Retail post-COVID 19: Knocking down persistent barriers

Despite technological advancements, several retail behemoths have associated shopping with massive high-maintenance stores and their beliefs have been supported by advocates of “physical shopping experience.”

The COVID-19 pandemic is a black swan event accompanied by mass uncertainty and fear that will leave its imprint on consumer behavior for years to come. As a result, the retail industry could change forever as coronavirus knocks down barriers to change that have held back the larger part of the industry during the past few decades.

Despite technological advancements, several retail behemoths have associated shopping with massive high-maintenance stores and their beliefs have been supported by advocates of "physical shopping experience." Online sales represented only 16 percent of total retail sales in 2019 in the United States, which is the largest economy and the home of the world's largest online retailer Amazon.

But the dynamics are quickly changing as many countries impose lockdowns to contain the pandemic, many consumers and even governments in many cases are now inclined towards online shopping as the more desirable option because going to a store, even for essentials, seems hectic due to the social distancing rules these stores have to follow and not forgetting the potential exposure to COVID-19.

Trade of non-essential goods has been greatly impacted and even stopped in many countries, crumbling the cash flows of many retailers and raising questions over their ability to survive the crisis.

Millions of employees working in stores have already been furloughed by retailers which include some of the largest brands in the world. Macy's is furloughing the majority of its 125,000 workers, while Gap and Kohl's are each furloughing about 80,000 employees.

A recent study by Alvarez & Marsal has suggested that about 50 percent of British retailers could be wiped out if coronavirus continues. This comes from a study of 34 non-food retailers, which found that five out of the 34 analyzed already had negative cash flow at the outbreak of the pandemic. Furthermore, modeling by A&M and Retail Economics indicates that every retailer analyzed could have fallen into immediate negative cash flow as sales are forecasted to have dropped as much as 70 percent.

Thousands of stores and some well-known brands would permanently shut down and even those who survive might need to raise fresh funds in the form of equity or debt to stimulate their recovery. Most of these brands would need to overhaul their operating model to assure investors that they can sustain competition from futuristic online giants who can scale up without hefty capital investments.

Consumers are getting more and more comfortable with online shopping and the value of physical shopping experience is fading. While not all of these habits are expected to stick, the pandemic could change the way how consumers shop and future strategies should take note of the lessons learned during the crisis.

Challenges ahead

• Rise of e-commerce

Online shopping has become a mainstream part of life, especially in developed economies, during the COVID-19 pandemic as billions of people are ordered to stay inside their homes.

UK's Office for National Statistics says that internet sales as a percentage of total retail sales peaked at 21.9% in March 2020. New data from the UK's online retail association, IMRG, also states that UK online retail sales rose by 22% in the first week of April compared to the same time last year.

Online retail sales have soared in the US and Canada as well, orders for primarily store-based retailers were up 56% year on year for the two weeks ending 4th April, and up 52% for web-based retailers, according to the Emarsys/GoodData tracker.

While these figures suggest a promising picture for online retail, it's likely that the rise is down to a select few categories. Groceries, exercise equipment, and appliances have witnessed a significant surge in demand and sales, in contrast, segments like apparel and luxury goods have seen their sales drop in most countries. So it's clear that e-commerce alone, in its current form, can't make a business pandemic-proof.

E-commerce companies also often face doubts about predatory policies and whether they can create a monopoly or unhealthy competition. The astonishing rise of companies in the segment has worried analysts and policymakers over the past years especially because their dominance can be hard to track due to diversification into a wide array of sectors and the tendency to become structural for the functioning of the market.

• Physical retail is labor-intensive and supports the economy

The retail industry is labor-intensive and employs millions of people, many of whom were laid-off or furloughed as the majority of the industry came to a halt. A global recession could further worsen the situation and impact the ability of retailers to support their workforce.

As a labor-intensive industry, it plays a major role in the economy and boosts purchasing power by supporting millions of jobs. Mass layoffs in an industry like retail could have broad economic consequences and would intensify the negative economic impact due to coronavirus because it would reduce consumer spending and result in a ripple effect across various sectors of the economy.

Major retailers are also having problems in securing government bailouts because of concerns over their fragility. Lobbyists for US retailers, which employs over 4 million people, are emphasizing the massive job losses that could occur in the absence of bailouts.

• Lack of training and experience

Many retailers lack relevant technological experience on the boards even as they acknowledge the potential of technology in addressing challenges of the 21^st century. In-depth knowledge and understanding of the latest technologies related to the retail industry are important to formulate a multi-channel approach, which will be key for growth in the future.

Due to struggle in recruiting relevant talent at board level, training of employees and investment in the latest technologies are also often viewed as an expense that should be reduced during challenging times. Lack of training of employees and experience in high-technology retail could become a hindrance to the growth of traditional retailers in the post-COVID 19 worlds.

• Change in behavior

Billions of people are either forced to stay inside or prefer to stay inside and digital grocery has become the only option or at least a more desirable option than going into an actual store, even to buy essentials. Even grocery and healthcare segments, which have been a stronghold of traditional retail is slipping away with the convenience of 'contactless deliveries'.

US online sales of consumer packaged goods (CPG) - the kinds of items typically sold in grocery stores—grew 56% for the one week ending April 18, compared to the same period in 2019, according to Nielsen and Rakuten Intelligence. Even the behemoth Amazon has informed customers that deliveries could be delayed due to an increase in orders, despite its unmatched standardization of delivery process.

Right now, most of the physical shopping experience involves standing in circles and maintaining social distancing. It will change consumer behavior and perceptions about the importance of human interaction while shopping.

• Packaging

The contagiousness of COVID-19 disease has also raised concerns about the packaging of products. Major businesses running reuse schemes have decided to temporarily suspend those operations due to fears of transmission of virus between customers and employees.

In early March, Starbucks Corp temporarily banned customers from bringing in reusable coffee mugs in the stores due to concerns about the transmission of the virus. Schemes allowing consumers to reuse their packaging at home or bringing it back to stores in exchange for discounts were beginning to flourish. But due to fears of spreading coronavirus, some companies have decided to cancel such schemes.

Plastic, however, is not necessarily a safer option, and studies have shown that the virus can survive for several days on plastic surfaces. Yet for many, products that can be thrown away after one use seem to be the safest options.

Concerns around hygiene due to coronavirus could increase single-use plastic packaging market's intensity and undo some of the progress made over the past few years even though the increase in demand for single-use plastic isn't expected to last.

Future

• E-commerce can fuel unfair competition

The benefits of e-commerce platforms are well-documented, they create new marketplaces to trade goods or services and help even small firms to sell internationally. The firms selling on eBay in Chile, Jordan, Peru, and South Africa are younger than the firms in offline markets. In China, start-ups are dominant on the Alibaba platform. Consumers also benefit as they get increased options of goods that will be brought at their doorsteps from all across the world.

These companies provide opportunities to underdeveloped rural areas and enable clusters of specialized businesses in these areas. In China, rural micro e-tailers began to emerge in 2009 on Taobao.com Marketplace. The number of these clusters, often called "Taobao Villages", have soared over the last decade, from just 3 in 2009 to 2,118 across 28 provinces in 2017.

Online marketplaces create huge wealth and goods worth trillions of dollars are annually traded through them but unchecked expansion could enable them to place the majority of these earnings in the hands of only a few people. E-commerce giants can expand without much infrastructure and these companies can take advantage of FDI policies and diversify into different markets to ultimately use the dominance of their own platform to unethically promote their own products.

Current laws are not equipped to tackle this 'structural dominance' and therefore can't tackle 'potential anti-competitive' practices.

• Physical retail will be more than just sales

During the initial boom of online retail, many people thought that consumers would soon drift away from physical stores, and platform marketplaces will be the death of physical retail. Only a few years later, advocates of online retail realized that consumers weren't done with physical retail, they just wanted something different.

Online behemoths like Amazon and online-only brands like Xiaomi have realized the potential of physical stores and are expanding their presence but not in the traditional manner.

Modern physical stores are high-tech establishments that help companies sell "experience" and build better relationships with customers by giving them the ability to feel the products and presence of the brand.

E-commerce companies plan to give traditional retailers a run for their money by combining physical presence with the vast online ecosystem, which can provide customers and the entire history of 'wish lists', liked products, and previous purchases. Physical retail is key to building loyalty and will continue to thrive, just not in the traditional manner.

• Taking advantage of traditional retail expertise

While online companies are just realizing the potential of physical presence, traditional retailers have been in the game for decades and have witnessed various disruptions including the dot com bubble and the very rise of these online marketplaces.

One of the most important things that consumers can't get online is a person to talk to and seek personalized assistance. Despite the excessive online marketing campaigns, many consumers still feel that going to stores and making connections provide some familiarity and make a difference, more so in the case of high-priced luxury goods.

The experience of traditional retailers in making such connections is invaluable and they could leverage their vast physical presence to adapt more efficiently than online companies. But the same vast presence could also become a liability if cards are not dealt with properly.

Clerks stocking shelves and cashiers at registers do not create a compelling reason to visit stores to buy the same thing that can be shipped for free at the doorstep of consumers, probably at a lower price as well. Training of employees and reassessment of goals of individual stores is important for retailers to stay ahead of the competition.

• Packaging should not impact circular economy goals

Consumers are inclining towards single-use plastics as they 'feel' safer because they can be thrown away whereas reusable or recyclable packaging would be used again and possibly come in contact with other people as well.

There is little if any, evidence to support the theory, and activists have also opposed it by giving examples of other potential carriers like currency notes, which are still just as valuable. But the inclination towards single-use plastic might not be going away anytime soon and the demand could also be increased by a surge in demand of face masks, which contain an air-filtering component made out of plastic, and latex gloves.

If increased hygiene measures extend beyond the summer, then some firms could push back the timelines for reaching their sustainable packaging goals and this could especially be the case in Asia, where consumer demand for sustainable packaging was already weak.

• Equality of opportunity

While major retailers will take on online giants with the help of their expertise in traditional retail and deep pockets, it won't be the case for mom and pop stores. Even before the pandemic, these online behemoths were posing a grave threat to small-scale businesses.

Online marketplaces can help these businesses increase their reach but not all of them have adequate training and access to technology to reap in those benefits.

These stores can also fall victim to predatory pricing, which can lead to a tipping point where the value of connection with consumers starts diminishing. To ensure equality of opportunity, governments need to ensure that retailers are ready for technological disruption in the industry.

Centre of Excellence on Emerging Development Perspectives (COE-EDP) is an initiative of VisionRI and aims to keep track of the transition trajectory of the global development sector and works towards conceptualization, development, and mainstreaming of innovative developmental approaches, frameworks, and practices.