THE VIRUS THAT KILLED RETAIL AS WE KNEW IT?
The pace with which events have unravelled over the past few weeks as been sonic. It wasn’t that long ago that we were talking about the supply chain effects of a virus far away in China, roll forward a few weeks and all physical stores selling non-essential items are closed and online retailing is gradually heading the same way.
What are the current side effects for retailers?
Stores have been mothballed, placed in hibernation and there are already estimates of large numbers of these stores never opening their doors again. The Centre of Retail Research has estimated that 20,000 will never reopen, that would be a 28% increase in closures compared to 2019. At the time of writing that sounds optimistic, if stores remain closed for longer than a few weeks, this number will only increase.
It is estimated that over 3 million people work in retail in the UK, 1 million of them might be furloughed (granted leave of absence), therefore saving the retail industry approximately £1.5 billion in employment costs over a 4 week period. A welcome intervention which will buy time and will be life saving for some. It also means that colleagues will stay on the payroll in order to be entitled to the 80% and therefore be available to work when the time comes.
Most retailers have withheld their rent payments and it has been reported that some are using this time to negotiate lower rents with landlords, often looking for turn over rents as future sales levels are so unclear. As several large landlords have announced that only 30% – 40% of rents were collected at the end of March they may well sit up and listen.
There are numerous reports of retailers not paying their creditors. With director’s duties relaxed somewhat (although there is not 100% clarity on wrongful trading) they are taking the role of preserving a future for the business further than the norm. However, this puts future supply chains and cash flows at risk as suppliers shut down or demand vastly improved payment terms for future orders.
In keeping with the above, many retailers are not placing orders for new stock. They have stock sitting in closed stores and no idea when it will be possible to open the doors to buying customers. Without revenue, cash flow will not permit purchases, which means that the stock will age, and in some cases become seasonally inappropriate and therefore be worth less.
What is the impact of the interventions available?
There is no doubt that the interventions are helpful in the short term. However much of the support is a deferral; HMRC payments, rents, loans and so liabilities will have simply been built up. To use a topical analogy, the help is not a vaccine that provides future immunity, it is akin to extra oxygen in a ventilator which stands a good chance of keeping those without underlying health conditions alive.
How long will it take to recover?
This is a difficult question to answer without knowing how long the social distancing measures will be enforced. Last weekend the government mentioned measures being in place for up to 6 months and that they will be gradually relaxed. The short sharp downward shock is therefore likely to be followed by a slow gradual return to “normality”. Most experts are predicting 18 months to 2 years recovery time.
For bricks and mortar stores, recovery will be determined by the pace at which footfall returns to the hight street. This is also difficult to predict, there is a school of thought that there will be pent up demand and customers will come out in their droves to buy everything that they have put on hold. Others suggest that habits will have changed for good, reluctant online shoppers will have tried it out and might have liked it more than they imagined, therefore the ongoing decline in footfall will undoubtedly speed up.
Making a full recovery will require change, store portfolios must be reviewed with urgency, online capability must be quickly enhanced, routine roles must be automated.
What will the death rate be and who will survive?
Strong brands will survive, some brands will have enhanced their reputations, especially where they have taken authentic action to protect employees or shown support for their communities. Timpson said it will keep its 5,500 employees on full pay while its shops remain closed. Tesco giving 12 weeks paid leave to staff over 70 and Pregnant employees. Boden is providing nightwear and clothing through the Helpforce charity to NHS staff who are unable to return home at the end of hospital shifts and to recovered patients, unable to get clothing from their families in hospital due to the risk of infection, and Boots helping to test the amazing NHS at drive through centres
There are also those who will have caused themselves damage, following the government shutdown, Sports Direct increased the prices of some products by as much as 50%. Those employers who immediately furloughed staff without paying any top up to the government allowance may suffer poor morale and loyalty once we get to the other side of this crisis.
It will amount to survival of the fittest, well led retailers with strong balance sheets and good brands will come back stronger, they will face less competition from retailers who have been limping along with underlying issues for some time.
According to GlobalData, the overall UK retail industry will see a hit of £12.6bn this year. Clothing and footwear brands are predicted to suffer the most, seeing a sales decline of £11.1bn. If a retailer has limited cash reserves and if Spring Summer stock is left sitting in shops until July and therefore has not been turned into much needed cash to buy for the coming season, that business has a real problem.
What will retail life be like after the virus?
Challenging though these times are, for the retailers able to weather the shock the future is bright. Relationships with landlords will have to change, there will be an even greater focus on cash, there will be a better understanding of critical expenditure, there will be better cross functional working, reaction / implementation times will have been reduced.
It is possible that attitudes will have changed, there could be a step change towards the high street of the future. After the crisis management subsides, leaders and their teams will have time to pause and reflect, the rhythm of the business week and month will have been interrupted. There is time to think, to really think about the stores of the future and how to get there, and most importantly of all, how retailers, landlords, councils and government work together to help deliver the reshaped High Street of the future.