How COVID-19 Will Change the Way We Shop

Only weeks after consumer confidence hovered at historic highs, COVID-19 dealt U.S. retail businesses a triple blow: loss of foot traffic, less need for quarantined consumers to spend, and, with the economy at a standstill and unemployment soaring, far less propensity to spend. Denise Dahlhoff, senior researcher for consumer research at The Conference Board and senior fellow at Wharton’s Lauder Institute, examines the challenges to consumer-facing businesses, the ways they are adapting during the pandemic, and what the retail landscape will look like once this crisis abates.

Even before the fallout from COVID-19, when the economy was humming, many retailers were grappling with changing shopper preferences and habits as well as with cutthroat competition. The COVID-19 crisis has only magnified the pressure, with headlines suggesting a “survival of the fittest” environment. From department stores and malls to iconic retailers and small local stores, the industry must brace for major upheaval in the coming months. Cases in point: J Crew and Neiman Marcus, the first major retailers to file for bankruptcy protection, Nordstrom closing 16 stores, and Victoria’s Secret calling off its deal to sell a majority stake and take the brand private.

And even when stores start to reopen, the pandemic will have left an indelible footprint on how consumer-facing businesses operate. As recently as February, when the virus was just spreading beyond China, U.S. consumers continued to be upbeat. However, in March and April, The Conference Board U.S. Consumer Confidence Index declined sharply, as did U.S. retail sales, experiencing a record plunge of -8.7% in March from the previous month with a further decline expected for April. The widespread global health issue quickly became an economic one, as its proliferation ended up dealing a triple blow to retailers.

First, consumer businesses depending on the physical presence of customers lost foot traffic due to stay-at-home policies. While some have moved online, this salvages only a fraction of revenue. Second, quarantining at home also reduces consumers’ need for certain products and services such as professional clothing, festive outfits, and salon services. And third — and possibly most enduring — consumers’ propensity to spend has decreased, resulting from income losses. New jobless claims in the U.S. have reached more than 33.5 million since mid-March. As people face an uncertain and potentially grim future, they limit expenses to essential needs.

After stay-at-home orders have been lifted, these challenges will ease only slowly. The brands and retailers best positioned for a rebound are those that are flexible and innovative in adjusting their business to the landscape and needs of the post-pandemic world—and those that cater to one end of the market: value or high end. Middle-of-the market brands are most vulnerable and in greatest need of an overhaul of their long-term strategy to be able to survive a shock like the current pandemic.

Middle-of-the-market brands are most vulnerable and in greatest need of an overhaul of their long-term strategy to be able to survive a shock like the current pandemic.

Retailers’ initial task will be to lure customers back, and that requires making people feel safe in stores. While current closures are increasing online shopping, the latter is not a full substitute for in-store shopping, which pre-crisis generated over 80% of retail sales.

Post-crisis, stores — possibly resized or repositioned versions — will continue to be crucial even for retailers with strong online operations, since they add reach, give shoppers a first-hand product and brand experience, provide in-person advice, and allow online pick-ups and returns. This is especially true for discretionary goods such as apparel, accessories, and tech products. That’s why digitally native brands including Warby Parker, Bonobos, and Casper eventually opened physical locations or partnered with offline retailers.

‘Click and collect’ Continues to Gain Traction

A notable crisis-inspired development is the surge of online delivery orders, especially for essential goods. The online market share in groceries has generally been small, in the low to mid-single digits, merely a supplement to brick-and-mortar visits.

The pandemic has introduced more shoppers to full grocery e-commerce: online shopping with home delivery. While some of this new business will likely stick, the current surge may be temporary. Once people return to work, the logistical pain points of e-shopping will remain: theft, limited space for deliveries in city buildings, and keeping perishables cool. Additionally, people will be more price-sensitive, rendering delivery fees less acceptable.

Nevertheless, the crisis may accelerate the “click and collect” trend: online ordering with store pickup. “Click and collect” is free or low-fee, convenient, and resolves most issues involving grocery delivery while minimizing contagion. Online ordering makes product searches easy, provides customer reviews and other useful information, and obviates checkout lines. Pickup reduces traffic congestion from delivery vehicles and requires less packaging – two sustainability benefits. Overall, winners may be grocers, mass merchants, and other retailers with well-integrated multi-channel operations.

Renewed Frugality Benefits Discount Chains 

Even before the crisis, U.S. consumers were increasingly concerned about debt. Given that most are now taking a pandemic-related financial hit, shoppers will be more value-conscious.

Hence, discount and value sectors may continue their growth. This includes grocery, apparel, and general merchandise, and may benefit private-label retailers such as Trader Joe’s, Aldi, Walmart, Target, and dollar stores.

Off-price retailers such as TJ Maxx, Marshall’s, and Nordstrom Rack, which have continued to expand since the 2008-2009 recession, may become even more popular. They may benefit from a large supply of merchandise that brands and retailers can’t sell at regular price.

Given that most [U.S. consumers] are now taking a pandemic-related financial hit, shoppers will be more value-conscious.

In the short term, widespread promotions may clear new seasonal and pre-crisis merchandise sitting in stores during the shutdown. However, some companies such as PVH — the owner of brands such as Calvin Klein and Tommy Hilfiger — are considering holding current merchandise to sell later, even next year, without having to discount heavily.

Fashion’s dilemma of fast-aging merchandise begs the question of whether more seasonless and classic lines may boost both profitability and sustainability. Such collections would increase flexibility and suit increasingly unreliable weather patterns. Shoppers might also embrace outfits that can be worn for both work and leisure. If the more casual work-from-home outfits loosen office dress codes, combined work and leisure wardrobes could reduce item counts and save shoppers money (and closet space).

Sustainability Will Benefit — or Suffer

When it comes to sustainable brands and products, strapped consumers may now be even more reluctant to pay a premium for sustainability, a major hurdle we found in our pre-pandemic global consumer research. At the same time, they may value sustainability even more because of their pandemic experience, which focused attention on many sustainability themes: the improvement of labor conditions for essential workers, the lowering of pollution levels during shutdowns, and the value of collaboration. Post-crisis, companies’ continued commitment to sustainability and creativity will be even more crucial to make sustainability financially viable for both companies and consumers.

Whether the sustainability-friendly business models of secondhand clothes and apparel rental continue their pre-pandemic growth trajectory remains to be seen. While these businesses fit the frugality trend, consumers might have hygiene concerns. Businesses that establish new cleaning standards and health-focused policies could be well positioned for continued growth.

Going Local Gets a New Lease

As the pandemic highlights U.S. dependence on overseas suppliers, especially from Asia, and the importance of further diversifying supply chains, industries may consider bringing some manufacturing back to North America. That includes Mexico, which already has substantial apparel production.

The pandemic may hit small local retailers hardest, due to their reliance on physical stores over e-commerce.

The crisis may also rekindle consumers’ interest in “Made in the U.S.” products — if they are affordable. For apparel, barriers to U.S.-based manufacturing have been availability of factories and manufacturing expertise along with comparatively higher wages. This crisis presents an opportunity to rethink and innovate. Many U.S. companies have already been doing so, producing pandemic-related goods (e.g., companies including Nike, Under Armour, Gap, Brooks Brothers, New Balance, Jockey). Some companies even switched lanes: Fiat Chrysler, for example, produced face masks, and Anheuser-Busch InBev made hand sanitizer.

However, scalable U.S.-based apparel production may require more automation and reskilling, including for high-tech-controlled processes. Micro-factories could fit new and modified business models, accommodating small runs on demand. At the same time, they would serve sustainability goals by lowering transportation, unsold stock, lost profits, and waste, while adding appeal for shoppers interested in purchasing American-made merchandise.

Finally, a visible result of the pandemic will be newly vacant retail spaces in malls, downtowns, and neighborhoods. The pandemic may hit small local retailers hardest, due to their reliance on physical stores over e-commerce. Loss of local retail, food, and service establishments causes layoffs and reduces the vitality, property values, and safety of neighborhoods. Innovation will be sorely needed to revive business districts, and local communities could emerge stronger by rallying around a common interest.

After the Great Recession, cupcake bakeries and food trucks — along with nail salons — emerged as popular “little indulgences” in tough economic times. These businesses enriched neighborhoods and filled vacancies. Let’s call in the entrepreneurs to start inventing our post-pandemic pick-me-ups.

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