The fallout from the COVID-19 outbreak for the U.S. retail sector has been staggering. Government-mandated social distancing measures and stay-at-home orders have resulted in the furloughing of millions of employees and indefinite closures of stores across the country for big and small retailers alike.
Near-term, the fate of retailers will depend largely on the length of the lockdowns across the country and the success of their gradual lifting. But while they make plans to reopen, retailers should also be developing strategic responses to the longer-term challenges. As we explain our new report, Retail after COVID-19: A challenging new reality, three forces will shape the industry’s future landscape:
- Weak demand and a long recession
- Accelerating e-commerce adoption
- Accelerating store closures
When stores reopen, nobody expects a rapid return to normal consumption. By mid-May, more than 36 million Americans had filed for unemployment benefits, dragging down retail sales by a record 16.4 percent in April from March, according to the Commerce Department. Depressed consumer spending will disproportionately impact the same retailers that were forced to close their outlets during the lockdown. We expect sales volumes at apparel, specialty (e.g., sports, music, books) and department stores to decline sharply and remain depressed until employment and consumer confidence rebound. Discounts, mass, and grocery chains, however, will benefit from relatively steady demand, and supermarkets and drugstore chains will also benefit from the burgeoning online business.
In fact, we expect e-commerce adoption to grow across all retail categories as a result of the increased trial during the stay-at-home period and ongoing fear of public spaces, but food and beverage and personal care stand to benefit most. More than half of all online grocery buyers in March said they bought online because of COVID-19. The March shutdown also brought a surge in online sales of personal-care products (including prescription drugs). We estimate that e-commerce penetration in food and beverage could jump 3 to 7 percentage points by the end of 2021. That would lift annual online grocery sales to between $50 billion and $75 billion, up from $25 billion in 2019. As for online purchases of personal care products, we estimate an increase of 4 to 8 percentage points in 2021, or about $15 billion to $30 billion a year.
Meanwhile, the COVID-19 lockdown, the recession, and long-term changes in consumer behavior create unprecedented revenue challenges for traditional brick-and-mortar retail. Some chains may be forced to seek bankruptcy protection. Many more will find that they can no longer support marginal stores. The hardest hit segments will be department stores, apparel, and specialty retail. This will intensify the Darwinian struggle for survival that has already been underway. To relieve some of the cost pressures and position companies for more sustainable EBITDA growth, most of them will need to optimize the retail footprint, redesign the labor models, and undertake corporate restructuring.
Two years from now, it will be clear that retailers that survived were those that grasped the new reality and acted early and decisively to adjust for it. More specifically, preparing for this uncertain future requires careful scenario planning and agile execution.
Rigorous scenario planning consists of a four-step framework:
- Market-back assessment – Develop perspectives on the profile of potential economic impacts across key markets, categories, and channels; review consumer base to understand likely recovery profiles and behavior changes; and understand how competitors are positioned for the economic downturn.
- Base case scenarios – Evaluate current retail footprint and e-commerce channels; develop an operational starting point for the business base case to inform the cost baseline; and analyze the impact of the market-back perspectives on the operational starting point.
- Strategic direction and supporting initiatives – In light of baseline scenarios, develop an enterprise strategic direction and financial aspirations for the new reality; identify and estimate the value of possible commercial and performance improvement initiatives onto baseline scenarios; and consider levels of risk / likelihood, timing, and required investments, with the number and level of change of these initiatives becoming the building blocks of possible new-reality scenarios.
- New reality scenarios – Develop multiple versions of the enterprise future, based on varying combinations of initiative selection, respective investment, timing, success, and market optimism. The scenarios provide visibility on the potential trade-off between the various strategic initiatives. The selected scenario will feed into the creation of a roadmap to the new reality.
In our paper, we emphasize that the execution of the chosen strategic initiatives has to be agile, but retailers will still need to develop detailed execution plans, including designating initiative managers and specifying targets and timelines. Given how different the new reality facing retailers will be from the old normal, there is no time to waste in taking bold steps.