inventory, we also expect inventory shortages late in the year and into early 2021. Retailers have canceled orders in mass and furloughed non-essential employees as a result of the crisis. These actions all but stopped the pipeline of new product development — a necessity at the time, but not a long-term solution. There may be some serious competition for winter coats come November.

Capabilities to Survive and Thrive in COVID

Our conversations with industry executives highlight a number of areas where retailers can use technology to manage short term risk while capitalizing on long term trends:

• Delivery infrastructure: Retailers with same-day delivery from store or curbside pickup infrastructure have an immediate advantage during the current crisis. In the short term, these solutions address customer needs that were previously achieved by a trip to the store. In the long term, these can drive increased conversion and customer loyalty.
• New shopping experiences (e.g., AR showrooms): Emerging social and digital shopping platforms have been particularly popular in other countries (e.g., China). Retailers can leverage these to address the void left by store closures. If done correctly, this could be a new distribution channel.
• Remote workflow/collaboration: Work-from-home orders and travel bans are creating momentum around virtual tools for retail operations. Retailers, brands, and manufacturers have been forced to collaborate exclusively online and are relying on new tools to do so effectively. We expect to see increased adoption of digital product development, 3d/AR collaboration, and online wholesale selling tools. It is unclear which of these platforms will be embraced post-crisis, but the exposure and usage during this period may provide the boost needed to drive significant market adoption.
• eCommerce capabilities: More than ever, now is the time to be doubling down on core eCommerce infrastructure. The shift towards digital has only accelerated with COVID. Retailers and brands with budgets to invest in digital teams, tools, and marketing will outperform their peers.
• Technology to safely re-open physical stores: Adjusting store ops to ensure social distancing and minimization of virus spread will be critical once doors are opened again. This includes store technology such as cashier-less check out to limit in-person contact and traffic counting/gating analytics to monitor capacity and social distancing. While some of these may require more upfront investment, in the long term, they can improve customer experience, reduce staffing needs, and reduce overall OPEX. One specific startup focusing on safety measures is RetailNext (one of our portfolio companies). They have pioneered a new non-profit initiative, called ShopSafe, that leverages its existing technology and sensor deployments across hundreds of thousands of stores to provide merchants with the ability to track shopping density and provide consumers confidence that the places they shop are safe.

Conclusion

The rest of 2020 will be challenging for retailers and brands. Those that do survive will be significantly better positioned to serve the needs of customers today (and tomorrow). Customers will still utilize digital and physical channels, but in both cases, we expect experiences will be powered by modern tools and technology.