Retail in transition

COVID-19 has been a part of our lives for over six months now. Most sectors of the economy are already past the initial shock caused by the lock-down, hence it is now worthwhile to address possible lasting effects. Changes in various facets of life are apparent but most of them are unlikely to be lasting. However, this may no longer be the case for the transformation of our shopping habits. Prior to the pandemic retail faced a number of challenges as online sales trended higher and at the same time the importance of brick and mortar stores declined. Now it seems that this evolution has received a strong boost, as if we had taken a leap forward into the future.

Quick recovery?

One of the consequences of the lock-down was the diversion of retail traffic to the online sphere, however due to the uncertainty during the quarantine online sales could not fully compensate for the loss of revenues. As a result, retail sales in the U.S. declined 8.3 percent in March and 16.4 percent in April year-over-year, followed by a 17.7 percent increase in volumes in May due to the reopening. Looking at the whole year, retail sales including car sales are expected to fall by 10.5 percent bringing total turnover back to 2016 levels, which would wipe out three years of growth. Globally, this estimate assumes a 5.7 percent drop in revenues.

These projections are a good illustration of  how the vulnerabilities of retail sales and the speed with which they recover vary by country by country. Countries with a higher share of online sales will likely experience a faster pace of recovery, while for countries with less developed online sales markets it may take longer. In the end the proportion of sales channels may change in the long term and the surge in online purchases may stabilize at this high level only to increase further from this new base.

Lessons from the past

Over the past fifteen years the retail sector has performed well. In 2009 retail sales fell by a mere 3% globally followed by a 6% growth in 2010 so overall retail trade was running at pre-crisis levels in about a year after the financial crisis. At that time, one could say that the triggers were completely different and that the sector had to recoup in the middle of a lengthy financial crisis, but nonetheless it didn’t last long. Currently, the health crisis caused by COVID-19 is the reason for declining retail sales, coupled with concerns over supply chain disruptions down the road.

The world has encountered a similar situation in the past when MERS (Middle East Respiratory Syndrome) reached South Korea forcing Korean residents into their homes in 2015, resulting in weak retail sales apart from groceries. Sales in the most affected subsectors such as clothing, footwear and furniture were only able to recover in 2017. It is important to mention that South Korea has one of the highest rates of e-commerce, currently stands at 22 percent but was already relatively high in 2015, which at that time provided a strong impetus for changing consumer habits. Overall, online sales increased by 50-60 percent in the month following the outbreak and online sales of groceries increased by 80 to 90 percent.

As the above chart illustrates consumers turning to the online space due to the epidemic have become accustomed to this form of shopping and continued to shop online after the emergency hence growth dynamics continued in both retail and online grocery sales in general. After 2015 the proportion of online commerce has skyrocketed. It is likely that we will witness the same dynamics in countries where this rate is not yet high but high internet penetration is present.

In our core focus region of Hungary, Poland, Romania and the Czech Republic the share of online sales is still low but internet penetration does not lag significantly behind the European average. European average internet penetration is 89.4%, while in Hungary it is 88.9% , 88.1% in the Czech Republic, 78.6% in Poland and 74.8% in Romania.
To sum up, given the relatively low online sales rate shown in the first figure it is reasonable to expect that the pre-COVID normality may return somewhat later and in the future online sales will continue to grow from a higher base.

 

What to make from all this?

Clothing and footwear companies have already pointed out in their H1 reports that the surge in online sales during the spring has not fallen back with the reopening of malls. We came across statements that during the course of several months years of online-offline reorientation took place so expectations are that these rates may stabilize near current levels.

Even prior to the pandemic it was well known that with the transformation of customer habits online sales platforms continued to gain more ground so retail chains with a large physical presence suffered primarily. A strategic transformation was needed, the optimal mix had to be found between online and offline. H&M faced the same exact problem at the end of 2017 resulting in moving to an omnichannel strategy. It also became a widely accepted view that the reorganization of sales channels will continue, one only needs to take a look at the stock prices of the real estate companies operating shopping malls. What’s more the current shock caused by the coronavirus and the sudden reorganization need spell trouble for companies that could have managed the gradual implementation of their online transition. This is especially true for companies that typically have larger stores and have sales numbers per square meters lagging competitors.

Large malls and large stores face challenges as smaller store size becomes an advantage. In addition, there is a growing demand for online grocery purchases, which puts hypermarkets at a disadvantage as high fix operating costs hurts the bottom line. Grocery or supermarket chains, if they have not already done so, need to optimize their supply chains to cater to this emerging form of demand. As hypermarkets have been facing the negative trend for years they are already somewhat ahead of discount food chains as it is generally true that only the quarantine has prompted discounters to develop the online sales channel.
On top of the above challenges competition is also increasing among retailers as moving products online makes it easier for customers to search for products and compare prices and product features.

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