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How will retail survive?

How will retail survive the online shift forced by the COVID-19 crisis? Will the new way we shop be long-lasting? Can small retailers compete with national chains? David Adams explores the importance of websites, payment processes, and delivery options, and the likelihood of a new online sales tax

SuccessionPlan

Informed observers have been predicting that the internet would transform retail since the 1990s, but 2020 was the year their prophecies seemed to come true. The COVID-19 crisis closed most non-food, bricks-and-mortar shops for months; more consumers than ever before became regular online shoppers; and thousands of retailers of all types and sizes were forced to create or upgrade online retail capabilities.

This sudden acceleration in the shift towards online retail has inflicted terrible damage on those retailers that have been unable to meet consumers’ expectations of online services, which have been shaped by Amazon’s extraordinary product availability and delivery offer. At the same time, overall demand fell. A few non-food retailers have prospered during the pandemic, including those able to satisfy lockdown-driven demand for goods such as electronics or gardening and DIY supplies, but the overall picture has been bleak. The British Retail Consortium (BRC) estimates that by the end of January 2021, the COVID-19 lockdowns had cost UK retailers £22bn in lost sales.

The list of retailers that have gone into administration and/or become online-only during the past year includes some major high-street names: Debenhams; the Arcadia brands including Topshop and Miss Selfridge; Peacocks; Jaeger; Oasis; Warehouse; Paperchase; TM Lewin; and Cath Kidston. During 2020, some 182,564 retail jobs were lost as 16,045 stores closed, according to figures compiled by the Centre for Retail Research.

Hope for the high street

Andrew Goodacre, CEO at the British Independent Retailers Association (BIRA), echoes the pronouncements of other key industry figures when he suggests that 2020 witnessed “five years’ worth of internet sales growth and five years of high-street decline” in the course of a single year.

The high street may not be finished yet, but new habits may die hard. BRC Director of Insight Kyle Monk notes that, even when lockdown restrictions are lifted, a “voluntary distancing” effect is likely to continue to depress footfall on the high street. It may be a long time before all office workers are working in the office five days a week again (if that ever happens) – a change that will have implications for many retail outlets in city centres. National chains reeling from the effects of the crisis will continue to withdraw from less profitable sites.

But if online sales are now set to become more dominant in UK retail, what are the most important factors that will determine success and profitability? Some smaller retailers will base online offers on meeting the needs of local customers; others will seize the opportunity to target customers who may be hundreds or even thousands of miles away. Brexit has created additional difficulties for those selling to customers in the EU, making it even more important that they derive maximum profit from interactions with UK customers, whether in-store or online.

Wherever the customer might be, the retailer’s first challenge is simply to be found online in a vast crowd of potential competitors. For those seeking to connect with customers in a local area, Goodacre suggests considering the use of technologies like NearSt and Pointy, which upload information about a retailers’ stock inventory to the internet to inform localised Google searches.

“That sort of technology is ideal for the independent retailer because people mainly search by product,” he says. “As a smaller business, you can’t compete with big retailers on pay-per-click and search advertising. An independent retailer has to be a bit smarter to be found. But you then also need the website to back it up.

Retailers must be able to offer attractive service and delivery options, delivering far and wide, within reasonable timescales and at competitive prices. But they must not overpromise. If something that a customer thought they had purchased is then revealed to be out of stock or takes an unexpectedly long time to arrive, consumers will move on – and may leave unfavourable comments on review sites and/or social media as a parting gift.

Online consumers may well be Googling product reviews anyway, so retailers need to embrace review sites, linking to them and encouraging consumers to review products on those sites and/or on the retailers’ own sites (although taking care not to irritate with such requests).

Websites must offer a pleasant experience. “It’s about engaging with consumers, taking the shop experience into the digital world,” says Goodacre. It should be well designed, easy to navigate and enhanced with photography, video content (such as product instruction videos for specialist DIY or exercise equipment, not just marketing) and easily accessible product information. It must also provide straightforward processes for filling or emptying the virtual shopping cart while browsing.

An easy and safe payment process

Websites must also offer all the payment options consumers might want to use, including payment by instalments, as provided via services such as Clearpay or Klarna. Payment processes should always be quick, seamless and secure – slow payment confirmations and any suggestion that using a website might make a customer vulnerable to cybercrime can easily dissuade them from making a second visit.

Whenever possible, every aspect of the site needs to be effectively under constant review: in an ultra-competitive marketplace your website and the pitch you make to potential customers can always be improved.

Sophie Michael, Head of Retail at business advisory firm BDO, highlights the importance of consistency across different service channels and social media, “to avoid any risk of reputational damage through poor customer handling”. If resources allow, she suggests mid-market or larger retailers invest in technologies that monitor goods through the supply chain in order to give customers accurate updates on the progress of their orders. She advises smaller retailers to focus on getting the best possible deals from logistics companies, to improve margins and, hopefully, enhance the customer experience.

Anneke Short, co-founder of the Camden Watch Company (see box), points out that retailers may be able to improve the terms they get from logistics companies as they grow. “Don’t hesitate to switch couriers if you can find a better deal,” she advises.

Another key question for many smaller retailers is whether or not to offer free returns – a selling point that can really eat into profit margins. The Camden Watch Company does not do so. Short says the company wanted to undermine the idea that a process that is so wasteful, in terms of time, money and effort expended by the retailer, and from an environmental viewpoint, should be taken for granted by consumers.

Online retail is also well suited to a subscription sales model, offering retailers a chance to build and nurture a loyal customer base, while also improving its leverage over logistics companies. Lockdown has provided opportunities to niche retailers selling all sorts of products, from food (including vegetable boxes, ingredients or meal kits) and drink (including brewers and wine merchants) to clothing (Stitch Fix), household cleaning products (smol), sustainably and ethically produced toilet paper (Who Gives A Crap?) and houseplants (Bloombox Club) – or a whole studio’s worth of different arts and crafts supplies. It will be interesting to see how some of these niche retailers develop, perhaps increasing the range of goods and services they sell to carefully cultivated and nurtured customer bases. Amazon began as a bookseller, after all.

Retailers of all sizes can use the data generated by online interactions with customers to inform strategy and add elements of personalisation to website, email, social media and (when permitted) in-store interactions. According to research from Accenture, more than nine out of 10 consumers (91%) are more likely to shop with brands that recognise and remember them, and provide them with relevant offers and recommendations.

Small business solidarity

Smaller retailers may also benefit from joining groups of other small businesses based in the same geographical area who collaborate to raise their profile, using Google, Facebook, WhatsApp and Twitter; or tools created for this purpose, such as Down Your High Street, Locally UK and ShopAppy.

They can also improve their online visibility and reach – and may avoid the cost and effort of running their own dedicated website if they wish – by working with Amazon or other online marketplace sites like Notonthehighstreet or Etsy. The pros and cons of working with Amazon – paying commission of between 7% and 15% on sales, alongside other fees, in exchange for access to its huge customer base – and the debate about Amazon’s impact on UK retail, are both subjects worth whole articles in their own right.

Amazon had an extraordinarily successful 2020, with worldwide net sales up 38% on 2019, to $386.1bn. But that success is built in part on the work of smaller retailers: around 60% of physical goods sold via Amazon are sold via third-party sellers, according to the company. Other online marketplaces also enjoyed strong growth during 2020. Revenues at Notonthehighstreet – where more than 5,000 small UK businesses, largely creative traders, sell to three million customers – grew by more than 50% in 2020. It reports a 78% increase in applications from small businesses seeking to sell via the platform since May 2020.

Goodacre can see the benefits and downsides of working with these platforms. “It depends on the product you’re selling, but it can become a race to the bottom in terms of price,” he warns. “If it opens up new markets, helps you to reach people you wouldn’t normally reach – fantastic. If you haven’t got a shop to run, it may work for you, because you haven’t got those overheads. But I know some BIRA members have moved away from it.”

Online sales tax under consideration

At the time of writing, the retail sector is also awaiting government announcements linked to a possible reform of business rates, and to the possible introduction of a new online sales tax. One suggestion is that a 2% tax might be imposed on any online sales to UK customers, to complement the Digital Services Tax launched in April 2020.

Opponents of a new online sales tax point out that the direct and indirect costs it would impose on retailers would be passed on to consumers by many retailers, that it could create extra costs and practical challenges for smaller retailers in particular, and that it would not level the online playing field or fill the gap in government revenues left by the fall in business rates revenue caused by the decline of bricks-and-mortar retail.

BDO has an alternative suggestion: a version of the tax levied alongside an overhaul of business rates. Occupiers of retail premises would pay tax on the rent they pay, while owners would be taxed on rent received. An online sales tax based on 2% of turnover from online sales would be introduced, but retailers would be able to offset business rates liabilities against the new tax. It might be combined with incentives for use of green technologies and processes in physical stores and supply chains.

Whichever policy changes governments make in the future to ‘save the high street’, or to ameliorate the impact of Brexit, all retailers must retain flexibility within their business models. We cannot yet be sure how many of the changes the pandemic has brought to the way we live, work and shop will be long-lasting. But the past year has shown that the most successful retailers, on the high street or online, are those able to adapt, again and again, as circumstances and consumer preferences change.

Box

Future-proofing retail markets

Timely investment in online operations

The Camden Watch Company, created by Anneke Short and Jerome Robert in 2015, creates watches with designs inspired by historical places or concepts linked to London. The business was online-only at first, but Short and Robert then opened a small store in Camden, north London. It was so successful that they opened two more London stores.

Short and Robert have always used social media to help publicise their brand, and have been assisted by the publicity coup of actor Martin Freeman becoming a fan of their watches. Before COVID-19, tourists formed an important part of their customer base. Many found the company online and went looking for the stores when they came to London.

Short is not sure the company would have survived lockdown and the temporary closure of its stores if it had not already had an effective online operation. At the start of the pandemic, the company also scaled back online marketing and social media activity to cut costs, but it was then able to resume this activity once government support schemes were announced.

Short advises retailers to ensure their website uses engaging content, and recommends testing how well it works when accessed from different devices.

Subscriptions can make business bloom

Dr Katie Cooper, formerly a therapist and psychology lecturer, founded Bloombox Club in 2015, after noticing the mental and physical health benefits many of her patients seemed to derive from being around plants.

With the assistance of an angel investor and then a business incubator run by Dutch florist conglomerate Royal FloraHolland, Bloombox Club has developed into an online store and subscription-based business that ships thousands of indoor plants and related products throughout the UK every year. It currently fulfils around 6,000 orders per month and employs seven people. The website also contains articles, blogs, guides and videos about plants and wellbeing. With people confined to their homes that have also had to act as workplaces, 2020 was a successful year.

Cooper says retailers selling online need to ensure customers understand the retailer’s offer, and they should try to maintain constant contact with their customers, “so you know what they’re looking for and what they do and don’t like about your website and your products”. The company has invested resources in online advertising, via Google and Facebook, alongside other profile-raising activity in the UK media.

Tailoring the website to customer needs

Coes is an East Anglian retail institution. The business is more than 90 years old and sells high-quality clothing from five stores scattered across Suffolk, Norfolk and Essex. It has also been selling online for more than 10 years, but activity and investment online has grown significantly during the past five years. “Within the next year, [the website] will be our second biggest shop,” says Managing Director William Coe.

The retailer prides itself on building personal connections with customers, so trying to recreate the in-store experience online during the pandemic has been a major challenge.

Coe advises retailers seeking to get the most out of trading online to focus on the basics: making sure goods are in stock and delivering them to the customer on time. Significant effort and investment have been put into ensuring customers find the Coes site.

The retailer has opted not to work with any of the digital marketplaces, “because of the amount you have to give away via commission” and the time and effort involved. Instead, it has focused on investing in its own website, creating a foundation for an online proposition to protect the business as it moves into its second century.

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