The Covid Chronicles

An example of shopping during the Covid pandemic

Being declared nonessential during the Covid-19 pandemic lockdowns perfectly captures the literal truth about mall-based specialty retail.

In fact, specialty stores only exist in the first place because they are magic. They invite us into beautiful stage sets, create new aspirations and help cater to our most refined tastes. Les Wexner, the one-time owner of over a dozen specialty retail chains, frequently reminded his executives that they were in the “wants” business, not the “needs” business. His most scathing (and still printable) critique of his brands’ marketing or displays would be “this looks like JCPenney.” The more magic his stores created, the more margin. The…math…was…that…simple.

Over the past decade, we’ve witnessed a broad and steady decline in that magic, inflicted in part by the infectiousness of a handheld supercomputer that brings the world directly to us. During this pandemic, we worry whether a trip to the mall would be safe; but the journey had already become increasingly unnecessary and banal.

So, what’s next for the malls and their tenants?

The Covid Chronicles

There’s a group of retail executives in Columbus, Ohio who are still committed to perpetuating that magic. We call ourselves CBUS Retail, with the motto, “We love retail.” We are currently producing — supported by Klarna and other like-minded sponsors – a nine-episode, streamed video series entitled “Specialty Retail in Crisis: The Covid Chronicles.”  The series describes the massive disruption in this sector, paints a view of its future and suggests strategies for post-pandemic success. So far, we’ve interviewed 40 analysts, operators and founders from retail hubs across the country. Here is a synthesis of the series.

1. Pre-Covid

Of course, the mall economy was already troubled well before the pandemic, plagued by a persistent supply-demand imbalance, eroding margins and falling productivity. The dynamic duo, Michael Dart and Robin Lewis list several key reasons:

  • Oversupply
    • Persistent falling manufacturing costs.
    • Continued growth of non-mall options – discount, value, outlet and off-price; clubs and big boxes; everything digital.
  • Shrinking demand
    • The mall’s targeting of, and dependence on a shrinking middle class.
    • Consumers spending more on experiences and health & wellness, and less on physical products (aka “dematerialization”).

Other speakers highlighted two other distinct failures of the mall’s tenants:

  • A generation’s-long inability of department stores to increase mall traffic.
  • Specialty chains’ increasing lack of novelty, creativity and differentiation.

In short, too much product, too many stores, and not enough magic.

2. Direct Impacts of the Pandemic

If zombie malls with zombie stores filled with zombie product populated much of the retail landscape pre-pandemic, Covid-19 appears to be finally killing off many of these walking dead. Since March, retailers will have announced the closure of an estimated 25,000+ stores, and a net ~300 malls are projected to “repurpose” or succumb during the next three years. So far, over two dozen specialty and department store retailers have declared bankruptcies, with most emerging much slimmer, with new owners. We are told to expect more Chapter 7’s and 11’s this spring.

NPD’s Marshal Cohen describes “The Discretionary Divergence” in consumer spending.

Shows the categories diverging in spending

3. The Silver Lining

As the pandemic continues to wreck stores, profits, jobs and livelihoods, not to mention lives, our speakers see plenty of future upside for the sector. First, much of the structural oversupply will be gutted from the marketplace. BMO Capital Markets analyst Simeon Siegel argues that the current crisis allows public retailers to strategically downsize without incurring shareholder ire. Most agree that digital commerce is racing through puberty during the pandemic and now stands at least as tall as its offline parent. All in all, there’s a scramble to re-form and reform retail: The future of specialty retail is up for grabs.

4. The Future

A More Diversified and Dynamic Landscape, With Faster Lifecycles and Lower Peaks

With malls and legacy retailers hobbled, the barriers to entry for emerging retailers have never been lower. Traditional wholesalers and DTC brands are finding more mall vacancies with lower rents and more flexible terms, according to Steve Morris, Asset Strategy Group’s CEO. Ottawa-based Shopify provides inexpensive Retail-as-a-Service to over a million ecommerce merchants, who can also co-list their products on other shopping and social platforms including Amazon, eBay, Facebook and Instagram.

Forrester’s Sucharita Kodali foresees an intense battle over the next decade between legacy analog brands now adopting digital first mindsets vs. digital natives seeking heightened customer connection and growth through operating stores.

Whoever wins, the spoils will likely be smaller than before. Analog-first brands that took a generation or more to build tend to top out at $2-3 billion in the U.S. at retail, according to Siegel, with only NIKE swooshing beyond. The current generation of venture-fueled concepts – monied, impatient, and viral-when-successful – will peak faster, but at a level limited to consumers’ goldfish-sized attention spans.

Given the increasingly complex and integrated nature of the equation, analog + digital = sale, J.Crew’s Billy May believes we should focus mostly on market and customer profitability, not channel.

Oliver Chen of Cowen argues that community is the unlock for sustaining consumer loyalty in an attention-deficit world. Aerie and Glossier use social media especially well to foster engagement, according to Chen. Pre-pandemic, Revolve, a brand positioned to party, hosted big, fab, in-person parties instead of investing in brick and mortar.

A Re-Engineered Retail Value Chain

During the pandemic, the design and merchandising teams at the tween girls’ retailer Justice took the whole product development process virtual — from inspiration to concept to line — removing months from their calendar. The compressed timelines prioritized merchant conviction and improvisation ahead of test-read-react. Truly energized by the speed, efficiency and empowerment in the new process, VPs Kat Depizzo and Julia Hanna  are convinced these changes will largely be permanent.

More frequent and smaller buys closer to floorset/listing is a recurring theme. Lower markdowns will make up for slightly higher unit costs. Supply chains will be leaner, faster and more distributed, avoiding single points of failure. Inventory transparency is doubly important as omnichannel options proliferate. Good forecasts are the ultimate lubricant in a lean, forward-positioned supply chain. From a tech perspective, Karl Haller demonstrates how IBM projects demand to the store level.

In stores, all agree that we’ll move towards contactless customer service and payments post-pandemic. Kodali states, “a customer should never have to wait in line to talk to a person.” WD Partners’ Lee Peterson reports that Alibaba is way ahead on these and other innovations in his talk “Innovation, Alibaba Style.” There was widespread agreement that Chinese companies and consumers provide a good benchmark for what’s ahead.

A New Role for Physical Stores

Cathaleen Chen wrote a Business of Fashion article in August, both profound and so obvious (as in why-in-my-decades-in-this-business-hadn’t-I-thought-of-it kind of obvious). There are four roles for physical stores: brand, service, immersive experience and community. Think slow on this.

A future strategy for a market-based store “portfolio” makes sense. Some stores offer full brand presentation, high-touch service and interactive community building; at the other end of the spectrum, are dark stores that only fulfill pick-ups and deliveries.

Less Algorithm, More Imagination

Author of “Aesthetic Intelligence,” Pauline Brown, states that in business there should be a tension between analysis and aesthetics. But that the only way to beat the robots is through the uniquely human ability to create beauty, infuse joy, and surprise and delight customers.

Aaron Walters, CEO of Altar’d State, asserts that the larger a business gets, the more it needs to either simplify the model or empower its employees. He advocates bringing the “special” back to specialty retailing.

Former Google executive and arts student, Abigail Holtz, observes that ecommerce has not evolved for 20 years and now seems emotionless and flat, not effortless and fun; and stores have their own shortcomings. She created online shopping site The Lobby to merge the best of both channels, where they curate emerging brands “doing something special” and make shopping fun with an original, authentic and very human-centered interface.

Magic.

NOTE: This is just a small sample of the smart commentary in the series. Please visit https://cbusretail.org/covid-chronicles-season-one/ to stream for free and join our live Community Roundtable https://cbusretail.org/member-events/ on January 6 to discuss the series content with several of the speakers.

Five Forces Shaping Retail’s Post-Pandemic Future

This is a precarious time for all retailers, but particularly those deemed non-essential: Inventories are piled up and on-orders slashed; relationships with suppliers, landlords and employees are fraught; cash is scarce and the timelines for stores opening and customers responding are murky. Many, if not most, are focused only on short-term survival.

Multiple Scenarios

As we plan for the post-pandemic future, we’d do best to plan for multiple possible scenarios. For over a decade now, we assumed steady consumer spending growth, some jockeying among competitors and steady momentum continuing towards digital. Today, there are so many more variables at play and a much wider range of outcomes to consider, contingencies to plan for and opportunities to exploit.

For management teams engaged or soon-to-be engaged in scenario planning, you should consider five broad forces shaping the future of our industry: Acceleration, Distortion, Depression, Natural Selection and Government.

1. Acceleration

The march to ecommerce has become a sprint, which is perhaps the most obvious outcome of the coronavirus crisis. Remember several years ago when website developers adopted the mantra of mobile first? It’s clear now the paradigm for much of retail, today and for the foreseeable future, will be digital first. For an increasing number of retailers, the primary role of brick and mortar will be to facilitate digital transactions and promote brand loyalty through the experiences of showrooming, ordering, fulfilling, pick-up and return.

The impact of digital first on stores is crystal clear. Even before the pandemic, a large part of the mall-based, non-essential retail economy was past maturity and in decline. This crisis will kill off the weak, including full-scale retail brands, retail locations and shopping centers.

Digital first applies to retail operations as well. Design is moving to 3D, sometimes linked in real-time to sourcing and pricing. These 3D images can also be tested with consumers, in multiple phases, to help optimize assortment and help manage an individual product’s lifecycle, from product development, buying and planning through to allocation and clearance. Finally, this crisis has cratered today’s supply chains, but will definitely spur retailers to develop processes that are more technologically integrated and responsive in real time, connecting hyper-local, dynamic demand forecasts to decisions far upstream, even to the selection of raw materials.

2. Distortion

There will clearly be differentiated impacts by sector. Retailers and their locations supported by travel, tourism, entertainment, sports venues and gyms are suffering the worst. Others are benefiting: the obvious, Amazon, plus nesting-driven retailers and food retailers. When the commercial world opens its doors again, retailers and brands that offer safety and familiarity may have an advantage over lesser-known brands that trade on innovation and novelty. Marketplace distortion is nothing new, but it looks more dramatic now in separating the winners from the losers after the crisis has abated.

There is also a consumer behavior distortion we are experiencing from shelter in place. We are dressing down, cooking, DIYing and drinking in place. No one knows if these trends will continue after lockdown or whether we might herd towards the exact opposite when “normal” returns. The opportunity is to bank on consumers’ needs to celebrate emergence back into their lives, marketing in mindful, sensitive ways to reconnect with customers who want to reclaim a sense of personal agency and freedom.

3. Depression

A sustained and deep economic downturn is possible, if not probable. Recent reports suggest a realistic “return to normal” may take two years or more. Plus, any retailer who has suffered a bad season knows it takes a good 18 months to regain momentum. And it’s still unclear when that clock will start ticking.

Even if this crisis is relatively short, retailers’ cash will be rationed, resulting in reduced investments in inventory, infrastructure and innovation.

A prolonged downturn will also scar consumer psyches. The generation that lived through the Depression lived, spent and saved far differently after it ended. We’ve all heard the phrase, “Depression mentality.” It’s important for retailers who target Gen X through Gen Z to understand and connect with the changed attitudes and behaviors of these consumers if we do enter a significant economic depression. They have been hammered twice now – just as they started looking for or beginning their first job then came the Great Recession. Now, 10 years later, we have COVID-19.

4. Natural Selection

Some commentators compare this global crisis to a mass extinction – a consequence of a catastrophic global event. For retail, this means the big and the liquid will survive while the weak and indebted die off. Amazon and Walmart are winning because as they increase scale for their concepts, it results in more selection, lower costs, better service and higher switching costs. They have the cash, leadership and determination to keep the flywheel spinning.

Retailers with strong brand equity including Nike, Louis Vuitton and Apple will survive. And those with superior value propositions including Ulta, Warby Parker, Amazon and Costco will emerge even stronger and more dominant. Yet size is no protection from mass extinction. Macy’s, Sears and JC Penney have proven to be too set in their ways to adapt to a changing environment. Toys R Us is gone. Other iconic brands are struggling, including Gap, Victoria’s Secret, J Crew. This crisis will kill the dinosaurs, even some of the biggest.

Survival during a catastrophic global event historically favors those with diverse portfolios and practices, plus the quickly adaptable. Diversifying sourcing in countries outside China will take on even greater urgency after this crisis. Retail chains that are targeting ever more diverse customers and creating different store and pop-up formats for different types of locations have a better shot at long-term success. In fact, the mall economy’s reliance on a monoculture of national fashion specialty retail chains made it especially vulnerable when customer demographics and shopping behavior changed. Successful retailers target customer micro-segments, adapting personalized marketing with adaptable operations, including micro-warehouses and customized merchandising.

Small may in fact thrive post-pandemic. Digital native brands that are flush with cash and lower fixed costs will have the financial ability to ride out the crisis. Small neighborhood businesses may benefit from customer loyalty and valued as places we know and trust, even if many reopen with new owners.

5. Government

Government continues to play a huge and necessary role in this crisis. Some of its post-pandemic impact will depend on which political party wins in November. Progressives hope the lessons from this crisis will generate political support for a higher minimum wage, universal healthcare and a more generous safety net. Many voters across the political spectrum have gained renewed confidence in their state and local governments through their able handling of the crisis. But let’s not forget that post-crisis, governments at all levels will cumulatively have added many trillions in debt and depleted their rainy-day funds. As a result, retailers may have to plan for being hit with some combination of higher taxes, higher borrowing costs and higher employee costs.

What Next?

This first step of the scenario planning process (i.e., identifying the forces likely to drive change) employs deductive reasoning: we start with general principles (e.g., Acceleration) and test them to gauge their power. This set of five may work well to describe the specialty retail sector generally, but may not fit your situation precisely; feel free to come up with your own list. Then build the various scenarios you feel are most likely and create plans for each. To describe each scenario, you’ll want to develop specific narratives around what’s likely to happen to customer segments, competitors, shopping centers, the macroeconomy, etc.

The five forces I’ve described above do map to some pretty bleak scenarios. The silver lining is they each create their own set of strategic opportunities: The culling of weak retailers will open up some pretty sizeable market spaces; a depression will lower asset prices, creating good investment/acquisition opportunities; and the closing of legacy department and specialty chains will allow legacy wholesalers and emerging digital native brands to scoop up less expensive leases with less risky terms. Using this framework, you’ll be best prepared and ready to seize these opportunities when, hopefully, they arrive.