Covid-19: Curse or Blessing for the Retail Sector?

A fictional debate by our editorial team, in which two contrary perspectives are elaborated on. Based on facts as well as abstract thoughts - Practically, pro and contra

Detox

In the current edition of our DEBATE, our editorial team discusses the medium- as well as long-term effects of COVID-19 on the retail sector. Undoubtedly, the almost global shutdown leads to numerous upheavals and serious cuts for a number of industries. The retail industry in particular, is greatly affected. The reason for this circumstance are idiosyncratic structures such as the high number of sole traders as well as employees in the low-wage sector and traditionally low margins. On top of that, retail does not have any recurring revenues (i.e. recurring revenues as found in parts of the technology and service sectors). On the other hand, however, the industry namely has permanent running costs such as rents.

In short: there will certainly be profound and existential cuts for numerous actors. But what are the medium- and long-term perspectives? In the following, our editorial team is dedicated to this topic and thus dares an indicative outlook on the future of the retail industry. Will COVID-XNUMX result in an even stronger polarization of the industry - both, on the supply as well as the demand side? Is the current crisis not really accelerating long overdue transformation processes that would have taken place anyway, even if delayed? And - as is often the case - is there not also an opportunity for consumers and companies to draw the right lessons from the current situation?

Enjoy reading.

Solid, future-oriented companies tend to develop more strength from the crises

The Austrian economist Joseph Schumpeter coined the term of creative destruction around 100 years ago. According to him, a constant transition and process of change is essential for the functioning of market economies, the efficient allocation of resources or the promotion of innovations. This is exactly what the current COVID-XNUMX crises - in an accelerating rate - entails.

It is likely that economically sound and solid companies (pre-corona) will emerge stronger from the crises - at least in the long term. They will benefit from a market consolidation as well as a certain "pricing power". This means that production costs will generally increase post-COVID-XNUMX as companies increasingly localize parts of the value added costs. As a consequence, only the companies which are able to rely on strong brands will be able to pass the resulting additional costs on to consumers. Strong and established brands do thus benefit from the pricing power in particular. In the current situation, online-affine companies such as Amazon and Netflix (i.e. retail in a broader sense) are undoubtedly the significant profiteers.

Setbacks for classic business models

The main sufferers, conversely, are the classic department store chains or brick & mortar stores. These do especially suffer from the absence of foot traffic in city as well as shopping centers. However, it would be wrong and not particularly expedient to discuss this consideration just one-dimensionally and diametrically. Current figures and developments also spotlight that a variety of traditional brick & mortar stores are coping with the crises quite well. These include US companies such as Target and WalMart. In the past, these chains have consistently expanded their online offering. Despite the profitability of grocery shopping in the respective stores, it is the online segment in particular which is growing exponentially. Therefore, the entire business will further stabilize. An example: In the first quarter of this year, Target recorded an increase of 275% in digital sales compared to the previous year.

Exceptions certainly confirm the rule. However, there are also the companies which have failed to make sustainable as well as important, future-oriented decisions. Companies without an effective online strategy, questionable product and market positions (eg “Stuck in the Middle”) or declining numbers - already pre-COVID-19 - are particularly affected by the current crisis. Some of them will probably have a hard time getting through it. Still, in line with thought, the question, whether their breakdown would have been unavoidable in the medium- or long-term anyway, arises - even in a world without COVID-XNUMX.

Digital affinity is greatly promoted

Currently, we are experiencing a rapidly growing affinity for digital offerings. And this applies to both supply and demand side. Namely, even in large groups of society which were displaying some hesitation with regard to technology pre-corona. Examples: online grocery shopping, video streaming such as FaceTime, Skype & Co and increasing acceptance as well as willingness to use digital payment methods. The shift from offline to online in the consumer landscape was already well under way before COVID-XNUMX. However, the evolving mentality was lead by the younger generations of society that have been pushing the trend forward for some years now.

Now, especially older people are discovering the advantages of online services and experience the same benefits as younger generations. The same applies to digital payments. Compared to Scandinavian countries, where 70-80% of all transactions are carried out electronically or digitally, this rate was at just 20-30% in Germany. Partly due to the lack of acceptance of electronically secure payment methods in shops (i.e. traditional retail or taxi business), but also due to the consumer's widespread affinity for cash. To avoid the false impression: We are not advocating a complete shift from offline to online. This would mean that, as a society, we will eventually cut off the branch on which we are sitting.

Weekly markets, gastronomic establishments, factories and traditional retail stores will also have their right to exist in a time after COVID-XNUMX. There may even be a renaissance as people have a lot of catching up to do because of the current lock-downs. In some segments, online will dominate, in others it will be a useful and complementary addition and in others, it may disappear completely. Ideally, however, the current trends and transitions result in the development that areas which were already predestined for successful online offerings will experience a surge in acceptance along diverse social strata.

Consumers are becoming more selective, companies are becoming more sustainable

As consumers, one thing is particularly clear to us at the moment: What is essential versus superfluous? Is our usual consumer behavior necessary? Sure, food (as well health essentials ) are vital - just like certain media and entertainment offers in order to promote the mental well being. On the other hand, we notice how many things in our life have become dispensable. Important changes in behavior can thus emerge from the current experiences and manifest in the long term. For example, a return to “less is more” - less quantity, more quality.

Besides the challenges with which COVID-XNUMX confronts society on a daily basis, it does also encourage some positive developments in people's behavior. More news formats are watched online and on TV, there is more cooking at home with family and less consumption of fast fashion. Undoubtedly, the status quo will change in the world post-COVID-XNUMX. If, however, the current (positive) behavioral patterns can be maintained to a limited extent, it will certainly trigger a series of key impulses and change certain aspects for the better.

The same applies to the company and supply side: regardless of the current challenges, the crisis will lead to strong reconsiderations along the value chain. Due to the rapidly growing globalization in the past, complex supply chains will partially have to be reversed as well as simplified and productions will probably partly be localized because of the lessons we are currently learning. Transport routes and the resulting emissions will also be simplified and reduced. The increasing vertical range of manufacture and production in each respective country will then automatically lead to the more efficient handling of resources. Otherwise, we would just be faced with the same problems and negative effects.

Survival of the Fittest - escalation of the variety of offers

Online versus offline, small against large etc. The arguments are complex and it will surely amount to the fact that companies, which were already successful pre-corona, will continue to be among the main winners of this crisis in a few months and years. And yes, economically speaking, there are undoubtedly the so-called economies of scale that continue to accelerate such dynamics. Successful companies with their market position have certain cost advantages and benefit from the departure of smaller players who cannot cope with the current crisis. This gives them even greater market power and further strengthens their comparative cost advantages due to the constantly increasing economies of scale.

This is possibly rational and sensible from an economic point of view. But is it really what we want as a society? On the one hand we would face an overpowering eCommerce player. On the other hand, old-fashioned city centers and the disappearance of retail as we know it. Doesn't the retail landscape really live from a certain variety of offers? Offers, from which we all benefit and have also learned to appreciate and love? It may be the case that some of the retailers that are currently badly affected had little future-oriented and solid business models, even before the crisis. Others, however, did not slip into the crisis because of personal negligence. In a world without COVID-XNUMX, they would certainly have had promising prospects for the future.

The retail landscape of the future will change - just how?

The fact that the crisis is having a fundamental and threatening impact on a number of retailers and businesses is also due to the traditionally low margins in respective sectors. And, ergo, partly "our" unwillingness to pay a fair price for handicrafts, retail and gastronomy. In any case, fact is, that many businesses we know from our inner cities and neighborhoods will not survive the crisis. It is also quite possible that the current developments will serve as a deterrent example for designated founders in retail and the underlying willingness to finance them. Perhaps this was an emerging trend which would longstanding have been unstoppable anyways. Nevertheless, the current crisis will lead to a sharp decrease in the variety of products on offer and the associated cumulation of our consumer behavior. Only time can tell to what extent this is positive or negative. However, the retail landscape as we know it, will probably no longer exist in the foreseeable future.

Sustainability factors take a back seat

The emerging, precarious economic situation for a large number of companies as well as sections of the population will result in drastic changes. Restructuring and reorganization on the part of companies, unemployment and lower wages on the part of consumers. Both sides must try to limit the economic damage to some extent - in the current phase and probably even beyond. It is already predictable today that companies will keep their investment and innovation expenses to a minimum in order to relieve their own financial position. But also to prevent mass layoffs. This is undoubtedly a necessary and commendable step, but it also means that funds are lacking. For example, funds to invest in modern systems and processes that would have resulted in a noticeable reduction in climate-damaging emissions.

The same applies to a lack of investment in research and development, where the long-term damage can be immense - with regard to climate goals and the competitiveness of Germany as a location. What about electromobility, for example? In the current phase, with sales slumping by more than 50%, will car manufacturers still be able to sustainably advance this topic? Does the distance to Tesla and some Asian players widen?

Financial reluctance instead of environmentally friendly actions

This also applies to the consumer - in a modified form, of course. It is a challenge to access sustainable as well as high-quality products for a wide range of consumers because the sufficient financial means are simply not available. Let's return to the example of the automobile sector: pre-COVID-XNUMX, the willingness to invest in an electric vehicle did noticeably increase among consumers. But what about the future - without or even with a recovery package? Uncertainty about the future as well as financial insecurities will prevent many consumers to venture high investments, thereby preventing the switch from the "combustion engine" to sustainable electric vehicles.

Depending on the duration, scope and economic cuts for both companies and consumers, it is conceivable that our efforts to promote sustainability will postpone at least a few years. Not because of any phlegm within our society, but primarily because of the limited financial feasibility in the near future.

Developing as well as emerging countries are most affected

Developing and emerging countries are certainly the most affected by the current COVID-XNUMX crisis. The sudden decline in the global economy and the associated demand along a wide range of industries has lead to an abrupt halt in production in a number of emerging countries. For local employees, whose monthly income was and is limited anyways, this means existential changes. Also, not least because of the lack of social security systems such as short-time work and general unemployment benefits in these countries.

It is nothing further to us than to even begin to positively highlight the topic of fast fashion. However, the comparison of the current situation with the pre-COVID-XNUMX state for workers shows a significant worsening of the local situation. Looking at the development economy, it would have been arguable that - despite the difficult and sometimes inhumane conditions - some emerging countries were on a promising development path. With progress, there would have been effective competition for labor. This would have created incentives to ensure better working conditions on the company side. Rising incomes would have resulted in a strengthening of the middle class as well as a stronger domestic economy and less dependence on exports such as fast fashion. Now, in the current situation, these economies may have been set back by a few years. And thus, also the efforts to improve local working conditions sustainably.

What will remain? It would be desirable for all of us as a society, if the direct and indirect effects on developing and emerging countries remained reasonably repairable. In this way, the developments that have already started can continue to be promoted.

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