The industry that was arguably impacted the most by the Covid-19 Pandemic has been retail. Business owners not only had to deal with months in lockdown, but they have also had to deal with a very definite shift in consumer behaviour that has come with the Pandemic.
This is the first of three interesting articles that Turnaround Talk found on the Gordon Brothers website which discusses the impact of the Pandemic in more detail. While the statistics and figures are very American, the trends will be replicated globally.
President: Retail Gordon Brothers
The COVID-19 pandemic has caused unprecedented upheaval in retail. The initial shock of lockdown and non-essential business closures led to an April retail revenue drop of 14.7% year over year (YoY). By late spring, however, retail spending had recovered, for YoY growth of 7.4% in June and 6.6% in July. An uptick in e-commerce appears to be largely responsible for that performance. Indeed, although non-essential retail foot traffic has recovered from the deep lows of March and April, it largely remained below 75% through mid-August, according to Placer.ai proprietary mobile data which feeds Gordon Brothers’ COVID-19 Retail Impacts and Trends Dashboard.
This article is part of a series examining the pandemic-era landscape to understand issues important to the retail sector, such as whether trends constitute secular shifts or short-term changes. In this article, we take a closer look at the dramatic increase in e-commerce.
Managing Director: Retail Gordon Brothers
Part II considers trends affecting essential-goods providers and discounters during the pandemic. Part III looks at pandemic-related fads, such as pet adoption, home improvement and sporting goods purchases.
The digital storefront
It is no secret that the pandemic has kicked e-commerce into overdrive. Skittish consumers have been avoiding physical stores, reluctant to wait in line at retailers and expose themselves to potential virus carriers. Online alternatives have been a saviour for consumers and have delivered a windfall for well-positioned companies. In the second quarter of 2020, retail revenues were down by about 3.9% overall, but the online segment jumped by about 37% from Q1 2020 and 44% from Q2 2019. E-commerce accounted for 16.1% of sales, up from 11.8% in Q1. Online sales are projected to surpass the 2019 total by the first week of October, even though holiday shopping is still ahead.
Data shows that companies with bold digital strategies have had higher sales and operating profits in the past few years, and COVID-19 has reinforced that trend. The increase in e-commerce demand has led to better performance from retailers with well-built, efficient digital platforms in place before the pandemic. In 2019, nearly half of businesses surveyed by 451 Research did not have a formal digital transformation strategy and were not actively digitizing business processes and technologies. For companies that 451 Research deemed “digitally delayed” prior to the pandemic, 46% stated that digital transformation was still not in the plan.
Larger retailers like Wal-Mart and Target entered the pandemic with strong online platforms and fared better amid consumers’ shift online. That said, even companies with years of progress in digitization were forced to expand their platforms rapidly, with a quarter of “digitally driven” companies reporting an acceleration in their digital transformation timelines, according to 451 Research. In a June conference call, Nike Inc. management said digital transformation “has been an area of investment over the past few years as we’ve built our digital advantage, but COVID-19 has accelerated the pace.”
Gordon Brothers believes pure-play e-commerce retailers and traditional retailers with robust omnichannel infrastructure will continue to see strong comparable sales during the pandemic. To achieve this, however, the necessary infrastructure must be in place. This includes ample warehouse space, a sophisticated digital supply strategy and fulfilment capable of reliably meeting increased demand. Despite the upsurge in volumes and the difficulties in operating during the crisis, consumers want their e-commerce goods to arrive quickly. More than 70% of US and UK shoppers expect delivery within a week of ordering, according to a survey from PFSweb. Cost is also a key factor. A survey by Convey, found that 79.3%of shoppers said free two-day shipping was important to their retail decisions.
The e-commerce outlook: habit formation
In the longer term, Gordon Brothers believes that e-commerce will continue to account for a larger proportion of retail revenues, to the extent that the pandemic has changed buying habits and provided exposure for e-commerce retailers. Overall, four-out-of-five consumers are shifting at least some of their in-store spending to online shopping, according to an April survey from 451 Research; nearly 30% said they are doing most (25%) or all (4.4%) of their shopping over the internet. McKinsey found a sharp increase in the number of consumers who say they have started and will continue to shop online for groceries (59%), snacks (50%) and personal-care products (46%).
Evidence suggests that store closures and virus fears have prompted previously reluctant groups to purchase online. About 40 percent of baby boomers and seniors have shifted their shopping habits during the pandemic; 21.7% say they have moved to online shopping permanently, versus 11.8% who changed behaviours temporarily because of the pandemic, according to a survey by Pymnts. Another survey, by DaVinci Payments, found that 71% of respondents intend to do more than half of their holiday shopping online, with the greatest growth in the 39-55 age group, up 12% from 2019 to 74%.
Third quarter e-commerce statistics, released in mid-November, will be important to understanding the longer-term size and sustainability of e-commerce growth. For roughly half of Q2, consumers often had little choice but to shop online because so many businesses across the country had been closed. While the virus is keeping many consumers away from stores, shopping at physical stores was at least an option throughout Q3. An e-commerce proportion of retail like or greater than the Q2 figure would suggest a more durable trend. On the bullish side, August data from IBM’s U.S. Retail Index suggests that the pandemic has accelerated the rise of e-commerce by five years.
Photo By: Karolina Grabowska via Pexels
BOPIS/same-day digital convenience
As a subset of e-commerce, retailers with efficient same-day delivery and buy-online-pick-up-in-store (BOPIS) platforms have been well positioned during the crisis. By May, BOPIS shopping had increased about threefold YoY. Many companies weaker in these capabilities were forced to swiftly expand them. Bed Bath and Beyond, for example, rolled out and expanded its BOPIS and curb side pickup offerings this year to help meet 100 percent growth in digital sales in April and May. Smaller retailers without robust delivery platforms have partnered with firms like San Francisco-based Instacart to meet rising demand. By mid-April, Instacart volume had increased 500 percent YoY; the company announced plans to grow its shopper community from 130 000 to 500 000 people, and raised an additional $225 million in financing, bringing its valuation to $13.7 billion.
Even the largest retailers had to adjust or further develop their supply chains, digital offerings or BOPIS services this year. These adjustments came at a cost to the companies. For example, Target Corp. reported blockbuster 24.3% same-store sales growth in its second fiscal quarter ending August 1. Most of this growth (13.4%) came from digitally originated sales, which increased 195%. The fastest-growing part of those digital sales was same-day in-store pickup services, which grew 273%. This growth helped Target’s bottom line as these sales have much lower unit costs than orders shipped to customers. However, operating margin for the first two quarters of 2020 fell 30 basis points versus the same period in 2019, due to “1 point of pressure from the accelerated growth in digital and supply chain investments and…just over 1 point of pressure in category mix,” according to management.
It is possible that BOPIS sales may experience slower growth or may decline somewhat after the pandemic, when consumers choose to shop in the physical store once again. Yet Gordon Brothers expects that many people will still opt for the convenience and potential cost savings of selecting a product online and picking it up the same day curb side or in the store, without delivery fees. A late July survey of 500 grocery store shoppers found that fees are the most common challenge for grocery delivery.
The bottom line: e-commerce still represents a fraction (16.1%) of all retail, and it is too early to tell the extent to which the pandemic-driven bump will endure. Yet the trend represents an important shift in consumer behaviour, introducing many previously reluctant consumers to the online retail experience. For companies, the pandemic has shown that e-commerce is essential to resilience during a crisis and to long-term competitiveness. It also serves as a wakeup call for traditional retailers.
As we discuss in An All-Digital Retail Space: Lessons from COVID-19, digital-native businesses outperformed during closure, and the pandemic-driven shift to e-commerce will likely cause thousands of physical stores nationwide to close. The investment in digital infrastructure is expensive and can be difficult for smaller companies to handle, but in the long run a failure to invest could lead to declining revenues and an unfavourable capital position.
