Retailers will spend the next few months trying to get their businesses running again, often in very difficult circumstances. By September a picture will emerge: who can survive and who will drown? Five dangerous trends say the latter group could be quite large…
1. ‘Value’ is back with a vengeance
It is becoming apparent that the world faces a major recession and an uncertain recovery. Many economists say the latter will be slow: not a V-shaped or a U-shaped (or even a W-shaped) recovery, but more likely a ‘swoosh’ (with a nod to an important retail brand): a very slow process that will last for years. Retailers will be faced with customers with a reduced budget and a shaky trust – as demonstrated by the long queues at many discounters. Price and discounts are becoming paramount again (or: “even more”), putting internal cost-cutting measures back on the agenda…
2. E-commerce eats margins
Possibly the most long-lasting effect of this pandemic: even the few shoppers that had not ordered online before, have now seen how easy and fast e-commerce usually is. E-commerce is now simply commerce: not just the major international platforms have seen their sales explode, but even smaller retailers that were apprehensive before have joined in on the trend. However, that may also be bad news: profitability is a lot lower, costs are higher and processes are more complex. Combining lower margins with a turnover decrease is deadly, but there is no way back…
3. A shake-out in September?
It seems inevitable that many stores will close and many companies will go bankrupt. Quite a few retailers were already struggling before the pandemic, and the lockdowns will make significant victims. Industries for whom seasons are important, like fashion, have a huge problem: they were unable to sell their spring/summer collection, which is virtually worthless in the winter and out-fashioned by next spring. They need to sell the overstock, often at huge discounts: they need the money and warehouse space because the next season is almost there. By September, a lot of chains will be asking themselves: is there enough money to purchase the winter collections? And: is it still viable to carry on? For some the answer to both questions will be “No”: they will not continue into 2021.
4. A closer look at leases
Those retailers who do continue trading, will need to take a closer look at all the stores they have – turnover will drop (especially in physical stores) and costs will be higher. If a store is not profitable or necessary to serve omnichannel customers, it will have to go – simple as that. This process had already started, but Covid has sped it up tremendously. Occupation rates will drop, mostly on secondary locations – but A+ locations will suffer as well. Retail parks near thoroughfares may have the safest future.
5. Turnover will decide rent
This coronavirus makes the relations between retailers and real estate companies a lot tougher: the demands to suspend rents for the duration of the corona crisis were just foreplay. Current rent levels are untenable in a context of lower traffic and reduced turnover. Retailers will demand the real estate sector also share a part of the damage, and will strive to make rents dependent on their turnover. It may be a good idea: both parties profit if things go well, and share the burden if they do not. However, the proposal will be completely unacceptable to a few tycoons – but will they be able to continue their resistance if retailers go out of business and shops remain empty?
If this analysis is too pessimistic for your taste, you will prefer our next in-depth article: that one will focus on all the positive signals we are seeing.
