Now that the coronavirus retail shutdowns are lifting, retailers across the country are breathing a sigh of relief. Hoping that the worst is over, retailers are encouraged that business will recover, maybe not in the third quarter, but that it will start to turn around by the fourth.
For some major retailers, things haven’t been all that bad, thanks to their online sales.
A back-of-the-envelope analysis by fellow Forbes.com contributor Chris Walton found that four major retailers were able to maintain a remarkably high level of sales during the shutdowns via e-commerce alone. Specifically, in late March through April, Best Buy held onto 70% of its sales, Nordstrom roughly 65%, Gap almost 60%, and Kohl’s at about 55%.
Consumer surveys provide signs to support retailers’ hope, like this one from Coresight Research conducted at the end of May. It found that about half of consumers expect their spending to return to pre-coronavirus normal within the next five-to-six months.
And The Conference Board measured a small but meaningful 2.6 points uptick in May in the consumers’ Expectations Index. This is their short-term outlook for income, business, and labor market conditions, which improved from 94.3 points in April to 96.9 points in May.
Not out of the woods yet, by a long shot
These glimmers of hope aside, there is much distressing news from other quarters.
UBS reports that more than triple the number of retailers will close their doors over the next five years than shut during the last recession. That’s upwards of 100,000 retail stores to be shuttered, as the number of U.S. retail stores will decline from 883,000 last year to 782,000 by 2025.
“Going back over the last 20 years, the worst year for closures was 2009 when 2% of stores closed,” UBS analyst Jay Sole told the Wall Street Journal. “Our forecast calls for 2% of stores to close every year into 2025.”
In the near term, Coresight Research’s closure forecast for 2020 is in line with UBS’s.
Coresight expects this year to end with between 20,000 to 25,000 major retailers’ stores closed, more than doubling the 9,821 closures last year. In addition, it expects 55-60% of the stores closed to be mall-based ones, putting additional stress on that much-troubled retail sector.
Adding insult to injury, Green Street Advisors predicts that upwards of 50% of mall-based department store anchors will close by 2021.
This will impact some 60% of the nation’s 1,000 existing malls, which count J.C. Penney (19% of mall-anchor space), Macy’s (some 18%), and Nordstrom, Dillard’s and Lord & Taylor (combined accounting for 20% of space) as their anchor tenants.
And these retailers are making a retreat. JCP just gave notice that it will close 242 locations out of its existing 846 stores as part of its bankruptcy reorganization plan. Macy’s will close 125 over the next three years, or one-fifth of its locations. Nordstrom will shut 16 of its 116 stores, and Lord & Taylor will liquidate all 38 of its stores immediately upon reopening after the shutdowns.
As mall anchors vacate, this will kick off existing mall tenants’ co-tenancy clauses that allow them to pay lower rent or break their own leases if an anchor tenant leaves. This will push many existing malls to the edge.
Currently, UBS predicts there are nine malls per one million U.S. households, which has risen from eight malls per million in 1980. If Credit Suisse’s prediction that 20-25% of malls will close by 2025 proves true – and there is no reason to doubt it – that will leave about six malls per million households, which still seems like a lot considering.
All this trouble in brick-and-mortar retail is complicated by the accelerated shift to e-commerce that has resulted from the coronavirus shutdowns. UBS expects e-commerce retail to account for 25% of all retail sales by 2025, up from 15% last year.
But even that massive consumer spending shift to online won’t begin to make up for the retail losses in 2020. Euromonitor predicts that U.S. retail sales will drop 6.5% in 2020 and may not recover to 2019 levels until at least 2022. EMarketer estimates the decline will be even bigger, at 10.5%.
“Consumers’ mindsets will switch to reduced consumption of non-essential items and anti-ostentation,” Euromonitor reports. “Companies will focus on maintaining value sales, as consumers find themselves in a recessionary era with reduced discretionary income.”
Big winners and even bigger losers
As retailers try to adjust to the post-pandemic world, government policies during the forced months’ long retail shutdown have tipped the scales mightily in the favor of retailers operating in the essential space and away from non-essential retailers.
IHL Group’s founder and president Greg Buzek said, and repeated by CNBC’s Jim Cramer, “the pandemic has produced one of the greatest wealth transfers” in the history of retail.
In North America, some $125 billion in retail sales have shifted from general merchandise retailers (e.g. department stores, apparel retailers) and hard goods (e.g. furniture, appliances, jewelry, sporting goods) to grocery, mass merchants, warehouse clubs and online (e.g. Amazon), according to IHL.
But this transfer of wealth “pales in comparison” to the shift from small retailers (50 or fewer locations) to big retailers.
IHL estimates some $250 billion sales moved out of small businesses’ cash drawers to large corporations in just two-to-three months time. Further, this cash drain will force 285,000 small businesses to close, including retailers, hospitality, theaters, and restaurants.
“Walmart, Costco, Target, and others were allowed to be open and sell clothing, sporting goods, crafts, education materials, and every other product in most regions while the small business was forced to shut down. Sadly, many are not going to survive,” Buzek writes.
Picking up the pieces
Given where retail is today and where it is going over the next five years, Katie Thomas, leader of the Global Consumer Institute at Kearney, says it’s time for retailers to get bold rather than retreat in the face of so many seemingly insurmountable challenges.
“We think retailers need to start to push harder and be more unconventional,” she says. “A lot of the ways retailers still operate stems back from the 60s Mad Men era and the thinking that people will just keep returning over and over again. Brands tried to strike a balance between price and quality, but that leads to disintegration over time. They’ve lost their sense of self, who they were in terms of their core values.”
Without naming names, she points to a “very obvious mall retailer that used to stand for something very specific, but lost its sense of core brand values and strayed from what the customers were coming to them for. They started to carry too much when customers were wanting a simpler experience.” You can guess which retailer it is, but the message applies to many.
Rather than double down on what made the brand great in the first place, it moved away from its core customer base in search of new customers, which ultimately led to watering down the brand message and losing connection with its loyal customers.
“Everybody has a loyalty program these days, but through the pandemic, I’ve heard very few stories of retailers doing anything special to really engage their loyal customers,” she shares.
By squarely focusing on a retailers’ loyalists, rather than trying to bring new customers into the fold, they can simplify their message and scale down their offerings to the hero products that brand loyalists rely on them for.
“It’s going back to a couple of core consumer segments and focusing on those, as opposed to trying to bring in all these new products in the hopes that they will sell and attract new customers,” she says. “It’s about simplifying and getting back to the foundation.”
Thomas believes that retailers have been led astray by an over-reliance on big data as a substitute for intuition. “In this world with all this data, what happened to gut instinct? We need to flip that switch back to gut instinct first and have it augmented and validated by data. Not the other way around,” Thomas believes.
And given the unprecedented nature of what retail is going through with no reliable historic data available to help forecast the way forward, retailers need to set their course to their true north: their best, most loyal customers.
The consumer insights gathered through qualitative research where retailers can listen and learn will provide ideas to activate retail leaders’ intuition and gut instinct. Reams of quantitative data and more charts and graphs are no substitute.
In the face of so much retail disruption, there is a human tendency to retreat to the middle in order to moderate risk. But that is the very last place any retailer that hopes to survive can afford to be.
“A retailer erodes any sense of who they really are by trying to be everything to everyone,” Thomas concludes. That calls on retailers to find their unique niche and stay out of the mainstream. “It all comes back to the customers, the loyal customers.”