The impact of COVID-19 on business is still largely unknown. The situation across countries continues to change almost daily.
But one thing is clear: the new coronavirus will have both short- and long-term influences on retail (and the broader world).
We wanted to go through some of the latest research and break down what these changes might be. But before we launch into the business of this, I want to take a moment to recognize how serious this virus is.
Regardless of where you are, our hearts at Omnia go out to you, your family, and your loved ones. To those of you whose family members are helping fight this virus, please give them a warm “thank you” from me personally. To those whose family members are sick, we are sending you all of our strength.
There’s no way to extract the human element of this, but it’s worth taking a step back and evaluating what this outbreak means for retail as a whole. In this post I’ll give my perspective.
How has the novel coronavirus affected retail?
In a recent briefing from Bain & Company, analysts broke down the coming storm into three different phases:
Phase 1: Consumers begin to stock up on essentials
Phase 2: Governments take restrictive actions
Phase 3: Recovery
While there is no way to know if this is the exact path the virus will take, it seems like a logical trajectory. Bain created this analysis based on what happened to China, the first country hit by the coronavirus. It’s an interesting framework to evaluate what is happening in the rest of the world at the moment.
Phase 1: Consumers stock up
In Phase 1 of the coronavirus outbreak, the virus is present but doesn’t have high visibility. Consumers know the virus is coming though and will stock up on key essentials.
In much of the west, we’ve already passed Phase 1. If you’ve been in a supermarket in the past few days, you’ve probably seen the evidence yourself.
Phase 1 will put the heaviest strain on supermarkets and health retailers as people panic-buy basic supplies. This has actually drastically increase sales performances at different supermarket chains.
The demand will initially occur in physical locations, but over time will transition to the online world. Bain noted that, “[a]s the crisis grew, 80% of Chinese consumers expressed a preference for online grocery.”
Conversely, during Phase 1, non-food retail will take an economic hit as consumers restrict discretionary spending. Chinese luxury retailers expect a 60%-95% decline in sales in sales during the lockdown period compared to the previous year. We can expect the same to happen in western countries as well.
Phase 2: Government regulations
During Phase 2, governments across the world will step in and impose harsher regulations meant to mitigate the disastrous effects of the new coronavirus. As governments steps in, retail will take hits in several key areas:
Closed brick and mortars
Whether self-imposed or government-mandated, many brick and mortar retail locations will close to prevent the spread of COVID-19. Some of the bigger brands and retailers to do this include Apple, Nike, Lululemon, Levi’s, and Patagonia, and de Bijenkorf.
If they don’t shut down completely, many stores are restricting their operating hours. Some 24-hour Walmart locations will limit hours to 6 a.m. to 11 p.m., for example. These restrictions (especially for bigger box stores like Walmart) are intended to help the store stay clean and sanitized and allow employees to restock shelves.
Disrupted supply chains
Remember how Bain said more than 80% of Chinese consumers said online was their preferred method for buying groceries as the crisis grew more serious?
Well, only half of those people could purchase groceries online because of a lack of supply.
Supply chain will be a huge challenge for most companies that sell online. Regulations that restrict regular travel or shipping networks will create “logistical bottlenecks” that retailers need to overcome.
Additionally, loss of labor will have a huge influence on supply chain. In China, production and distribution centers slowed down because of forced extended holidays for workers or quarantined employees.
Since many retailers use just-in-time manufacturing models, a broken or weakened supply chain could dramatically affect stock levels. Supply chains are at a great risk, and this pandemic will be a test of supply chain resiliency. This will force retailers in the front end (their shops) to quickly adjust to these back-end (supply chain) interruptions.
Phase 2 doesn’t mean doom and gloom for retailers: coronavirus and e-commerce
During Phase 2, retailers will be under increased pressure. And with physical stores closed, the economic impact of the COVID-19 virus could be huge.
But, retailers may not experience plummet as they would have in previous pandemics.
Today’s global marketplace exists both online and offline and total consumer demand will remain constant, at least in most categories. And while offline channels may struggle during this pandemic, online sales may skyrocket to replace the offline component.
In the short term, there will be a huge surge in the number of online orders. This is already happening. There is already evidence of this trend. Insights platform Contentsquare analyzed more than 1,400 websites, 1.8 billion user sessions, and 50 million transactions in the UK. Found that online grocery purchases grew by 20% while shoppers spent 26% more time on grocery websites.
This trend isn’t limited to grocery stores alone. The same study found that sales of underwear, lingerie, and sex toys rose (by as much as 35%). In the Netherlands, retailer Coolblue had to “reinvent itself” overnight to handle the increased number of online orders. Some of the more popular products they’re selling include articles to work from home (computer monitors and webcams) and household items (notably freezers). The company has customer service working “en masse” from home and is still operating delivery services. Amazon also announced this Monday that they were going to hire 100,000 additional workers to help fill the increased number of online orders.
The impact of the COVID-19 virus and the move to e-commerce will vary by category. Some retailers will face a slower transition; for others the transition could be fast. All have to be very adaptive to the new situation and continuously reassess their strategies and operations to assure their long term success.
Mid-term, and in a more negative COVID-19 scenario, all retailers may become online pure players. While we don’t know what the coming months will bring, if physical store closures last, many retailers will be forced to accelerate digitally. Without the luxury of leaning on a large bulk of online revenue, shops will need to invest heavily in the proper tools to compete in an online-only marketplace — one that is fast paced, dynamic, and price-transparent.
Longer term, I think that the forced accelerated habit change caused by coronavirus will simply change how consumers shop. And that is perhaps the more interesting aspect to consider as we think about the recovery phase.
Phase 3: Recovery
The COVID-19 virus will undoubtedly change the world, and it will be a long time before we can return to “business as usual.” And the reality is that we may need to confront a new “normal” after all of this is over.
My opinion is that in the short term, there will be a big surge in e-commerce traffic (during Phase 2). That extreme surge won't last, but it will accelerate a long-lasting habit change towards online shopping in many categories. As consumers grow more accustomed to buying online, the role of e-commerce will grow.
After this crisis is over — when stores can reopen their physical doors — I expect that e-commerce will occupy a new level of importance. While consumers will return to regular brick-and mortar shopping, the balance between e-commerce and brick-and-mortar may remain forever changed.
How retailers and brands can prepare and cope
The COVID-19 virus is here, and retailers and brands need to get creative in how to manage the coming months.
Above all, retailers and brands need to create policies that protect people. As a sector that has many embedded points of human contact, the safety of employees, customers, and anyone else on the supply chain is of the utmost importance.
If possible, encourage employees to work from home. If employees have functions that simply cannot be done from home, consider implementing a “red team, blue team” approach. With this approach, teams should split in two (a red team and a blue team) that operate on segregated schedules. If someone on one team gets sick, the other team will still be able to function.
Protecting people goes beyond employees. It also includes protecting the public at large. Price gouging during this emergency is simply unethical, whether it is intentional or unintentional. The practice also stains the name of our industry. To all retailers out there reading this, no matter which pricing software you use I encourage you to cap all prices at the Recommended Selling Price.
Optimize distribution networks
In the coming months, supply chains will likely be the greatest obstacle for retailers. The demands of each supply chain will vary enormously depending on category.
Bain & Company has several actionable checklists for the following categories:
- Fresh produce
- Packaged food and household essentials
- Seasonal non-food categories
- Continuous replenishment products
Consider stock levels
As supply chains come under pressure, retailers need to pay more attention to stock levels when they manage prices.
If you’re running out of product, you might as well maximize your margins or revert to the recommended retail price. But again, this goes without saying, do not price gouge. Remember this is an emergency, and as an extremely visible face of the crisis, your brand could face backlash.
Omnia customers already have the ability to add stock levels into their pricing strategies. If you use a different pricing tool, you might want to ask your software provider how to incorporate stock into your strategy.
Because of the combination of increased price fluctuations and the need to constantly adjust pricing based on stock, we expect that automated pricing will be more important than ever. Without it, companies will struggle to keep up with the market and increase their risk of insult pricing.
As we move forward and adopt a new way of working, we’ll continually provide updates on the industry, our work, and more. So while the times are changing, the good news is you don’t have to navigate those changes alone.
There’s no way to be certain about what the future holds. But I am confident that one outcome of this pandemic will be a growth in the importance of e-commerce. No matter what though, as retailers and brands we need to remember the human element of our work. We should do everything we can to prevent the spread of this disease.