What will retail look like post Covid-19

Covid-19 restrictions have changed the way we live and the way we shop. As retailers begin to reopen their doors in the coming weeks, they can be assured of one thing – retail as we know it has changed permanently.

It is expected the shift to online shopping will remain, leading to initial higher costs for retailers and greater challenges. Retailers operating in this digital space will be under increasing pressure to improve their customer’s experience, in order to replicate the ‘in-store experience’ and mitigate the
effects of price transparency.

The post-Covid-19 consumer will also behave very differently, overly cautious about their health and their spending. Smaller, agile retail businesses will bounce back faster than larger national chains, unencumbered of long supply lines and large fleets of stores. As online channels begin to provide greater revenues, retailers may take the opportunity to ‘right-size’ their fleet, closing store no longer financially viable, without attaining material losses.

Online now the norm

Australians are now spending almost $32 billion online, or about 10 cents in every shopping dollar. It is predicted that by 2021, 80 per cent of us will shop online, with e-commerce reaching $35.2 billion. As Covid-19 restrictions began to take hold in March, and retailers began shuttering stores, online shopping increased 21.8 per cent, compared to the same time last year. This shift to online presents several challenges for retailers.

While shoppers may have disappeared from shopping centres, many are still spending. The queues are still there, they have just become invisible. The first challenge retailers have faced relates to online capacity and capability. While previously retailers have been quick to promote their online capabilities and investments, the sudden increase in demand left many floundering, like Coles and Woolworths who suspended online home delivery and in-store pick up. To respond, retailers may choose to convert some existing stores into ‘dark stores’, small, decentralised fulfillment centres.

Alternatively, creating click and collect ‘pop-ups’, or partnering with ‘gig-economy’ delivery service providers, to meet soaring demand.

Once shoppers have set up accounts, logins, credit card details and have gained trust, online shopping will become a habitual activity. This enduring shift to online will become permanent, placing greater cost pressures on retailers. Operationally, inefficiencies are experience in dealing with online exchanges and returns. The small transaction size and order size associated with online shopping will require pick-and-pack order fulfillment operations that are either labour intensive (high variable cost) or mechanized (high capital investment). This order type dissimilarity and high cost of processing individual customer orders result in a downward pressure on the retailers’ financial bottom line.

The post-covid-19 consumer

Covid has changed every aspect of our lives and consumer spending is no exception. Consumer confidence has hit an all-time low, unemployment levels have soared, and consumers are now uncertain and anxious about the future. Only 20 per cent of consumers in Australia are optimistic about an economic recovery post Covid-19 and 44 per cent of consumers are concerned about losing their job.

Globally, 30-50 per cent of consumers indicate that they expect their income to continue to fall in the short term. The economic shock cannot be understated. The impact of Covid is set to dwarf the impact of all the recessions since the Great Depression of the 1930’s, but at much greater speed leaving its mark in the history books.

Greater anxiety

Consumers are irreversibly damaged from the economic effects of Covid. Economic downturns are stressful events that have historically shaped the mind-set of whole generations of consumers and they have a long-term impact on buying behaviour. We are seeing a move from spending to saving
with 76 per cent of Australian’s pessimistic about the longer-term recessionary effects of Covid.

For example, consumers who lived through the Great Depression, and even those who experienced the GFC, have been found to consume in a more frugal manner. They “cocoon” themselves, choosing to stay in rather than go out. They cook at home, entertain at home, and engaging in DIY rather than spending their hard-earned dollars. In Australia alone, 41 per cent of consumers have cut back on their spending.

The implications for business are profound. These economic contraction effects have wreaked havoc on a numerous industry sectors some of which are now on the brink of collapse. Globally, travel, tourism and hospitality has been the hardest hit with over 50 per cent of consumers indicating that they were spending less. Facing continued uncertainty, consumers continue to dramatically reduce discretionary spending, reprioritise, and cut deep into budgets to make ends meet.

The shift to thrift

Consumers are now much more price sensitive and value conscious than pre-Covid. In times of economic downturn there is a clear shift to thrift, and simplicity. Evidence of this is in car sales which plummeted to their lowest levels in 20 years in Australia as household confidence tumbles.

Restaurants are pivoting to retailing in a bid to survive. Even high-end distillers are selling sanitiser instead of rum to reel in some dollars in a market of collapsing demand.

Consumers are demonstrating an increased willingness to trial new brands when their regular brands are out of stock, buy generic store-brands, and seeking out deals. Price sensitivity is a double-edged sword in that it leads to a loss of retailer margins, however it is offering some retailers the opportunity to significantly enhance brand awareness for store labels, particularly in grocery. It is also leading to a growth in the performance of discount retail stores as consumers seek increased value. However, from the perspective of business, it also brings about a double jeopardy effect
where well-positioned price-oriented big brands with their operational scale and efficiencies have shown growth, and smaller brands poorly positioned for Covid are increasingly struggling to hold market share and survive.

Home entertainment is one of the rare categories to be on the rise as consumers seek affordable and convenient ways to entertain at home. Streaming services such as Netflix, Hulu, Disney+, Amazon Prime, YouTube Video, and HBO Now, have seen an unprecedented increase in subscription as consumers seek avenues for entertainment in lockdown. They are also signalling a potential death knell for traditional forms of entertainment such as cinema. By virtue of trial and use of these services, consumers are also predicted to continue with these subscriptions post-Covid.

Touch-free transformation

The advent of Covid has been a positive catalyst for change in terms of retail offerings, as well as how consumers engage. Retailers are already demonstrating significant retooling in their formats and offerings. A study revealed that 72 per cent of consumers have been wearing gloves and engaging in sanitisation processes when in public spaces.

Aside from the obvious continued interest in hygiene products that will ensue post-Covid due to extreme conditioning, this increased awareness of hygiene practices has also exposed consumers to new ways to shop, and this is hitting the ‘re-set’ button on consumer expectations. Online purchasing has skyrocketed and buy online pick up in store (or ‘somewhere’) (BOPIS), and order kerbside delivery have become common shopper lingo. As consumers try these new shopping options, and become more digitally sophisticated, these new habits are likely to stick. Consumers now expect a much greater level of convenience and efficiency in their shopping experience than ever before.

It has also fast-tracked businesses’ shift towards touchless shopping and contactless payment options. Social distancing is not just about being aware of other consumers proximity, it is also about being aware of contact with public shared terminals, and devices such as those at checkout.

Consumers are increasingly turning to the use of new payment methods since the Covid outbreak in the interests of hygiene, and ease of transaction. Mastercard’s recent global survey demonstrated the significance of this shift in contactless transactions – 79 per cent of consumers are now using contactless payments, citing safety and cleanliness as the main motivations for adoption of the technology.
Through trial of these new services, consumers have become accustomed to these convenient e-commerce options and many of these newly formed habits are likely to stick post-Covid.

In addition, there have been a raft of significant innovations and subsequent growth in new products and services. For example, wellness apps, fitness from home services, remote learning and upskilling, and telemedicine have shown sudden growth as consumers search for new ways to meet their daily needs. Many of these new consumer behaviour habits will stay in the long-term post-Covid lockdown as consumers adjust to the convenience of digitally enabled service delivery.

Overall, the longevity of these significant changes to consumer behaviour may depend on how long stay-at-home restrictions remain in place. Until consumers start to feel safe stepping out to shop, dine and gather in crowded public places, consumer aversion is likely to keep a dampener on spending in these categories. In some categories those effects will be more entrenched than in others – it is unlikely that the consumer psyche will be robust and resilient enough to lead to rapid re-uptake of travel anytime soon. A sense of safety, wellbeing and consumer confidence is needed
before economies can reopen and return society to a sense of normalcy.

David and Goliath retailers

Small and micro retailers are most likely to have pivoted quickly and adapted their business operations during the Covid-19 lockdown compared with their larger competitors. Small stores that have successfully weathered the lockdown have had a few things in common. They either already had an online store pre-Covid-19, or they very quickly shifted from selling via bricks and mortar stores to a digital platform. Using every platform available (social media, email, SMS and even traditional advertising) they engaged with their customers through regular updates on products and services as well as providing informative and entertaining content, and information about how they were addressing hygiene and social distancing in their business operations. Importantly they also leveraged the significant positive sentiment in their local communities which showed many shoppers want to support local businesses and a shift in shopping behaviour by purchasing online from local stores and buying products that are locally grown or produced.

Those small stores deemed as essential, and therefore able to remain open during the lockdown, have found implementing and managing social distancing and increased hygiene measures in stores easier to manage than larger retailers due mainly to the smaller size of their stores which allows for fewer numbers of customers in the store at one time and more efficient management of queuing and browsing.

As we come out of lockdown and retailers around the country re-open their stores, small businesses unencumbered by long supply chains and large fleets of stores will likely bounce back faster than larger national chains. This will be for a number of reasons including flexibility in store opening hours, store operations, the hiring and training of staff, managing seasonal product offerings and being able to respond quickly to any new directions regarding retail trading restrictions from federal or state governments. The nimbleness of small and micro retailers will likely be their saviour.

Ultimately, it is expected the shift to online shopping will remain, leading to initial higher costs and greater challenges for retailers. The post-COVID-19 consumer will also behave very differently, overly cautious about their health and their spending. Smaller, agile retail businesses will bounce back faster than larger national chains, unencumbered of long supply lines and large fleets of stores.

As online channels begin to provide greater revenues, retailers may take the opportunity to ‘right-size’ their fleet, closing store no longer financially viable, without attaining material losses.

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