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The COVID-19 pandemic has ravaged the nation’s retail industry. During the national lockdown, at least 630,000 non-essential retail outlets were forced to close.1 Simon, the largest U.S. mall operator, closed over 200 shopping centers.2 Many well-known department stores, such as J. Crew, JCPenney, and Neiman Marcus, declared bankruptcy due to their unsustainable levels of debt entering the pandemic. The number of retailers filing for bankruptcy protection continues to climb including, most recently, Lord & Taylor. Unfortunately, the struggles resulting from lockdowns may only be the beginning, as shifts in consumer behavior leave retailers questioning the right strategy to stay afloat. To stay viable, retailers will need to find creative ways to weather this uncertainty in the short-term and be ready to adapt to new consumer preferences in the post-pandemic world.
Although economists now state that the recession began in February, retailers will reflect upon April as the month when the trouble began. U.S. retail sales plummeted by 12.6% in April 20203 as non-essential retailers were closed due to the coronavirus pandemic. Certain segments of the retail industry incurred a disproportionate share of the losses. Clothing store sales dropped 73.5% for the month of April. Furniture store sales fell 49% while sporting goods and hobby store sales fell 34% in April. Restaurant and bar sales dropped 34%, while department stores were down 28.9% from March 2020 to April 2020.
Those retailers deemed essential were not hit as hard as the non-essential retailers. With many consumers confined to their homes, many embarked upon home-improvement projects. As a result, building material and garden supply stores emerging relatively unscathed with sales falling by only 2.2%. Grocery stores absorbed gains from panic buying observed early in the crisis as well as consumers left with few options but to cook at home, resulting in sales surging by 30.9% in April 2020 as compared to April 2019. Unsurprisingly, non-store retailer sales increased by 9.3% in April as people shopped online from home. E-commerce sales account for about 10.0% of total retail sales and this share is anticipated to continue to increase as a result of the coronavirus pandemic. The pandemic has forced some consumers to buy solely online, a trend that consumers will likely grow accustomed to. Retailers that offer essential items, such as grocery stores, have been able to keep demand steady. Conversely, luxury or discretionary item retailers will likely suffer in the long run as consumer behavior and preferences change.
As U.S. retail and food service businesses began to reopen in a limited fashion in May 2020, they experienced an increase in sales of approximately 17% from the previous month. Clothing and clothing accessories saw the largest jump in sales from April 2020 to May 2020 with an increase of 176.7%. Other trends observed in April continued into May, as consumers continued shopping online and engaging in home improvement. Non-store retailer sales in May 2020 were up 28.4% from May 2019, while building material and garden equipment and supplies dealers were up 18% as compared to May 2019.4
We now know that the second quarter of 2020 was the largest ever contraction of the U.S. economy at -9.5%. While subsequent quarters are unlikely to be so bleak, short-term signals suggest consumers are doubtful of a quick recovery. The consumer sentiment index, which fell to 73.2 in the first half of July 2020, down from 78.1 in June. Experts had predicted that the consumer sentiment for the beginning interval of the month would be about 79.5 The unexpected dip, however, puts the index back where it was in April 2020. The index had not been this low since October 2013 when it dropped to 73.1 due to a 16-day federal government shutdown.6 The July dip in the index is thought by economists to be due to breakouts of new COVID cases nationwide along with the continued uncertainty surrounding the disease and a potential vaccine. With consumer spending driving almost 70% of economic growth, the decline in consumer sentiment is an unwelcome sign for retailers looking to the future.7
Some retailers have quickly adapted to survive, whether that is to engage in e-commerce, offer delivery/pick up in-store options, or creating a new way of generating revenue. Tech-savvy retail chains, such as Nike and Lululemon have created online workout apps in order to keep customers engaged and maintain demand for their products. Other retailers such as Bed Bath & Beyond have converted some retail locations to fulfillment centers due to an 85% increase in sales in its e-commerce platform. As a result, the company has been able to rehire employees to meet the company’s e-commerce demand.8
Brick-and-mortar retail, faced with occupancy restrictions and limited foot traffic, are forced to focus on making each shopping trip more productive for the consumer. Some retailers will be able to withstand the limitations on foot traffic more than others. For example, the average gross margin (the difference between revenue and cost of goods sold divided by revenue) of clothing stores (46.2%) is higher than health and personal care stores (29.9%) by over 16%. Consequently, assuming a 50% decrease in foot traffic equates to a 50% decline in sales, a clothing stores will take a bigger hit than the personal care store in terms of profitability. Further profit erosion will hit certain retail sectors such as women’s apparel products that are mostly manufactured in China. The industry’s purchase costs are expected to fluctuate as operators contend with supply chain disruptions, leading to unsteady profit margins.9
With economic uncertainty at unprecedented levels, the retail industry is left with many more questions than answers. What will the economy look like in 6 months? Will consumers return to their old ways, or embrace new habits acquired during the pandemic? According to a recent survey of retail and restaurant industries, 83% of c-level executives believed that their industries would be changed forever as a result of COVID-1910. The retailers that can adapt most quickly to the changing environment will have the greatest chance for survival.