The Pandemic Paradigm
The pandemic with its myriad of lockdowns has destroyed the retail industry from high-end luxury to low-end bargain basement triggering unprecedented bankruptcies and vaporizing decades-old, beloved retail stores.
Historically when danger approaches man and beast seek shelter underground in their respect caves. The fundamental change to reacting to danger in the 21st century is that with information technology, humans are seeking sanctuary in the cloud by working and socializing remotely.
Some luxury brands were laggards to embracing technology and ended up being dragged kicking & screaming into the cloud. Their reluctance to adapt was their belief that their high-end clients strongly preferred shopping in-person and they didn’t want to “cheapen” the brand by allowing anyone, anywhere with a credit card to purchase their exclusive products.
The collapse of the retail industry is illustrated in the following chart entitled Retailers Face Mass Extinction in Pandemic Fallout provided by Coresight Research and The Wall Street Journal and presented by Statista, an online statistical firm.
Shopping in the Cloud
The fashion retail firms with foresight pre-positioned themselves for a shift to online business were far better able to adapt to an abrupt change in the economic landscape and maintain some semblance of business while closing their brick & mortar stores.
The financial advantages of operating mostly online include lower fixed costs without the hassles of negotiating leases, operating expenses, on-site security personnel and/or technology and adhering costly municipal regulations.
Operating mostly in the cloud is the present-day new normal despite the precipitous drop in commercial leasing prices. All businesses have suffered several profound shocks within the last 20 years notably 9/11, Great Recession and the present-day pandemic creating a justifiable paranoia that screams, “What’s next?” with the new mindset of being nimble to adapt to long-term tough times.
With respect to the American consumer, they’ve become comfortable shopping online 24/7 without risking an “arm and a leg” in a world of protests, civil unrest and skyrocketing violent crime while shifting the risk to delivery personnel. This particularly applies to the thousands of urban residents who have decamped to smaller cities and towns where there are fewer, if any, of the higher-end fashion shops.
The following chart entitled Covid-19 Crisis Accelerates Shift to Online Retail provided by the US Census Bureau and presented by Statista, underscores this powerful shift to online shopping:
The Cloud & Tactile Disconnect
Despite all its conveniences the present-day pandemic era of robust growth of cloud-based shopping may be short-lived and wane in a post-pandemic landscape. Consumers may strongly prefer the tactile shopping experience particularly for higher end clothes to justify their expenditures. The best of best technologies even holograms cannot replace the irreplaceable tactile experience.
Then there’s the so-called “shopping experience”. The brick & mortar’s real-life aesthetics represent a far different shopping experience than the online aesthetic design. Some firms may have great product but a terribly designed web or a firm with a marginal product has terrific sales because of great web design making image and perception far more critical elements in the online world to generate sales.
The Demise of the Brick & Mortar Model
The pandemic economic destruction on brick & mortar stores represent a weight wrapped around their necks, the death keel for most, as they seek financial sanctuary in the cloud through online operations. The cloud represents that oasis where these firms can survive. Though firms are making their operations leaner and nimbler, generating sufficient sales is challenging.
Furthermore maintaining customer loyalty was already a slippery task pre-pandemic because customers, particularly the younger generations, became less brand loyal and far more price-sensitive by seeking quality over labels.
With limited brick & mortar operations direct customer interaction barely exists making it difficult to monitor and assess changes in customer sentiment vs. best-guess online marketing surveys results. In a hyper-competitive field such as the fast-changing world of fashion, being proactive and ahead of the curve in customer preferences is paramount for maintaining market share, sales and profits.
Finally although market share is important, the pie is far smaller due to lower demand through mass unemployment as customers shift priorities to purchasing and stocking up on survival essentials such as food and medicines.
This stark trend is evident in the following chart entitled Mass Exodus of Retail Stores provide by Coresight Research and The Wall Street Journal presented by Statista.
Uneven Recovery for Fashion Retailers
The recent financial recovery of the fashion (clothing) industry within the retail market has been uneven. The following chart entitled Clothing Stores Fall behind in Uneven Retail Recovery provided by the US Census Bureau and presented by Statista, articulates fashion’s struggle during the June-August 2019 v 2020 year-on-year comparison with 2020 sales 22.6% below that of 2019 during this period.
A hybrid solution in the rebalancing of brick & mortar and online shopping is reinvigorating the pop-up store. The advantages of pop-up stores are the following:
· Immediate market survey information by speaking directly with current and prospective customers to gauge customer sentiment on present-day and new product lines
· “Up-designing” pop-up stores to look like boutiques.
· The limited liability and loss of inventory to offset the risks of looting by organized mobs on high-end retail shops which is occurring regularly in Soho, NY in broad daylight.
· Because of the commercial leasing collapse firms should be able to obtain highly favorable and flexible leasing arrangements in prime locations well into the post-pandemic era.
A New Frontier in e-Commerce
The first step for the immediate to near-future is whether the e-commerce business can make up for lost brick & mortar sales.
The second step medium-term to long-term step (post-pandemic) is whether the decrease in brick & mortar sales will eventually meet at the crossroads with the ascendent online sales and provide an acceptable return-on-investment.
These trends provoke the big question: what are the limits as to how far one can leverage technology to generate and maintain long-term online sales to justify the elimination of the brick & mortar model?
Copyright 2020 Indo-Brazilian Associates LLC
Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides prescient beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security.