What COVID-19 Means for Brick-and-Mortar Retail Decline
Keith Jelinek
The news isn’t good—but smart retailers can use this time to regroup and plan.
The decline of brick-and-mortar retail was underway well before the COVID-19 pandemic. Now, with businesses shuttered around the country—and world—we asked Keith Jelinek what retailers and consumer brands are going through and what they should be doing to prepare for an eventual return to (some sort of) normalcy.
Q: What are the biggest challenges retailers are facing?
What we’re hearing can be classified into three segments. There are the retailers in the grocery, drug, club, home repair and dollar channels deemed critical and open for business. Their biggest struggles stem from providing a safe work environment for employees and customers, which will only get tougher as social distancing continues and more restrictions around product handling emerge; and from obtaining timely product from suppliers who are already stretched thin. Direct-to-consumer (DTC) retailers and consumer brands that provide commodity and essential items are struggling to keep up with demand, as many consumers want product delivered directly to their homes.
That leaves companies in the department store and specialty retailer space, whose primary revenue streams depend on customers visiting malls, strip centers and outlet centers. They are being hit hard by a lack of revenue and a diminishing ability to meet their financial obligations, such as leases and loan repayments. This group has also been challenged with difficult decisions about aligning costs with revenue, leading to the furlough and layoff of many loyal employees.
All three groups have the same fears: trying to predict when consumer traffic will return to some sort of normal, how consumer behavior will change and what those changes could mean to the products, services and environments where commerce will transact.
One thing that is paramount to weathering this storm will be the amount of liquidity retailers have to navigate the rough waters ahead, as well as access to capital. We have seen and experienced high waves and storms in the past, and those eventually passed in relatively short order. A recovery in this case will be unlike anything we have had to endure or experience.
Q: Has anything surprised you about the fallout from COVID-19 when it comes to retail?
What surprised everyone was how quickly everything came to a screeching stop. We have experienced economic slowdowns and recessions before, but never have we experienced such a halt on a global scale. The potential impact to businesses likely had not been modeled.
The crisis serves as a reminder to all businesses, and especially those in the retail and consumer products and services sectors, that it will be prudent to have worst-case-scenario plans as an important stage of critical strategic planning. Although we all are hopeful that we will be more prepared globally, we should apply lessons learned so we never see the impact of something like this again. It will be important for every business to have a playbook to survive this type of global economic crisis.
Q: With so many physical locations shuttered, what should retailers be doing?
As most retailers have brick-and-mortar stores, this is a critical time to reassess their store portfolios, which will require looking at stores from at least three different segments: stores in enclosed mall-based locations, in strip centers or standalone locations, and in outlet centers. Each will likely have a different traffic pattern when consumers are comfortable to return. Each will be modeled based on the type of product that is sold, and whether it is a necessity or a fringe purchase. We also expect that available income to spend will be impacted by the heavy amount of unemployment. The analysis, which factors in forecasted traffic and revenue for the remainder of 2020 and into 2021, will provide the ability to determine which stores might need to close, all dependent on lease terms and potential landlord negotiations.
Q: You’ve said that retailers should always have a Plan B. What does a Plan B look like in the middle of an unprecedented crisis?
Retailers and consumer goods and services companies must assess potential threats and challenges through a logical set of steps that build their capability to sustain the impact of a crisis and then rebound. Our paradigm involves five stages:
Assess the risks around customer sales patterns and traffic, as well as the supply of product.
Implement dashboards to track critical key performance indicators of product, addressable cost structures, and human capital and protocols for working remotely.
Develop contingency plans to address timelines for when key decisions need to be made for items such as curtailing or increasing inbound product flow and timing, adapting marketing and promotions plans, or renegotiating contracted services such as IT, transportation or lease obligations.
React to and capitalize on short-term opportunities and necessary increases to product discount levels, and term out deferred payments.
Be prepared for a rebound and plan for the recovery.
Q: Can traditional retailers move quickly to DTC?
The ability to ship directly to consumers will vary by retailer. Many retailers and consumer brand companies are well suited and prepared to fulfill these orders from their distribution centers and have the flexibility to shift capacity and ramp up with additional shifts. Depending on their footprint and technology, some can replenish fulfillment slots on a timely basis and while orders are being fulfilled. Others will need to revert to separate shifts, taking time away from fulfilling orders.
Almost all companies are constrained by when the orders are picked up by carriers from their fulfillment centers. Many have windows between 5 p.m. and 9 p.m., depending on how far they are from a carrier’s hub, especially if the product is being shipped via air. Air cargo has been extremely strained with less capacity, forcing prices to increase by three to four times. This also impacts profitability.
Many retailers have the capability to ship from store and fulfill online orders by picking the product from a store and shipping directly to the consumer. Compounding the equation is that many retail locations are closed indefinitely. Retailers will likely begin some sort of staffing model sooner rather than later to “open” some locations for a couple hours a day solely to fulfill orders of some products as product runs out at fulfillment centers.
Q: How difficult will it be to open dozens if not hundreds of shuttered stores quickly and effectively? Will it depend on what each retailer sells?
Retailers will want to open stores as soon as social-distancing restrictions are lifted, as the products in the stores are not getting better with age. Restrictions will likely be up to the individual states, and we have seen recently that many of the states on the coasts and the Midwest have banded together to make aggregate decisions.
Once these areas open to allow consumers to travel freely, the impact on the stores will vary depending on whether the company sells commodity goods, whether the company provides services such as beauty or hair care, and the location’s physical environment. For instance, if a store is in an enclosed mall, consumers will likely be slower to return. But they’ll probably feel more comfortable in an open-air strip mall, lifestyle center or outlet. Of course, consumers have been shopping the grocery, drug, club and dollar channels based on limited needs, but once things open back up, we would anticipate that traffic will increase rapidly at these channels first, as consumer restock their pantries.
Q: Big picture: what will brick-and-mortar retail look like when life returns to normal—or some semblance of normal?
I wish that we had a crystal ball. Retail always manages to adapt. We will likely see a much smaller footprint, with many retailers trimming their portfolios and decreasing their number of locations. Some will not survive. However, we know that through this crisis, consumers have become much more comfortable purchasing online. Going forward, we will likely see a much higher penetration of e-commerce sales direct to consumer.
This shift will likely force retailers to rethink their ship-from-store capabilities to enable supporting sales while a store is closed to consumers. Store staffing models will also need to adapt, as will how we interface between sales associates and consumers—the handling of shopping carts and baskets, product handling, dressing rooms, bathrooms, cash wraps and credit card/point-of-service terminals, as well as the handling of cash, will all need to put associate and consumer safety at the forefront.
As we look to the holidays and the end of the year, it is unlikely that sales will have returned to normal, but we know that the consumer is resilient and adaptable, and smart retailers and consumer brand companies can embrace forward-thinking strategies. There has not been a better time to rethink how to go to market more efficiently, capture market share and be a leader in the new world that lies ahead to not only survive, but to thrive.