Retailers’ fight with Covid proving to be a blessing in disguise

Pandemic led to investment in technology and new ways of connecting with consumers

Retailers have had a rockier two years than many sectors. AFP

When Covid-19 erupted and upended retailers around the world, it looked like another chapter in the sad story of an industry’s decline.

The reality of the pandemic era, however, has not played out that way.

Yes, there has been a shake-out, with thousands of stores, and some chains, closing for good. A wave of retail workers lost their jobs, some permanently, and an unknown number became ill. But Covid’s shock to the system also brought overdue changes that will fortify the sector for years to come, including big investments in technology, new ways to connect with consumers and faster delivery of online orders.

For all the misery the coronavirus has brought, it is not hard to make the case that the pandemic will ultimately strengthen the global retailers who made it through. It is a startling turnaround from the doom-and-gloom predictions for the industry in mid-2020.

“The idea that stores are dead has been proven to be a fallacy,” said Michael Baker, an analyst for DA Davidson, who has covered US retailers for more than two decades. “A lot of retailers are coming out of this stronger than going into it.”

The pandemic pushed shoppers around the globe to adapt quickly, which forced retailers to do the same. Stuck in their homes in those first few months and then wary about visiting stores when they reopened, consumers flush with cash from government stimulus programmes – along with savings from not travelling or dining out – embraced e-commerce like never before. That is why the outlook appeared so dour early on for retailers dependent on foot traffic to brick-and-mortar locations.

The idea that stores are dead has been proven to be a fallacy

Michael Baker,
an analyst for DA Davidson

Since Amazon ignited the online shopping era more than two decades ago, the big question has been how do legacy retailers survive? The industry’s answer eventually became “omnichannel”, a fuzzy buzzword about intertwining stores and the internet. Retailers had been investing on that front – think of innovations like online ordering with in-store pick-up – but sporadically.

The pandemic created the existential threat many needed to embrace that vision. They responded by shaking up their business models in unprecedented ways, whether though customer service or the ways they fulfilled orders (cue groceries ordered online being delivered to the boot of an customer’s car outside Walmart a few hours later).

“It completely changed the way we shop,” said Greg Buzek, president of researcher IHL Group. And now retailers are deploying technology at a “once-in-a-generation” rate, with huge rises in the use of warehouse robotics and inventory management tools such as electronic shelf tags, he said.

In China, one of the world’s most sophisticated retail markets, stores quickly pushed deeper into e-commerce. More embraced the use of chat groups to complete orders and keep in touch with customers who no longer wanted to visit in person, consultant Kearny reported.

Retailers of all sorts increased sales through live online video streaming. In Wuhan, a food-delivery service helped retailers set up contact-free pickup, kicking off a boom in that kind of fulfilment.

Marks & Spencer, the British department-store chain has been trying to turn itself around for more than a decade. It used the pandemic to speed up its transformation by shutting poorly performing stores and investing in digital offerings, including online groceries. The chain has lifted its profit forecast twice this year – the first upgrades this millennium – as its stock surged more than 60 per cent.

With stores shut in the US, retailers adopted new ways to serve customers. Live-stream selling spread from China and became a bona fide revenue source thanks to simple and inexpensive and simple software. Chains also pushed more of the traditional in-store experience to the web. Signet Jewellers, owner of the Jared brand and other chains, added video calls with an associate from its locations that eased the resistance to making big purchases online.

And retailers also figured out ways to push more e-commerce into their locations. That included making it easy for in-store employees to help online customers by chatting and sharing pictures and video through mobile app.

Shopping patterns also dramatically shifted in places where e-commerce was in the early stages of development. Retailers in markets spanning Mexico to Russia were pushed to speed delivery and build more secure payment systems. In one example, the Mexico division of US retailer Home Depot now lets customers buy items online and pay for them at a store with cash, which is still the dominant way to pay for goods there.

The success of many of these advancements will hinge on how well this new consumer behaviour stick post-Covid. Retailers are betting that services such as collecting online orders at stores, will be used for a bigger portion of their sales. The pandemic also gummed up supply chains and caused labour shortages that pushed wages higher. It remains to be seen how long these hurdles last.

The Covid era will also be remembered for all the retailers who did not make it and the employees who were infected with the virus. Pier 1 Imports in the US and Britain’s Arcadia Group, owner of Topshop, were among the chains that shut down their locations. And many others without as much money to invest as big players have not be able to undertake meaningful pivots.

They still look vulnerable, especially as pandemic-era stimulus programmes are petering out and the emergence of the Omicron variant is causing a surge in Covid cases in several parts of the world.

But for the big players who got things right, 2021 brought a remarkable rebound. In the US, chains with more than 50 stores are expected to have added more than 4,000 locations this year, led by discount chains Dollar General and Dollar Tree. That would mark the first net increase since 2017, IHL Group reported. Total closings among this group in 2021 are estimated to have been 3,500, a quarter of the 2020 total.

The comeback is a big reason why the SPDR S&P Retail exchange-traded fund, which tracks the S&P Retail Select Industry Index, has surged 32 per cent this year, easily topping the broader S&P 500 Index’s advance. Retail stocks in other parts of the world have not fared as well, though.

Even with Covid variants hammering some parts of the country, overall visits to US stores this year are only 0.8 per cent below the same period in 2019, reported Placer.ai, which uses anonymous mobile phone data to estimate foot traffic. Many of the biggest chains spanning various categories are drawing more shoppers than before the pandemic. These include Target, Lowe’s, Dick’s Sporting Goods, Ulta Beauty and Bath & Body Works. Visits to Walmart, the world’s largest retailer, are only 2 per cent below 2019 levels so far this year, Placer.ai data show.

Foot traffic is being aided by stores fulfilling online orders for pickup. Best Buy is among the chains who built kerbside pickup systems on the fly during the pandemic so customers would not have to enter stores. Target’s shopping app now allows drive-up customers to choose exactly where bags are placed in their car.

On top of all this, physical stores are still where the overwhelming majority of goods are purchased. While in China, e-commerce accounts for about 30 per cent of total retail sales, the rate in vast markets like Japan, Mexico and India are less than half of that.

Even brands born online are continually showing the value of physical locations by turning to them to boost growth after e-commerce gains stall. In the US, Warby Parker, an eyewear company that helped to jump-start the boom in digital-native brands, is increasingly betting its future on bricks and mortar. Stores can also increase profitability in a myriad ways, including reducing returns – a big hit to e-commerce margins.