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Retail recovery: online is the answer

15 October 2020: 2020 has not been kind to the retail sector, but there are opportunities for those that embrace online platforms.

High street retailers have been grappling with declining sales and footfall for years as they competed with online retailers. In 2020, the scales tipped heavily against them, bringing new challenges to an already struggling industry.

According to the British Retail Consortium (BRC), there were £1.6bn lost sales between April and May this year. Around 150,000 retail jobs have been lost since the start of the pandemic, a figure which is likely to increase.

Easing restrictions in the summer did not result in a return to normality. Despite retailers attempts to convince customers it’s safe to return in-store having implemented social distancing measures, hand sanitation stations, one-way systems and Perspex screens at checkouts, footfall was down 41.7% in August.

BRC spokesperson Tom Holder says the prevalence of working from home has had an impact on footfall; those at work tended to make a lot of ‘casual purchases’ during their commute or at lunchtimes. 

Even so, Holder insists the industry has shown ‘great resilience’. Online sales, particularly among supermarkets, grew fast. ONS figures show that despite the decline in footfall, retail sales actually rose in August for the fourth consecutive month, thanks to online shopping.

“Prior to the pandemic, online food amounted to 7% of sales but increased to 13% at the pandemic’s peak,” says Holder, citing BRC's figures. “In terms of overall sales, online sales increased from 19% in February to 33% in May. This shows an enormous expansion in delivery capacity and click and collect functionality.”

But Sue Richardson, partner at KPMG and head of retail in the north, says that while essential retailers have geared up to meet unprecedented demand, it’s been a very different picture for non-essential ones, which mothballed their business during lockdown. The pressure is now on all retailers to focus on their online offering. 

This shift to online retail was already happening long before the pandemic but at a much slower rate. Most retailers planned to increase online sales over several years.

“The industry has had to make ten years’ worth of progress in just six months,” says Richardson. “You can imagine the highly complex infrastructure issues retail businesses have come up against.” 

Retail and business expert Sabrina Benjamin says that supermarkets have spent millions in frontend and backend online infrastructure to meet demand. It's not just delivery slots and order fulfilment, but warehouse automation solutions via robotics to speed up stock picking and delivery from huge regional sites. 

“Many retailers had already invested in automation long before the pandemic,” says Benjamin, “But I know of one major company who decided not to, and now they are kicking themselves.”

Good IT and online infrastructure, Benjamin believes, is essential for survival and customer retention, especially systems which update in real-time. Existing online-only retailers have an advantage: they have systems already in place, and they don’t have bricks and mortar locations to eat away at profit margins. 

“Retailers with a strong online presence at the frontend and a good supply chain to ensure a strong backend will be more likely to survive crises like this,” says Benjamin. “But you’d be surprised how many retailers are still behind on the digital transformation journey.”

She points to Primark, which has no online presence. When lockdown happened, it lost all contact with its customers, going from £650m in monthly sales to absolutely nothing until stores reopened. 

Next, on the other hand, has been a market leader in online innovation for years. It was the first to introduce ‘Buy Online Return in Store’, a game-changer at the time. In common with other fashion retailers, in-store sales figures plummeted 72% in Q2, but online sales increased by 9% year-on-year. 

Having an online presence, however, doesn’t necessarily mean investing thousands in a new website.  KPMG’s Richardson believes that smaller retailers can leverage existing online platforms and marketplaces to sell products. Many are already doing this; some retailers, especially fashion brands, are selling other retailers’ products on their websites as well as in-store. 

Both Benjamin and Richardson believe there will be fewer high street stores in future. The ones that remain will be showrooms, displaying limited stock. The in-store experience will, therefore, be more important than ever going forward. Pre-COVID, Perfume brand Jo Malone offered complimentary in-store hand and arm massages. Lego stores continue to provide 3D ‘test drives’ of Lego sets.  

This, in itself, could create different opportunities. “If there is a general trend of reduction in high street stores which is likely, you’d expect to see retail estate rents reducing,” says Richardson. “This might mean retail outlets would be more attractive to different types of tenants, so we expect to see retail space being re-purposed." 

Many retailers have been granted varying rent extensions and moratoriums, most of which are due to expire at the end of December. BRC's Holder warns this could pose a considerable challenge if landlords and retail tenants fail to negotiate further.

Looking at the short to medium term: are we likely to see retail discounts and promotions as a way to increase sales and promote recovery? BRC’s Holder doesn’t think so. “There is a limit in what retailers can offer because margins are already very tight and retailers have lost billions of pounds already this year,” he explains. “But some areas of retail have done well in addition to supermarkets. Home and furnishing retailers, for example, because people have spent more time at home and have invested in their home environment and taken up DIY projects. This trend looks likely to continue.”

There are some concerns: business rates, which are temporarily reduced for many retailers during the current tax year, could return to typical rates next April. This would put extra strain on the industry. There are also ongoing unease around EU tariffs on food and drink imports, which could add £3.1bn a year to the cost of importing food and drink if no trade agreement is reached.

“This is undoubtedly going to be a period of very significant and rapid change,” Richardson says. “But the most important thing for retailers is agility and their ability to respond to change. If the last six months have taught us anything about the consumer environment, it can change very, very quickly. The retailers who can respond fast to this changing environment and adapt to changing demand will be the ones who survive.”