Too many stores. Too many Malls. Too much space allocated to what we are now deeming non-essentials. Too much inventory. Too many “White Flower Day” sales. Too few salespeople. Too few knowledgeable salespeople. Too few conveniences. And a completely changed consumer.... the list goes on and on… and retailers one by one are falling victim.
There has never been a more precarious time for retailers, especially those that were complacent about their future. With stores having been closed for nearly two months, inventories continue to pile up and future orders are either coming into closed stores, getting pushed out to future dates, or being canceled altogether.
Re-opening dates are undecided in most states, and even with a staggered return to business, customers’ response is uncertain. Many factors will impact consumer spending including how quickly people get back to work, additional government stimulus initiatives, and precautionary measures that retailers put in place to ensure safe shopping environments.
The grim reality is that while most retailers are trying to balance short-term survival with long term viability, many won’t make it. Lauren Bitar, head of retail consulting at RetailNext said recently, “I think we were overdue for another shakeout, both with the large number of direct-to-consumer brands which have started to open stores and for legacy brands which have too many. And as always, from the ashes, new brands and store concepts will rise up.”
The issues that have plagued retailers for over a decade are not new, but now, as a result of COVID-19, they have become emergencies. How each problem is prioritized and resolved will determine who weathers this final battle, turns these challenges into opportunities, or simply dies a natural death.
I have broken down the five fundamental issues facing retailers today and attempted to provide some guidance on how to navigate in the short-term and long-term.
#1: THE CHANGED CONSUMER
Whether you’re targeting financially flush baby boomers or Next-Gen shoppers, there are significant changes in the consumers’ mindsets, priorities, and shopping behaviors as a result of COVID-19. Regardless of generation, people are coping with their “new normal,” and their purchase behavior reflects this.
Stay at home orders and more people working from home means different product priorities. Health and wellness, beauty, home, and accessories are proving to be winners, and this doesn’t look to change anytime soon.
Comfort is key and even more important than ever across multiple categories with an added emphasis on health, wellness, and activity.
Value is critical. As seen with other economic drops in spending, during and after economic recovery, consumers become very value-conscious especially with fashion goods (apparel, accessories, shoes).
Brands are less important. As private brands at Target, Costco, and Amazon soar, shoppers are demonstrating that even brand names are less critical when making a purchase.
MITIGATION STRATEGY - Know What Matters Most to Your Customers
If you remember one thing, it should be that all solutions need to be grounded in what matters most to customers.
Adjust your future penetration by category to reflect the change in consumer demand. Your sales & inventory plans, brand budgets, space allocation, and marketing/advertising budgets need to be adjusted.
Consider incorporating comfort across categories and price points as this preference probably won't change anytime soon.
Review your AUR (average unit retail), percentage of sales at regular price vs.off-price to determine the “sweet spot” pricing for future orders. For many retailers, sales during the pandemic have been between 25% to 40% off regular-priced retail, and these lower prices are stimulating purchases. Look at your current markdown plans and prices and adjust them accordingly to make them count.
Future product assortment decisions should be based on the category, product, value, and price first, and brand second. If the first 4 values are in place, the customer won't care what the brand name is. If you have a private label division or brand, now is the time to prop it up.
#2: INVENTORY OVERLOAD
Historically the problem of having too much inventory stemmed from two main issues:
Enter a global pandemic with store closures for over two months and this problem is now a crisis. Retailers have a huge amount of merchandise in stores that they can’t sell and it is only becoming more out of season the longer that store closures drag on. Because it is unclear just how much consumer demand there will be the rest of the year, retailers are also trying to figure out what’s in the pipeline for the rest of the year that they can still cancel, so they don’t risk being left with too much inventory in the fall and beyond.
What this means is that on any given day a retailer could have up to five seasons of product in their stores and no customers (residual sale merchandise from Fall ‘19, Holiday markdowns, Resort markdowns, Spring, and even some early Summer merchandIse which historically delivers in May, etc).
Reducing overall inventory levels is the highest priority, but no matter what your liquidation strategies are, it is critical to balance the options with your brand equity and consumer perceptions.
MITIGATION STRATEGY - Short Term
Reduce future incoming inventory by partnering with vendors or manufacturers to cancel orders or push out deliveries until fall. Consider repricing your product to reduce the overall value and make it more attractive to customers.
Identify the most perishable merchandise, and prioritize seasonal categories. Evaluate ownership and viability as the product is losing value. Take deep markdowns (40-60%) to cut through all the promotional activity and remember your first markdown is your least expensive.
Leverage online stores and off-price retailers like Burlington, TJX, Ross, or Nordstrom Rack. Consider donating inventory in certain relevant categories and practice doing good while managing your business.
If possible, write-off fabric commitments intended for future production in lieu of manufacturing which could be cheaper than the inevitable markdown.
Pack and hold should be a last resort. Most merchandise is unlike fine wine, it does not get better with age!
MITIGATION STRATEGY - Longer Term
Use your financial planning process to force inventory reductions.
At the risk of oversimplifying, I would recommend taking a blunt instrument to your average inventory levels and reducing across the board by a minimum of 20% or greater and commensurate with the planned decrease in sales. This planned inventory reduction will force the editing process, and eventually produce increases in regular price sell-through and profitability.
#3: GO ONLINE OR GO HOME
Prior to COVID-19, omnichannel retailing was the only way to survive, let alone grow. Many traditional retailers were struggling to catch up to their digital-native counterparts or DTC brands. And the DTC brands seemed to be racing to find brick and mortar stores so they could bring their brands and products TO the customer in a physical space.
The race to omnichannel proficiently was in large part driven by the value of omnichannel consumers. An IDC Retail Insights report revealed that multi-channel consumers spend more money, including:
Optimize online and offline was a formidable challenge then and now it’s a necessity.
For the past few months, customers who were forced to pivot to online shopping are now savvy and comfortable across multiple categories and therefore more apt to maintain that switch.
“In China, the share of consumers over the age of 45 using e-commerce increased by 27 percent from January to February 2020, according to Chinese market-research firm QuestMobile. Once they are acclimated to new digital or remote models, we expect some consumers to switch permanently or increase their usage, accelerating behavior shifts that were already underway before the crisis.” -McKinsey
MITIGATION STRATEGY - Go Where Your Customers Are
(which is primarily online for the foreseeable future)
Now is the time to prioritize a well-integrated multi-channel operation. If possible, continue to invest in the online experience, and make it engaging, easy, affordable, and quick. The only replacement for the instant gratification you get in a store, is the click and collect, or click and receive right away!
Remove any friction with the process, particularly at checkout in order to reduce your cart abandonment rate.
In today's market, free shipping is bare minimum - with purchases and returns. You should also be over-communicating with consumers before, during, and after transactions and extending your return policy to accommodate for the slower shipping times we’re experiencing.
Nathan Richter, vice president of strategy and Insights at Dynamic Yield, said recently “Free shipping is absolutely a consumer expectation, and with the delivery time frames noted, we are seeing better consumer planning happening within their buying cycles, allowing for the swap from delivery “as fast as possible” to “on time and free.”
There is an opportunity to regain some market share but it will require a concerted customer-centric analysis and investment in the experience, convenience, assortment, and pricing strategies across all of your channels, especially online.
#4: THE GRIM FUTURE OF SHOPPING MALLS
Malls were among the most hard hit by the retail apocalypse of the past decade and now are at massive risk as a result of the global pandemic.
According to real estate research firm Green Street Advisors “50% of mall department stores could close by the end of 2021” and “if department stores start closing up shop, it could doom the malls they vacate as well”. With department stores in malls gone, other specialty retailers will undoubtedly question their existence if they aren’t already on the brink of closing themselves.
MITIGATION STRATEGY - Get Creative & Make The Best of Your Locale
Renegotiate your location within the mall. Just as in retail stores, there are ‘A’ locations, and ‘C’ locations. Go where the foot traffic is, and seek adjacencies that can bring your target customer in-store, and enable cross-selling.
Renegotiate your lease or your payment terms with the landlord. The mall owners are going to be faced with tremendous vacancies and if you can stay, your negotiating power just got bigger.
If you can vacate your mall locations, look towards more localized centers.
Most customers want convenience and efficiency and want to be able to shop close to their home or along their driving route or when they’re traveling.
Prior to COVID-19, Sephora has committed to opening 100 new stores in local neighborhoods with smaller formats as a growth alternative to their position in major malls.
#5: BIGGER ISN’T BETTER
Retail stores have been built way too big... as was just about everything in the ’80s. Fresh Prince of Bel-Air ring a bell? Just last year retail space grew 3.7% while the general population of the United States grew less than 1%.
Now with a complete retraction of retail sales, plummeting 8.7% in March which was the biggest decline since 1992, is yet another massive dilemma for department stores. Actually, the supersize stores may be a short term benefit given the mounds of excess inventory at the moment.
But, long term, this is going to be the final nail in the coffin.
Prior to COVID, consumers were looking towards smaller, local stores that offer a more targeted product assortment and a more engaging shopping experience.
MITIGATION STRATEGY - Shrink Your Box
Less is more. A small space and other constraints can force editing and editing will be key in solving many of the problems outlined in this article.
Ways to shrink the box:
If you can, negotiate for a new location in your current commercial retail space so that you can make necessary edits and updates while social distancing restrictions are still in place. This way, you’ll be ready for customers when they are allowed to shop in malls again.
If you can’t shrink your storefront, get creative with a remodel. Close up entire sections of the store (an entire floor, back corners, etc) to keep the focus small.
When looking for a new brick and mortar location, prioritize smaller, boutique-style shops with a neighborhood feel.
COVID-19 is an opportunity for brands to reconfigure their strategies and storefronts. Get creative with new ways to serve your customers, edit your offerings, and really hone in on the things that will make you stand out from the competition.
Reach out today if you need additional help navigating the wake of this global pandemic.