- The coronavirus pandemic has altered not only retailers' financial outlook for the year but also their long-term direction.
- Among the long-term changes, retailers have invested in contactless ways for customers to shop and expanded e-commerce options such as curbside pickup.
- The global crisis has widened the gap between off-mall retailers such as big-box stores and mall-based retailers.
- It has also underscored the stark differences between wealthier shoppers and those who have had to pinch pennies because of the recession.
Few in retail could have predicted that a newly discovered virus would spread widely beyond China's borders earlier this year, morph into a pandemic, lead to a recession and change the trajectory of many businesses.
When the outbreak began, some companies spoke about Covid-19 but described it as a temporary inconvenience or a supply chain challenge. Best Buy CEO Corie Barry told investors on a late February conference call that the company viewed the coronavirus "as a relatively short-term disruption that does not impact our long-term strategy and initiatives." In recent remarks, Walmart Chief Financial Officer Brett Biggs reflected on the retailer's expectations in the early months of the year. He noted that in its script for its mid-February analyst day, the world's largest retailer addressed the coronavirus only once.
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Roughly one month later, in March, the spread of Covid-19 brought the U.S. economy to a near halt. Americans stayed home for weeks during shelter-in-place orders. Grocery stores, pharmacies and home improvement stores stayed open as essential businesses. Consumers filled up their shopping carts, jockeyed for grocery delivery slots and cleared shelves of staples, from hand sanitizer and toilet paper to ground beef, rice and beans. Shopping malls with apparel stores were temporarily shuttered. Retailers saw a shift toward e-commerce, as it became a safer option — and in some cases, the only option, for shopping.
As the global death toll reaches 1 million people, retailers stare down a new reality. The pandemic has altered not only their financial outlook for the year but their long-term direction. Some retailers have filed for bankruptcy, laid off thousands of employees and are in the process of liquidating stores. Others, such as Target, Home Depot, Peloton and Lululemon, have benefited as consumers fix up their homes, look for ways to entertain themselves and adapt their daily routines and wardrobes.
Here's a closer look at some ways that the pandemic has forever altered the retail landscape.
Before the pandemic, a big part of shopping was the hands-on experience: Eating samples at the grocery store. Spending an afternoon in the fitting room. Trying a lipstick at the beauty counter. Swiping a credit card on a long-desired purchase.
Many retailers are now trying to stand out for the opposite reason: They are making it easier for consumers to avoid shared surfaces and limit interactions with employees or other customers. That's led to investment and expansion of contactless checkout approaches — particularly by grocery stores. Several grocers, including Price Chopper, have expanded availability of smartphone apps customers can use to scan items and tally up orders. Pittsburgh-based grocery store Giant Eagle is piloting a system that allows customers to skip the checkout line with technology that resembles that of Amazon Go. Lowe's is installing lockers at its stores where customers can retrieve online purchases by scanning their phone.
Walmart's strategy reflects this newfound eagerness. Two years ago, the retailer expanded its Scan & Go app, which shoppers can use to ring up purchases with a smartphone, to its SuperCenters — only to quietly shut down the project. This month, however, Walmart said access to the app is one of the key perks of its new membership program, Walmart+.
Acceleration of e-commerce
Customers shopped online before the pandemic, but a desire to limit trips to stores unleashed new demand and encouraged retailers to roll out new options. The result: new habits. Americans will continue to shop at stores, but they also may schedule curbside pickup or sign up for grocery delivery services.
Retailers also ratcheted up their use of stores as fulfillment centers. Gap said it doubled down on turning stores into mini warehouses, particularly when people couldn't visit malls to shop. Target said it used stores to fulfill more than 90% of its second-quarter sales.
In the U.S., over the course of 2020, almost 36% of online nonfood spending will be supported by physical stores, according to research by GlobalData. This is up by 2.6 percentage points since the start of the year.
GlobalData also said about 68% of U.S. shoppers say they are going to use curbside pickup at stores more in the future and nearly 60% say they will collect more of their online purchases from inside stores.
The shift is redefining how stores use their employees. Both Walmart and Target said they are anticipating increased need for people to fulfill online orders and to ready items for curbside and in-store pickup this holiday season. Both are working to cross-train employees to have more flexible duties that will allow them to pivot as customers' needs change.
The rise of the 'everything store'
Many retailers that have thrived during the pandemic share a commonality: They're big-box retailers. Walmart, Target, Best Buy, Home Depot and Lowe's have seen sales soar as many consumers skipped the mall and shopped at the big-box store or website instead.
Leaders of Walmart and Target, in particular, have attributed their success to a diverse mix of merchandise. Target CEO Brian Cornell has touted the retailer's role as a "one-stop shop." In the early weeks of the pandemic, consumers flocked to stores to stock up on pantry staples and hand sanitizer. But as the pandemic stretched on, they shopped for bikes, puzzles, hair color and other items to help them entertain themselves or adjust to more time at home.
And even sales in specific categories illuminate that contrast. Apparel revenue is expected to drop industrywide by 20% to 30% this year, according to McKinsey & Co. Mass retailers such as Target and Walmart, on the other hand, are expected to see apparel revenue grow by 10% to 20% in 2020 compared with last year.
That sharp divide between retail's haves and have-nots will make off-mall and "everything stores" more likely to thrive and specialty retailers more likely to struggle.
Sharp split between big spenders and penny pinchers
The coronavirus pandemic has heightened a longstanding wealth disparity among American consumers. The rich are stowing away even more money into their savings accounts — money that they're saving by not commuting to work, eating out at nice restaurants or traveling. The poor are forced to cut back even more, with some entirely reliant upon unemployment benefits that are running out.
"Every year since the dawn of time, the higher-income quintiles spend more ... and that same pattern will continue," said Craig Johnson, founder of the retail consulting group Customer Growth Partners. "But it's not just about income right now, it's whether or not you have a job."
As the rich splurge online, and the poor flock to budget-friendly shops, it's players in the middle such as department stores and specialty retailers that are struggling the most. A number, including J.C. Penney and Ann Taylor parent Ascena Retail Group, have filed for bankruptcy protection this year.
"We view the health of the consumer as 'bifurcated,'" Cowen & Co. retail analyst Oliver Chen said in a note to clients earlier this month. "Positives include personal savings trending at 18[%] to 19%. ... On the other hand, negatives include a U.S. unemployment rate of ~8%, negative wage growth, and volatile consumer confidence."
The divide is likely to shape holiday spending. Deloitte estimates sales during the November-to-January time frame will rise between 1% and 1.5%, amounting to between $1.147 trillion and $1.152 trillion, compared with growth of 4.1% in 2019. It said its predictions hinge on how much splurging high-income consumers do and how much belt-tightening takes place throughout lower-income households. This will shape up to be especially true if unemployment benefits run out.
Some economists are calling for a K-shaped recovery — a scenario where certain types of industries see gains while others are left out. Unlike so-called U- or W-shaped recoveries, growth in a K-shaped rebound is unevenly split between income groups.
"We are going to see groups of consumers recover differently," from the pandemic, said Rod Sides, a vice chairman at Deloitte and its retail and distribution sector leader.
Another blow for malls, department stores
Malls were already facing an uphill battle before the pandemic, as shoppers shifted more spending online. But lost sales from weeks of shuttered storefronts made the slog even more challenging.
Shops that were deemed nonessential were shuttered in March to help halt the spread of Covid-19. The biggest U.S. mall owner, Simon Property Group, turned its lights out on March 18. Taubman Centers, Washington Prime Group, Unibail-Rodamco-Westfield and others quickly followed. Simon Property CEO David Simon said it lost roughly 10,500 shopping days, across all its properties on a combined basis, during its fiscal second quarter because of the crisis.
Shopping mall owners are now collecting less in rent. Some retailers argued they couldn't pay their bills after their sales dried up. The pandemic also accelerated the rate of bankruptcy filings by mall-based retailers. Dozens, including Brooks Brothers, J.C. Penney and J.Crew, have wound up in bankruptcy court in 2020. Some of these names plan to close hundreds of stores, as they restructure their business. Others, such as Lord & Taylor, are liquidating entirely.
As more and more stores go dark at the mall, some major retail executives are looking to grow outside of it — a tactic they hadn't touted so publicly before. Macy's, for example, said in early September it's planning to open a smaller-format Bloomingdale's department store away from the mall. It's also looking to test smaller-format Macy's stores off-mall.
"We continue to believe that the best malls in the country will thrive," CEO Jeff Gennette explained. "However, we also know that Macy's and Bloomingdale's have high potential [off]-mall and in smaller formats."
Even as malls reopen, they aren't necessarily welcoming huge crowds, with the appeal of eating in a mall food court or catching a movie at a theater waning and new outbreaks reviving concerns. Coresight Research put out a forecast in August predicting 25% of America's roughly 1,000 malls will close over the next three to five years. The malls most at risk are classified as so-called B-, C- and D-rated malls, meaning they bring in fewer sales per square foot than an A-rated mall.
Casualization of clothing
Another trend hitting malls is how Americans are changing their wardrobes and where they're shopping for apparel. Take a look around, and it seems everyone is living in sweatpants and pajamas now.
Walmart spotted the onset of the trend known best as "Zoom dressing" back in March, when it said sales of tops were up but not bottoms. People only cared about their appearances from the waist up — on video calls. Meanwhile, sales of pajamas online surged 143% in April compared with March, according to data from Adobe Analytics, as consumers quickly started to favor comfort over style.
The trend has stuck around, prompting marketing messages such as: "Cozy is in," "Work-from-home wardrobe" and "Zoom-ready styles."
It's led to the success of some brands — and the peril of others. Jos. A. Bank-owner Tailored Brands, known for its professional menswear such as suits and ties, is on a list of companies that have sought Chapter 11 protection during the pandemic, alongside denim makers Lucky Brand and True Religion.
Meantime, consumers have been stocking their wardrobes with new workout apparel, such as leggings and tank tops. Lululemon reported a surprise revenue increase during its latest quarter, as its online sales soared 157%. And teen retailer American Eagle recently reported a smaller-than-expected loss as its Aerie division, known for its soft bras and lounge wear, saw strong demand from tweens, teens and young adults looking for comfortable clothing. Peloton also said its apparel sales were up during the latest quarter, as people stocked up on sports bras and hoodies embellished with the bike maker's logo. Nike has been another pandemic winner. It said its women's apparel sales were up nearly 200% during the quarter ended Aug. 31.
"Athleisure is more relevant than ever," Mary Beth Laughton, the president of Gap Inc.'s Athleta division, told CNBC. "Customer behavior continues to evolve every day, but I think [the consumer] has gotten used to wearing comfortable clothes."