Covid Acts as Accelerant in Retail Sector Transformation
The health pandemic that swept across the globe in 2020 produced a host of challenges, yet not all outcomes were negative. There were a number of bright spots and opportunities for growth across the retail sector that emerged amidst the culling of some of the weakest players. The pandemic actually acted as an accelerant to continued transformation of the retail industry, but it also clearly pointed to the need for retailers to execute on multiple channels.
While the damage brought widespread disruption to people’s lives and economies in virtually every corner of the U.S., the impact of government-ordered COVID-19 lockdowns is continuing to reshape a sector that was already undergoing tremendous change.
Beyond the initial shock of the arrival of a pandemic, an underlying fact emerges: the strongest, fittest and most prepared companies adapt to the challenges and learn how to thrive, while weaker ones become less relevant and fade away. “It is painfully clear that one of the lessons 2020 taught us is that Covid truly revealed who was weak in the retail sector and conversely it proved who was resilient,” says Velocity Retail Group’s Dave Cheatham, who serves as President of X Team Retail Advisors, a retail real estate organization comprised of more than 350 affiliate specialists in 40 markets across the U.S.
“We experienced significant growth in the essential retail, food and home improvement categories in 2020,” notes Cheatham. “Clearly, consumers shifted where they spent their money in 2020, and that played out across all retail categories. Dollars were funneled to some retailers but not others.”
An example of that is the significant decrease in travel to theme parks and hotel room bookings in an attempt to avoid large crowds. Instead, vacation plans may have included travel in a more siloed approach or one that encompassed the outdoors. That helped drive the success of retailers that sold RV’s, camping gear, golf equipment, quads or bicycles.
Disposable income was also heavily shifted to the home front. Those working or learning remotely drove increases in the home improvement sector as people completed remodel projects at their house, added landscaping, bought new furniture, or discovered new tech gadgets to enhance their work efficiency or to help a child keep pace with their education. Simply by shifting where they spent time each day introduced growth opportunities for some retailers, while reduced others.
The work-from-home shift also brought out an interesting trend in apparel. “Since people stopped going into the office on a daily basis, they realized that they didn’t have to follow an office dress code, and could be more casual,” says, Cheatham, who points out that spending shifted away from buying more formal office clothing to buying more busines casual wear like dressy pants that look like wool but are actually tech wear. He notes, the “other shoe dropping” due to this shift was the fuel added to the athleisure wear category that features clothes that look good for work but are more comfortable and casual.
Another key learning in 2020 was the fact that the retail industry must adapt to a new way of conducting business, both from a physical aspect as well as technological one. Specifically, as a result indoor dining room closures, restaurants needed more areas outside to serve customers. That means adding drive-thru’s or curbside pick-up areas. Fast food restaurants like McDonald’s and even many Walgreens sought to add double or triple drive-thru’s.
The onward march of the tech convergence and COVID-19 health and safety measures will mean restaurants and stores will introduce more touchscreens, and apps from which customers can order. Cheatham says, “Covid threw gas on technology and it was already a trend set in motion by the fact Millennials shop differently using apps and digital tools. These are changes we expect will continue advancing in the future.”
The long-term impact of all the changes is the fact that many of the short-term solutions and strategies retailers deployed during challenging times are becoming permanent fixtures because consumers liked them, found value in the new approaches and it helped retailers create a more efficient sales process. Some of those emergency solutions included use of QR codes and menu photos instead of menus that need to be printed each day at restaurants.
Physical aspects of a store or restaurant are also be explored to find new ways to serve customers. Some of those could involve updating design and zoning codes in cities to accommodate more drive-thru’s to meet demand for outdoor service. In some cases that will mean planning for much longer stacking lanes to accommodate increased drive-thru business, observes Cheatham.
While Covid acted as driver to continued adjustments in the retail sector, retailers must re-think their overall strategies, as well. A case in point, notes Cheatham, is Starbucks, which shifted to pick-up stores before Covid hit. The Seattle-based coffee giant announced it was slowing the addition of traditional third-space stores and instead favored a new, smaller pick-up store concept.
Integrated Customer Experiences
The Covid pandemic can’t be credited for ushering in all new approaches to retail. In fact, for some time retailers have been under pressure to meet consumers demands in a host of ways in what is commonly called Omnichannel retail. This integrated customer experience aims to deliver goods and services at every conceivable moment, in any fashion or at whatever place someone wants. Retailers now must deliver in four ways – a great in-store shopping experience, home delivery for online shopping, buy online pick up in store (BOPIS), and drive-thru’s where practical.
“Amazon taught us the art online shopping for home delivery, and Covid taught us convenience of pick-up at stores in the buy online pick up in store (BOPIS) or pick up in store parking lot model,” says Cheatham. “Grocery stores now must open their arms to young moms who want to pull up and have their groceries loaded in car, or seniors to shop at a special time and have items loaded into their car.”
One of the prime examples today of a fast-food retailer who understands the requirements is Chick-fil-A. It reinvented the customer experience via drive-thru’s, incorporating practices that were well received by consumers such as replacing windows with sliding doors and eventually the adoption of outdoor ordering. “They are now a master of the process because they understood it wasn’t about taking orders faster. They recognized it was about creating more touch points to serve customers since they were restricted from having dining rooms open,” says Cheatham.
Navigating Choppy Waters: Is Retail Dying?
The strategies retail tenants can deploy to navigate choppy waters depends largely upon the health of the business heading into the pandemic. For instance, those who had serious terminal illnesses related to their core business model, didn’t survive, as evidenced by such examples as Pier One or Sears. And for those that are sick or weaker and lack the financial wherewithal to see them through a long-term disruption, they are likely headed for a painful demise.
In 2020 some sectors of the retail industry performed well such as grocery-anchored, or discount retailers like Costco. The retailers expected to be in demand down the road include those that best meet customers’ needs when and where it is demanded.
“The real answer to the challenge retailers face today is helping them develop selling channels and different processes during this time period,” says Cheatham. Those with the expertise to understand what, how and where to meet customer demand, whether that be adding drive-thru’s, pick up spots or delivery options, as well as the knowledge of the best practices to retain from COVID-19 times, will be those who succeed in the future.
The ability to operate successfully in multiple channels will dictate the future winners. Amazon already succeeded online and in delivery, so now they are working to expand their brick-and-mortar channel. Walmart is acutely focused on building an online delivery service because they already operate a store near customers.
“The false narrative is that brick and mortar is going away,” notes Cheatham. “Yes, we will see some retailers disappear. But ultimately, the greatest need is the ability to operate in multiple sales channels today. That’s where we expect to see the best examples of growth and expansion in the retail sector in the future.”
Opportunities and Challenges
Leaders such as Costco or Amazon will continue to find ways to remain ahead of the competition, whether that means coming up with a new way to sell something or offering something new to sell. Amazon now sells health insurance and pharmacy orders can be delivered directly to your door. Malls now are focused on adding more entertainment options, restaurants, essential retailers, and even medical and office users.
The biggest challenges Cheatham sees ahead in 2021 for retailers, retail property owners or retail investors include right-sizing stores to the proper footprint, adopting a less homogenized format, working to be the two or three dominant players in each category and perfecting an omnichannel strategy. The key, he believes, is “trimming the fat” and figuring out where your operation is the weakest, so you don’t “get weeded out.” In today’s omnichannel environment, that may mean improving a retailers’ in-store experience or addressing an online shopping bottleneck or adding a drive-thru.
“The fundamental precept of retail is to deliver a customer what they want, when they want it and at a good price. Retailers who are able to accomplish that the most efficiently across the four channels will survive,” notes Cheatham. “Change creates opportunities, but only for the fittest who seek to fill the void and don’t get caught up in the chaos around them.”