Richard Lim, CEO of Retail Economics, is concerned that this new normal could have lasting implications for the sector. “One of the biggest challenges for retailers is modelling levels of demand moving forward and finding the appropriate level of discounts. The pressure will be on retailers to turn inventory into cash and stem the depletion of working capital.
“However, the way consumers will react to the reopening of stores remains uncertain. They will likely remain anxious about shopping for discretionary items and there could be a significant gap between shoppers’ expectations of the retail experience and the reality of browsing with social distancing measures in place. Being greeted with mask-wearing shop assistants, disinfecting shelves and guarding closed changing rooms could risk undermining the whole retail experience, further fuelling the shift to online.
“Many clothing retailers were already plagued with underlying issues heading into the pandemic. Further administrations could lead to distressed discounting piling further downward pressure on prices.”
Impact on revenue
Marks & Spencer recently warned its shareholders that excess inventory would affect profits. “There will be a substantial impact on Clothing and Home revenue at the very least (in the next few months),” it said in a statement. “Although it is possible that this may ease as we get into summer trading, margins are likely to be severely impacted by the surplus of unsold seasonal stock and probable clearance activity in the marketplace. We are therefore taking all possible steps to defer supply.”
Demand will decrease across the board, according to retail consultant Richard Hyman, which will impact the entire sector; but some stores will prove more resilient than others. “Regarding stock levels, we know demand will shrink but none of us knows by how much,” he says. “Directionally everyone will lower prices and trade in a materially smaller market than they were, because of a reduction in capacity and a reduction in spend. Everyone will be hit, but it’s not a democratic system – some will face the pressure better than others.”
Hyman believes the crisis and the resulting fallout will make retailers shift their focus and their stock management into a longer-term strategy. “This virus will put an end to short-termism as businesses have to start aligning the way they look at things with how their particular markets trade,” he says.
“Retail entered this crisis in bad shape. The industry was bloated with too many stores, too many websites and oversized ranges, the result of decades of chasing growth at any price. Many firms’ inventory crisis is because they haven’t balanced revenue with cost – in any business, the former determines the latter, determines what is needed, and what is not needed. That means listening to your core customer demand and editing your ranges.”
Need for a clear customer focus
Those who were already getting this right before coronavirus, in terms of business models and stock management, will be the ones that will survive and thrive, Hyman believes. “Selfridges, Costco, TK Maxx, Reiss, B&M, Home Bargains – all have very clear customer focus which in turn determines ranging. They have resisted the lure of expanding their offers to attract a wider customer base and generate incremental sales, because they understand that would adversely impact stock turn, inventory carrying costs, availability, and lead to higher mark-downs, all hitting margins.”
This is why he – and other retail analysts – believes Primark will survive not shifting any stock at all for three months.
“There’s a good reason Primark isn’t online, and that’s because so much of its stock is so cheaply priced it’s not worth their while. The virus hasn’t changed that good reason. AB Foods is a family business which takes the long view. They sell fast fashion, but most of their stock is basics and they can shift that at any time. If the business doesn’t take money for a while, so what?”
And as demand remains low for the foreseeable future, other retailers will need to reassess their own approaches to stock management – although for some, says Hyman, it may already be too late.
“The fiscal stimulus packages are propping up businesses, but it means many are already bust but don’t know it yet,” he says. “Many staff who are furloughed are actually unemployed but don’t know it yet. This suspension of all the rules cannot go on forever. When the cost regime kicks in again, which it must, and businesses have to honour their debt, we will see the truth of Warren Buffet’s famous quote: ‘It’s only when the tide goes out that you see who’s been swimming naked.’”