Physical retail contracted 35% more than online retail did during the GFC. This time we believe the figures will be more extreme.
In some ways, this crisis is similar to the SARS epidemic of 2003, which also saw a disruption to travel, work and the economy.
During the SARS outbreak, because everyone was afraid to go outside, the founder of Jing Dong (JD.com), one of China’s largest online retailers, moved his physical stores in Zhongguancun to an online store. The demand for e-commerce also saw the set up of Taobao (Alibaba’s B2C commerce platform).
SARS created the perfect storm for Chinese e-commerce to change Chinese consumption forever.
Let’s take a look at what’s happening, and what we mean by ‘macro’
Macro means large-scale, overall. The macroeconomy has a direct impact on everybody in it because it applies to everything. The economy can be measured in terms of dollars exchanged, productivity, happiness, mortality, environmental impact and a whole range of other indicators important to our society.
The economy is sick, and without concerted effort between fiscal (tax) and monetary (interest rates and money supply) policymakers, it could fall into critical condition. It will have a direct impact on jobs, welfare and public health. Oh, and consumption.
So what happened?
After a decade of incredible growth following the GFC of 2007–2009, cracks began to appear in 2019. The first disruption, as is typical in late-stage bull markets, was barely felt and markets went unphased by the trade war. Brexit didn’t make much of a dent either. However, with the interrelatedness of global markets, they can only manage so much stress.
The black swan of 2020 was unexpected, unprepared for, and puts us in a position of great uncertainty.
As the coronavirus hit China, it was first felt in the west through a constrained supply chain (Chinese factory activity was down 12.5% in February 2020 versus February 2019, fixed asset investment down 25%). The epicentre of coronavirus swiftly shifted to Europe and locked down the United States as stock markets collapsed.
Travel bans, quarantine and fear have grounded airlines globally with layoffs expected to be about 85% of workforces. Governments are now stepping in to bail out those most at risk. Leasing aeroplanes and restricted cashflow quickly translate to liquidity risk for the likes of Boeing who have now exhausted credit facilities. Corporate liquidity risk on such a scale is capable of creating an economic shock of its own.
The coronavirus has undermined energy demand worldwide, but especially in China, which is now the number one importer of crude oil, taking in about 10 million barrels a day. This has put pressure on energy prices globally — we say energy prices because cheap oil makes it more expensive to invest in alternatives.
Such stresses have led to a fallout within the Organisation of Petroleum Exporting Countries (OPEC), with Saudi ramping up production and decimating oil prices. To the untrained eye, cheap petrol might seem like a good outcome for the average consumer, but as we have seen in previous oil crashes it generally leads to government and corporate liquidity risks, slow down contagion (real estate, debt markets), credit crunches, hampered consumer confidence, and reduced consumer spending (tourists, domestic).
Approximately 44% of the world’s oil supply comes from the OPEC states, as well as accounting for 21% of the world’s natural gas production. The USA is now a net exporter of oil products too — with the most expensive means of extraction. That means that Saudi and Russia can afford a race to the bottom, where US oil firms cannot.
US energy companies are unlikely to be able to maintain profitability and are some of the highest leveraged in the world. More liquidity risk. Not to mention smaller oil-dependent nations like Algeria and Venezuela finding liquidity problems of their own.
So, there’s a bit going on.
The best way to stem contagion in financial markets is to solve problems before they get too big to manage, the government is best placed to do this through stimulus. Options available to them include but are not limited to:
- Reducing tax rates;
Printing money through an asset purchase;
Reducing interest rates to make borrowing cheaper; and
Putting money directly in people’s pockets.
The tricky thing about our current economic situation, by and large, is that interest rates are already at rock bottom, and there’s already been a huge amount of money printing (quantitative easing) to get us out of the last recession — any more and we risk destabilising currencies, the European Central Bank went ahead and did just that.
This week, the Federal Reserve committed to pumping USD$1.5 trillion to steady financial markets. The S&P 500 plummeted nearly 12% anyway. Tax rate adjustments, increases in public spending, helicopter financing for individuals and business grants we expect to be next in line.
There are few historical parallels for the shock waves created by the coronavirus pandemic. From still-closed factories in China, where the outbreak first emerged, to western nations where millions of people are living in a state of semi-house arrest, most of the engines that keep the global economy aloft have simultaneously sputtered to a halt.
Goldman Sachs analysts now expect the gross domestic product in the United States to contract at a 5% annual rate in the second quarter of 2020, in what would be the steepest drop since late 2008. JPMorgan Chase economists recently wrote that “the coming collapse in consumer spending will pull first-half growth into negative territory”.
So, we have economic troubles and a viral pandemic at the same time. It’s more extreme, and widespread than SARS was.
There is definitely a uniqueness to the current and predicted downturn considering the stay-at-home nature of the coronavirus pandemic. Hospitality, leisure, travel and physical retailers are expected to be hardest hit — harder than any prior period of economic stress.
There was a relative outperformance of online retail during the GFC, we expect online retail to increase considerably as it becomes the pre-eminent focus of consumer spending, both essential and discretionary. The same applies to online streaming services and marketplaces.
Looking at surveys from the GFC, here are the top reasons for shopping online, ranked in order.
- Easier to compare and find the lowest price.
- The convenience of shopping anytime anywhere.
- Free shipping and return policies.
- Avoid stressful crowds and parking.
The last point is almost certainly higher this time around. As the SARS outbreak of 2003 demonstrated, the outlook for online shopping is actually incredibly bright.
As motifs of lockdowns, quarantines and isolation begin to circulate around the world, will consumerism have no choice but to be fulfilled through the internet?
In times of crisis, there can be opportunities. Let’s take a deeper look.
Industry impact: Winners and losers
For some, the next few months will see an unavoidable struggle. While for others, we’re already seeing increased growth, for some this growth is extreme — we’re talking 500% revenue in the third week of March 2020 versus one month earlier. Any short term upward jolt — home office equipment for example — is likely to persist as the consumers demonstrate inertia, and stores remain closed.
Discretionary spending is in hot competition, and yet PPC and AdWords prices are coming down. This is not the time to pull advertising budgets… more on this later.
Physical retail will see its decline continue at a more accelerated rate than before. Mass store closures have already begun around the globe as a result of health and safety concerns, as well as a dip in footfall. Uniqlo moved to close 350 of its stores in China. UK luxury brand Burberry, which gets 40% of its revenue from China, says the impact has also been significant. It shut 24 of its 64 stores in China and reported its footfall had dropped by 80%.
Retailers and hospitality businesses in the UK are also feeling the pinch. In the second week of March, footfall in the UK was down 4.8% from this time last week and 23% from this time last year, which is only likely to increase as movements become restricted.
OpenTable restaurant occupancy data shows hospitality is in big trouble, and this is before shutdowns get enforced. A proxy for physical retailing too?
Travel and leisure companies are scrambling in an effort to meet their cost obligations in the face of minimised revenue opportunity. Grounding fleets and laying off staff, in some cases approaching governments for support.
With cancelled flights, no tourists arrive. Tourism forms a massive 3% of Australia’s GDP, for example, contributing $47.5 billion to the national economy.
There is also an intrinsic link between luxury retail expenditure, leisure and tourism. Luxury retail in Australia has been bolstered over the past decade by increased visitation and spending from Chinese inbound consumers in particular. This has come to a grinding halt, a pattern replicated across the world.
Events, entertainment and other such companies join a growing list of delicate industries as they are forced to abide by government regulations.
Car retail sales are through the floor across China.
Who then, are the winners? You can’t catch a (corona)virus online, and while there will be further economic fallout through unemployment and reduced consumer confidence, online retail was already a small enough proportion of total retail that we do not expect it to suffer. In 2017, e-commerce sales accounted for 9% of all retail sales in the United States, this figure is expected to reach 12.4% in 2020.
Streaming platforms, online consulting, online education, and e-commerce not reliant on social products are safe.
At the moment, some of the immediate winners are those serving the more immediate needs of many. Pharmaceutical companies providing for sanitary needs are experiencing tremendous spikes in online sales. Food companies on the other end of panic-buyers are experiencing increased foot traffic, but as this crisis continues, customers are turning to online orders. Moreover, as companies begin to implement working from home policies, stationery and furniture companies servicing the need for desks, chairs and other work-related products are also seeing immediate growth.
More sustained winners will be areas such as book retailers, apparel, activewear, toy companies, beauty and self-care focused suppliers.
For other goods like liquor, there is data available to suggest that sales may not decline, and in some cases grow. Take the 2008 GFC, for example, during which liquor sales grew by nearly 9% across the board. These are all industries with an already big online presence. Retailers will need to harness this responsibility over the next few months and adapt accordingly.
Ben Perkins, research director for consumer goods at Deloitte, goes as far as to say the core customers for luxury goods companies had not been hurt by the recession at all: “They won’t have noticed the change. It tends to be the middle that gets squeezed during times of economic hardship.” We can apply this to things like fashion, which will still go through its usual seasonality despite what may be happening. People will look to replenish potentially stale wardrobes. This is how we need to think about changing consumer mindsets over the next year.
Rebounding against economic uncertainty isn’t a rarity. Take the ‘lipstick effect’, for example.
In theory, when facing economic uncertainty, consumers will be more willing to buy affordable luxury goods.
One of the world’s largest cosmetics retailers, L’Oreal, noted their sales figures during 2008 recorded a 5.3% growth.
There’s plenty to be confident about for online pure-plays, and plenty of swift action needed to digitise budgets for retailers operating even partially offline.
The convenience of online to consumers and the real-time analytics it provides to retailers mean that this accelerated (and inevitable) shift in spending will stick.
Consumerism
What does this all mean for retailers, and of course, consumers?
Retail sales growth has been huge over the past decade, last year figures across the board were starting to slow. China saw an 8% expansion in 2019, its slowest pace in 1999. Forecasts through to the end of February put growth this year at about 4%. With the social world closing its doors for a few months, it’s important to recognise that retail is still growing, and as it begins to contract, it is important that we are clear on the cataclysmic shift in where retail growth is occurring.
The pronounced contraction in physical retail means mega growth online.
There will be short term and long term impacts on consumer behaviour, but it is evident from previous periods of upheaval that new behaviour tends to stick.
Physical retail has its perks, but it was broken. The retail-apocalypse has had little to do with people shopping less, only where they were shopping. Check out the Walmart and Sears share prices (bottom) as compared to Shopify, Amazon and Boohoo (top) as proxies for online shopping.
Comparing retail models.
E-commerce solved physical retail’s problems but was hamstrung by inertia in consumer behaviours. In Australia more so than markets such as China and the USA. E-commerce permits endless aisle abundance, personalised and satisfying experiences, extreme convenience and access to information. Physical retail is out of stock, and out of luck, it is hard to create consistency and even harder to automate.
Is the age of physical retail over?
Since shopping is done online, the physical store of the future is no longer centred on ‘selling products’, but with a shift through new retail to ‘providing experiences’.
Google has often used the narrative that consumers are more demanding (we are very lazy, for example, searches for restaurants in a certain area dropped because people don’t expect to have to specify, we will take convenience over effort any day), we are also more curious and empowered (we want to research, and can do so easily online), and we are more impatient (we want things now).
Did you know that over 87% of shopping journeys start online now?
If the physical store is still designed as a place to simply sell, then it will lose relevance as brighter shinier things crop up next door. No matter what kind of retail you operate in, you must have an ability to capture customers online, the traditional way of getting customers, such as cold calls or traditional advertising, have less and less power, and will cost more and more.
It’s not as simple as competing on experiences either, it is competing for convenience.
Shopping journeys start online
With social distancing and societal lockdowns likely to be short-lived, and current delivery capacity under strain with sustained demand expected into the future, there is a massive opportunity in how retailers can invest in optimising their online to instore relationships. These same efforts can drastically reduce the costs of shipping from a store and regional distribution infrastructure, whilst delighting shoppers with faster cheaper delivery options.
Did you know that over 87% of shopping journeys start online now? If you are not leveraging this data, segmented geographically, to predict demand and inform stock re-allocation then you are missing a trick.
Approximately $24-$30 billion annually of Amazon’s retail sales in North America can be attributed to consumers who first tried to buy items in the store but the local retailer was out-of-stock. Which based on estimates of Amazon’s 2017 retail revenues would account for 21–24% of their sales stemming from retailer challenges in inventory management.
Last year, Nike acquired Celect to become more insight-driven, data-optimised and hyper-focused on consumer behaviour. This is how to serve consumers more personally at scale. Celect’s cloud-based analytics platform provides proprietary insights that allow retailers to optimise inventory across an omnichannel environment through hyper-local demand predictions.
Buy online, pick up in-store (BOPIS) has increased immensely with consumers and retailers alike, saving on shipping costs and cutting down on fulfilment times. A new survey, conducted by Radial and NAPCO Research, of US-based retailers with annual revenues over $10 million, reveals just how popular it is becoming.
Some of the findings outlined include:
- 67% of shoppers in the .S have used BOPIS in the past six months;
- 88% of retailers are able to track incremental in-store purchases from the BOPIS customers; and
- 98% of retailers who have adopted these programs say they’re getting additional in-store purchases from their BOPIS customers.
Cutting-edge retailers are using data and intelligent inventory prediction to tailor assortments at the store level, to anticipate changes in customer traffic patterns, and to determine optimal distribution routes, inventory levels, and allocations, simultaneously enhancing the customer experience and improving unit economics. These systems are capable of balancing the extra cost of shipping that order from the store against the expected markdown from continuing to hold them in the store. This exercise determines whether the order ought to be fulfilled from a store or from a centralised warehouse. In short, the system helps the retailer to make real-time fulfilment decisions that maximise expected profit.
Retail executives should continually assess their investments in data and analytics to ensure that they are bringing new insights to the biggest business problems. What steps is the company taking to turn data into practical suggestions and actions to increase revenues, reduce costs, or free up capital? What capabilities is it building to become a more customer-centric, analytically driven enterprise?
Rethink assortments and product offerings, not just company-wide but hyper-locally.
As prices and inventory availability become more transparent, businesses will not survive as generic multi-brand retailers. They will have to give consumers a reason to choose their stores over competitors. No longer will consumers shop at a retailer simply because it happens to be where a product is distributed. Instead, they will seek out retailers that provide value in new and different ways. We believe retailers will need to offer deep product expertise (that is, they must help consumers decide what to buy and explain why it makes sense) and a unique product education (that is, they should help consumers learn how to use the product better and do this over time, not just during the moment of purchase).
If you can achieve this level of intelligence you’ll develop stronger insight into attribute trends and demand forecasting to better influence buying and design decisions, optimising inventory investment and be able to reduce tieing up liquidity in stock you can’t sell.
Online stores are always open
Retailers have to engage with the needs and desires of the consumer and adapt to their behaviour. The opportunity to do this online is measurable, data-driven and creative — it offers more opportunity than any other channel.
Customer loyalty, retention and improving the online experience were all paramount to the success of e-commerce.
The GFC brought with it an industry-wide decline in retail sales, both online and in-store. Consumers had less credit available, meaning people were forced to save more and so the reduced consumption expenditures meant a slowdown in consumer spend.
Consumer confidence became a central problem. But still, trends began to emerge, dividing the online and traditional retail markets. In-store, customers were deterred from impulse buying, eliminating room for unnecessary purchases.
As a result, consumers took time to research online and find the best deals. Constant price comparisons were the result. This has not changed today. Crisis or not, people are hooked on the ability the internet gives them to find the best deals.
Did you know, 91% of online shoppers use the internet because researching products online makes them feel more confident about their purchases? The same percentage of buyers also announced that comparing prices online reassures them that they are getting the best deal.
People used the internet because it didn’t feel like an impulse purchase.
In 2003, the SARS outbreak dramatically changed consumer behaviour.
SARS spurred the growth of e-commerce, and likewise, with the spread of COVID-19, it will encourage the movement from traditional store-based selling to digitalisation and retail through omnichannel.
This idea of empowering the individual in a time of crisis, controlling when and what to purchase and how it’s distributed and delivered, comes with eliminating as many variables as possible.
Online stores are always open and now is no exception.
Even during a weak economy or public health crisis, people continue to use the internet to shop.
The internet provides a comprehensive set of information related to a particular product or service that is not always available in store…
Nor is that information, price and availability limited to a single retailer. In a time where markets become increasingly challenging they also become more competitive, digital marketing and the internet allow you to break into new markets and retain existing share.
The emerging trend of avoiding going in-store is here. As Governments around the world attempt to contain the spread, choices become limited. It is going to get worse before it gets better.
In the USA, Nike, Apple, Microsoft, Abercrombie & Fitch, Urban Outfitters, Glossier, Patagonia and LuluLemon are all closing their doors.
Online stores are always open and now is no exception.
Retail behemoth, Amazon, reported they have already seen significant spikes in activity on their site. Scrambling to hire an extra 100,000 team members to meet warehouse and delivery capacity requirements. They are even being accused of putting profit before safety by warehouse workers in the UK as they are asked to work overtime.
E-commerce is absolutely roaring as a result. To quote Mark Dolliver at eMarketer: “Since older individuals are the ones for whom the virus has been most fatal, they may be especially likely to alter their behaviour, which could mean a more widespread adoption of e-commerce, an area lacking for the demographic.”
In the US, e-commerce is booming. The search count for health products and groceries has surged. Moreover, digital shoppers are more willing to convert on products they need despite longer delivery times.
Meanwhile, in the UK, there are reports that e-commerce purchases could increase to as much as 40% of total retail spend, up from just over 10%. Not all shall prosper, but opportunities will begin to present themselves. Especially in the world of online.
Retailers selling social products, including party supplies, are having a tough time. It’s been inspiring watching their rapid shifts toward product diversification and the quick pivot on marketing messages as they adapt with the time.
It will be interesting to see how fast fashion is effected, pureplay online retailers are doing well and we haven’t seen much of a shift in behaviour for those with physical stores at this stage perhaps as a result that the economic buyers have little concern for the overall economic situation, and even with a reduction in buying outfits for events, the reallocation of spend from bricks to clicks seems to be holding up online metrics.
Focus on cashflow generating investment, with transparent performance analytics and strategic collaborations with specialist vendors is imperative. The greatest risk to retailers right now is cutting valuable investments under the illusion that they are expenses. Vendor consolidation in areas that benefit from data network effects such as data mining, AI and machine learning may be an astute move with the right partner.
Everything outlined above regarding the changing face of the consumer is an ecosystem of demand data, benefiting from great data network effects, and should drive every single investment decision a business makes.
Keep on keeping on
During the GFC, there was a 4.3% increase in profits during the recovery period for those businesses who invested in marketing and technology. Conversely, those who cut marketing spend saw a negative return of -0.8% in profits over the longer recovery period.
But what about profitability during the downturn?
During the GFC, a study of 1,000 firms in the UK revealed that they maintained average profitability of 8% if they increased their marketing spend during the downturn.
Guy Consterdine, a marketing and research consultancy commissioned by the Periodical Publishers Association of Ireland after the GFC, summarises this in saying that “contrary to most marketers behaviour, the evidence clearly shows that it pays to maintain advertising expenditure in an economic downturn”. A recession actually provides opportunities for marketers, for it is a chance to invest to gain market share and market leadership, and attack timid rivals. This can also improve the stock market valuation of the company.
To quote Peter Fader of the Wharton School: “As companies slash advertising in a downturn, they leave empty space in consumers’ minds for aggressive marketers to make strong inroads.”
Price promotions can also be tempting in a downturn, and are widespread in consumer markets, but they are likely to damage not only profits but also brand values. Brand values that are impaired in bad economic times will be hard to restore when the economy expands again.
Channel management is central to optimal response in changing consumer trends.
Slashing prices and desperately trying to attract consumers in places where they won’t actually be is a bad strategy. Retailers with physical assets must be swift in mitigating solvency risks, leverage physical locations for cost optimisation and convenience.
Retailers have access to the technology, tools and resources to assist with this now more than ever. Cashflow positive technology investments and those that can reduce operating expenses and labour costs are in focus.
Where are our machine overlords when you need them?
Artificial intelligence is new to most retailers since the GFC, the opportunities here include:
- Detailed analytics and decisioning systems;
- Prediction and experience optimisation; and
- Cost-cutting and resource automation.
Now is the time to consolidate legacy systems with cutting edge third-party technology vendors who will let retailers maximise every opportunity where opportunities are less frequent, and that will turn your retail stack into one that will emerge from this downturn as a market leader.
With the increase in website traffic for retailers it will pay to investigate how big data and machine intelligence can make you more defensible in a downturn, memorable, reliable and a winner in the rebound. Leveraging data for predictive models will help retailers forecast sales, as well as allow retailers to react effectively with behavioural-driven recommendations to make discovery onsite intuitive.
This is not capitalising on downward trends or profiteering from a crisis, all in all, decisive measures need to be taken to assist your target market and keep you in business.
In fact, if you are short on resources. Investment in optimisation and automation during this time of uncertainty will be what will keep you on track when the rebound comes too. Servers scale, untrained staff tend not to.
This includes inventory allocation optimisation, visibility on attribute trend analysis, geographic demand gauging, intuitive and automated experiences both online and instore. Investing in technology has never been more important, the role of the digital team becomes incredibly important especially as human capital comes under fire elsewhere in the business.
We are also witnessing increased interest in robotics and warehouse automation across even mid-market retailers counteracting human capital risk. Ocado, for example, is weathering the current storm beautifully.
Ocado share price.
Vendors who eliminate business costs will assist your business in times of uncertainty. Automation itself serves to fulfil this purpose to some extent, but look for flexible billing models such as pay-per-performance models that offer business owners confidence in times of uncertainty.
The Harvard Business Review concludes: “Paradoxically, the businesses that will survive and ultimately stand out are those that create certainty for themselves, forging a path depending on how the situation unfolds.”
Conclusion
The future is bright for e-commerce, the wider economy is facing extreme volatility.
We’ve built our own business around the opportunities presented by online shopping and we develop the most cutting edge technology to capitalise on it all. We may be biased, but the data does not lie, and history does tend to repeat itself. There’s a lot to gain during the uncertainty of today.
The leading brands of tomorrow will be the ones that navigate it well, fortune favours the brave.
Key takeaways
- A viral pandemic and a weakened economy will incite significant behavioural change.
- Economic stagnation, oil prices collapsing, the travel and leisure sector grinding to a halt and corporate liquidity putting the fabric of our economy on the line all risk contagion through financial markets — without concerted efforts in monetary and fiscal stimulus, things could get worse.
- This is not the first time a viral outbreak has changed the face of a consumer economy.
- We know a lot about consumption patterns from what happened during the fallout from 9/11, SARS, and the GFC.
- Those who cut marketing during downturns saw an average profit drop of -0.8% during the recovery, whereas those who increased activity saw a +4.3% increase.
- Marketing, analytics and automation are typically ‘cashflow positive’ activities — turning the wrong things off will cost you more than the line item saved.
- Online marketing and digital technologies are extremely measurable, with businesses able to gauge return on investment in real-time.
- It’s easier to grow market share during a downturn if you outperform your competitors, especially if they are reducing investment. Our analysis suggests that they are.
- Online consumers struggling in a weak economy continue to use the internet to shop. Researching products actually increases.
- During the global financial crisis of 2007–2009, 91% of online shoppers used the Internet because researching products online made them feel more confident about their purchases.
- In the GFC, 91% of online buyers announced that comparing prices online reassured them that they were getting the best deal.
- Notably, 54% of online buyers said they search for coupons and discounts online even if they planned to shop offline.
This article was first published on Medium and has been republished with permission.
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