Prior to the onslaught of coronavirus (COVID-19), the retail sector was already being pummelled by a number of factors, such as increasing consumer preference for online shopping rather than brick and mortar retail outlets.
“The retail sector has been distressed for many years,” says John Bae, a partner at Thomson Hine. “In 2019 alone, approximately 240 retail companies sought bankruptcy relief in the US. While a number of factors can cause financial distress for retail companies, the increasing use of e-commerce has been a consistent and significant driver of financial distress, especially with brick and mortar companies with high overhead and commercial lease obligations. The brick and mortar retail stores simply are drawing fewer number of customers into their stores.”
Profits were down, but the sector, although on the ropes, was still punching.
In recent months, however, another gauntlet has been thrown down in the form of COVID-19. This new enemy has arrived without warning to ravage the sector and force retailers to consider the short-, medium- and long-term impact of the pandemic on their business.
“The COVID-19 pandemic has undoubtedly brought additional stress to an already distressed industry,” continues Mr Bae. “Many governments have required the temporary closure of retail and other businesses, and even in instances where retail businesses are permitted to operate, customers are voluntarily avoiding crowds to exercise social separation or to comply with ‘stay at home’ orders.”
Given the magnitude of its impact, retailers need to adapt quickly to a vastly different environment in the short term, while keeping an eye on what COVID-19 means for the sector in the long-term.
Certainly, an examination of the impact the pandemic is having on the retail sector across the globe makes for sobering reading. Analysis by IBISWorld reveals that, in the UK, high-street brands are struggling to pay rent and commercial landlords are set to begin legal proceedings against retailers. Only 41 percent of UK retailers paid rent on the 25 March collection date according to Remit Consulting.
Across the pond, the US is struggling, with the retail clothing industry experiencing massive job losses and drops in sales. As a result, many of the sector’s largest operators are asking for federal aid to stay afloat during the course of the pandemic.
It should be noted, however, that the crisis is also providing some opportunities for innovation and growth. Food and beverage outlets and health and personal care stores are expected to see strong increases in sales as consumers stock up on personal protective equipment (PPE) and food due to lockdowns and restrictions.
In its analysis of the retail sector – ‘The realities of retailing in a COVID-19 world’ – KPMG identifies five key areas where retailers should focus attention, with suggestions on how to remediate shorter-term shocks and prepare for the longer-term implications of the pandemic.
First, managing demand fluctuations. Virtually every retail outlet – except grocery stores and pharmacies – has shut their doors. Yet, while some retailers are seeing demand fall away and customers shift channels, others are facing unprecedented spikes in demand. The ability to predict and manage demand has never been more important, says KPMG.
Second, shoring up the cash reserves. Retailers, particularly those with physical footprints, are rethinking their current cash positions and trying to assess how they will continue to pay the bills should the downturn in demand continue for a prolonged period of time. Many retailers are reviewing their overall financial stability under a variety of different scenarios and, if required, engaging with lenders to refinance loans or amend financial covenants that may be impacted.
Third, protecting the people. The COVID-19 virus has already led to a number of workplace shutdowns and quarantines. Retailers must have a plan that ensures the safety of employees, while also trying to maintain business as usual activities. Beyond simply creating a crisis communications plan, retailers should be thinking about how they will manage their workforce under various different scenarios.
Fourth, thinking about the longer-term supply challenges. While grocery retailers are trying to manage significant supply challenges due to consumer panic buying and resulting stock-outs, most non-food retailers are not yet feeling the full impact of supply disruptions. But as the situation evolves, KPMG expects to see significant variations in the magnitude and timing of supply chain disruptions across geographies and subsectors.
Finally, talking to customers. Retailers should also be thinking about the impact of COVID-19 on the customer and the customer relationship. How will retailers maintain trust in their brand and their products and services? How will expectations be reset for today’s reality? In this environment, says KPMG, shoring up the customer relationship is just as important as shoring up the bottom line.
“The long term social, economic and health impacts of the COVID-19 virus are still unknown,” notes KPMG. “Our hope is that current global efforts to contain the virus and its impacts are successful. And our view suggests that smart retailers are thinking about all of the scenarios and planning accordingly.”
Whether the crisis lasts weeks or months, but presumably not years, it is clear that the global response to COVID-19 has fundamentally changed the reality for retailers. The sector must face that fact and start adapting.
“I anticipate the retail industry’s recovery in the post-COVID-19 period to be both slow and challenging,” says Mr Bae. “No one really knows if there really will be a post-COVID-19 period, as many medical experts are fearing that the virus could return in the fall or winter. In addition, there are serious questions as to when a vaccine or effective medical treatment will be available to the public. At least for the foreseeable future, I believe these concerns will continue to cause consumers to avoid frequenting retail stores, especially when most every product can be purchased through the internet.”
As the pandemic continues to tear through the retail landscape with no obvious end in sight, going forward, the industry needs to remain resolute that it can weather the storm, utilising all the financial support available to do so.
The companies likely to remain ongoing, viable enterprises will be the ones that recognise the need to plan and adapt to the unprecedented changes sweeping the sector. These essential measures will serve to assure many in the retail space that, although the shutters may be down for now, they need not be down forever.
© Financier Worldwide
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Fraser Tennant