Q&AMarch 31, 2020

From Fifth Ave to the High Street, What’s to Come for Department Stores?

Insights from Carol Spieckerman, Ian Shepherd and Tony D'Onofrio


On Monday, Mar. 30, RETHINK Retail Editor in Chief Julia Raymond spoke with European retail consultant and author of “Reinventing Retail,” Ian Shephard, along with industry futurist Tony D’Onofrio and retail expert Carol Spieckerman, about the COVID-19 pandemic and the impact it could have on department stores and other struggling retailers. 

 

Ian Shepherd:

As the virus crisis has spread across European markets, the impact on retailers has followed a very similar pattern. At first trading dropped as people stopped shopping as much and then as governments have implemented increasingly stringent lockdowns, retailers deemed non-essential have closed altogether.

At first closing their stores, but keeping online deliveries going. But as I record this more and more are now shutting down their distribution centers too and ceasing online selling. The result of all of that is that the retail sector splits into two. Actually in two different ways.

The first split obviously is between those who are open and those who are closed. Pharmacy and grocery retailers are open obviously and are under incredible strain as they try to cope with demand. In the early days that demand was boosted by panic buying, but even in the post-panic phase, demand remains high as people who are not eating out or at work and so need more stuff at home. It’s been incredible to watch retailers in these categories cope with the current situation. Retail colleagues in stores and throughout those operations have earned the admiration of all of us I think for their amazing work.

The other side of that split, of course, is retailers who are closed for business. They are under incredible pressure of a different kind. Their world is now about survival. In a crisis like this, that means only one thing, cash is everything. The world for these retailers simply boils down to how much cash they have or have access to and what their daily or weekly burn rate on that cash is. Reducing that cash out flow rate is key, but of course that often from a wider economic point of view, just spreads the pain into other sectors as retailers stop paying rents to their landlords or furlough staff for example.

That brings me to another way in which retailers are dividing into two groups. There is a palpable sense that some retailers in this crisis are doing the right things, trying to protect and support customers and colleagues as best they can, but that others are not. Whether the naughty list is about gouging prices on in-demand products or heartlessly letting colleagues go while continuing to pay high executive salaries, there is a very clear, and in the social media world a very public tallying of retailers behavior through this crisis. That’s one of the longer-term implications that I think the crisis will have.

Sadly, there’s no question that many retailers will not survive this period. Those that do will emerge with a new attitude to how much balance sheet strength they need to have to survive tough times, how many stores they need, and lots of other issues as well. But consumers too, I think will emerge from the crisis and will remember and reward those businesses who do the right things in the right ways for their customers and for their people.

 

Tony D’Onofrio:

At the beginning of 2020, the IHL Group projected that North American sales, including the United States and Canada, would grow by 2 percent for the year. The new forecast, with COVID-19 lasting three months, has North American retail sales dropping by 1 percentage point. 

Not all retail sectors will share the pain equally. Grocery, including supercenters and drug stores, will do extremely well. For example, the projection initially for grocery was to grow 3 percent. Now it’s projected to grow by 18 percent

Department stores and apparel, especially retailers lacking clear branding or price positioning strategies, are going to continue to struggle and multiple will probably not make it. It’s not a retail apocalypse, it’s really brands not keeping up with consumer trends.

Again, a new normal is coming because of COVID-19. It is going to accelerate things like eCommerce, cashier-less stores and contactless solutions. Physical stores are not going to go away because of COVID-19, but they do need to accelerate and harmonize across all channels of digital transformation.

 

Carol Spieckerman:

The COVID-19 pandemic is definitely the elephant in the retail room right now—there’s just no avoiding it.

And it is going to hasten the demise of retailers, like JC Penney, for example, that have been on the brink for a while. Now, JCPenny is particularly vulnerable because it is so dependent on soft lines for their success. Categories that are highly discretionary, like apparel and home,  are great businesses to be in (when business is good) because they’re high margin. But now, we’ve got consumers so focused on essential products and paring down, that it has become hard to imagine that that discretionary spending is going to magically go on the uptick. This is particularly true when some of those higher spending individuals, the ones that are still gainfully employed, are not working from home now. To think that they’re going to suddenly feel a need to refresh the wardrobe, or chase the latest fashion trend, is still more wishful thinking.

But like a lot of times throughout retail history, during the difficult times, there are going to be winners—those who make it through and even thrive on the other side—and there are going to be those who, frankly, fail fast, and fail faster than they ever thought because of this pandemic. But we’re going to start to see who falls into which category, and I think it’s going to happen more quickly than anyone anticipated. 

 

These insights first appeared in the March 30, 2020 episode of the Retail Rundown.