Insights

COVID-19: Is the worst yet to come for retail?

The COVID-19 pandemic has disrupted supply chains, changed consumer behaviour, and created havoc in the global economy.

However, thanks to the financial support of central governments, much of the pain of the crisis has been ameliorated and pushed out into the future. These unprecedented levels of support for employment and businesses have provided critical aid in managing the effects of the pandemic. In a way, our economies have been given a "painkiller." But painkillers wear off - repeated use tends to dull the effect and often end in addiction.

In a way, our economies have been given a "painkiller." But painkillers wear off - repeated use tends to dull the effect and often end in addiction.

Prepare for the Crash

Against this backdrop, retailers globally need to prepare themselves for a large-scale economic crash, on a scale not seen for a very long time. Unemployment will skyrocket, and a huge number of businesses will find themselves unable to operate in the absence of the kind of support they’ve received recently. The impact on consumer spending will be stark. Retailers have hard choices to make about how they position themselves for a world where consumers demand higher cost-to-serve models (online delivery, visible and expansive safety measures in stores), but spend less as wallets are squeezed.

Some of the players, such as Grocers, have so far mostly benefited from the crisis. Shoppers have spent more in supermarkets as they stay away from restaurants and pubs, and reverted to a 1990s style of shopping, with one big basket a week. However, even these retailers will not be immune to the upcoming storm, as shoppers will trade down, both to cheaper products and to the discounter retailers. In the face of heavy economic impacts, price will once again be the key to attracting customers.

In the face of heavy economic impacts, price will once again be the key to attracting customers.

Choose Your Path

In the coming months, retailers need to choose their path for the next few years. How will they be able to differentiate most effectively? Do you specialise, focusing on customer experience and proposition, while ensuring that you offer the full range of fulfillment options? Do you focus on value and providing a low-cost option for your customers? Many retailers are closing physical stores, to better focus on their online offer, but this leaves businesses exposed to those customers (still the majority in many sectors) who want to shop in physical environments.

The right answer will vary as a function of market positioning, consumer behavior, and whether the customer segments targeted are large enough to sustain the resulting business. Another key element to consider is how businesses operated during the pandemic. Many brands have found themselves damaged in the eyes of the consumer, as some appeared to have focused on profitability over the well-being of staff and customers. These businesses face an uphill challenge in seeking to restore brand integrity.

Overall, the businesses that will thrive in the coming years are those that succeed in providing a clearly differentiated offer, one that is anchored in their overall brand promise, and that resonates with enough of the market to make the proposition viable. A me-too chase to the lowest prices will only result in the survival of the players who can operate at the lowest cost.