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The new normal paving its way

As COVID-19 continues to spread, much of the world is adjusting to a new reality. And while it is still too early to tell what the consequences will be for businesses, what is certain is that retailers need to adapt to the evolving situation.

Amid the coronavirus pandemic, it was tempting to feel some sort of relief as promising news surfaced about Apple reopening 29 of their 42 Chinese stores, more and more recoveries from infections were being reported, new infections coming down, and production sites gradually restarting. But then the COVID-19 impact on retail started to become a hard reality. On top of health concerns, brands across the globe are worrying about how COVID-19 is impacting the retail sector as a whole. And the stock market has become increasingly volatile. E-commerce, B2B, B2C, and brick-and-mortar retail formats alike are all bracing for the impact that COVID-19 will have on their business.

Abrupt stop of the urban activity is leading to a steep fall in consumption of the non-essential items like consumer electronics, home appliances, and air conditioners. As shoppers avoid physical stores and more retailers close their doors, offline sales are taking a hit. But the outbreak would not necessarily be doing favors for all online retailers. Consumers are turning increasingly to e-commerce, but they are pulling back from buying non-essentials. In efforts to bring customers in, some retailers are offering generous discounts, free shipping, and free returns. But even with promotions, consumers are holding back on discretionary shopping.

Retailers, particularly those with physical footprints, are rethinking their current cash positions and trying to assess how they will continue to pay the bills should the downturn in demand continue for a prolonged period of time. In particular, retailers should be taking a close look at their current and predicted liquidity profile and assessing any changes in their working capital dynamics or short-term cash forecasts.

Given the industry’s high dependency on cash to pay for stock, real estate and – importantly – staff, many retailers are now also talking with policy makers to see how they can influence and take advantage of any hardship funds, rental renegotiations, and rate holidays. Many retailers are also now reviewing their overall financial stability under a variety of different scenarios and, if required, engaging with lenders to refinance loans or amend financial covenants that may be impacted. Store closures and sharp declines in discretionary consumer spending have crippled non-essential retail. Many retailers have already had to make tough choices, including temporarily or permanently closing doors, furloughing employees, and more.

Geographical differences
The effect of the outbreak on e-commerce is playing out differently across geographies. According to Morning Consult, Japan, the UK, and Germany were experiencing reduced confidence when the virus hit, while in the US, consumer confidence was near an all-time high. By March 2020, consumer confidence hit a new 2-year low in the US. In Japan, Germany, the UK, and France, confidence has continued to decline.

Although the fall in confidence is consistent with a bleak view of the economic future, e-commerce activity, particularly related to products consumers most need, is booming in the US. This growth is most likely a result of panic buying. Meanwhile, from February to mid-March, France and the UK saw a decline in excess of 30 percent. Nevertheless, some UK retailers are finding ways to make up for the drop in sales.

In China, consumers have a more positive outlook. In fact, online sales in China seem to be picking up as the outbreak recedes. We saw a spike in Chinese orders on March 8, when China reported no new transmitted cases outside the epicenter of Hubei province. Sales on this day increased a whopping 813 percent from the day prior, and continue to show steady growth since.

Although the rest of the world is not yet there, China provides a glimmer of hope to the potential rebound in sales once the effects of the epidemic subsides and consumers believe the worst is behind them.

Indian scenario
The Indian consumer electronics and appliances industry is highly dependent on China. Products that are imported from China include AC components, compressors, and appliances. In ACs, 50 percent of the bill of materials for most companies is imported; out of this, compressor is the main component. Most compressor/appliances manufacturing units were shut due to the Chinese New Year. The rapid outbreak of coronavirus extended the shutdown. However, situation in China seems to be easing off as some of the AC component manufacturing facilities have started operations from February 10, 2020, but not at full capacity. China’s supply chain is highly disrupted and upsetting both in-bound and out-bound supply. It takes 30–35 days to receive products from China to India and Indian vendors take 10–15 days to manufacture/assemble and dispatch to channel partners. Hence, the total lag is 45 days. Currently, the Indian consumer electronics and appliances industry has an inventory of 45 days (4QFY20) from seasonal products such as ACs, as RAC companies have been pre-building inventory since November 2019 for the current summer season.

Closing of cinema theaters, and declining footfall in shopping complexes, has affected the retail sector by impacting consumption of both essential and discretionary items. Consumption is also getting impacted due to job losses and decline in income levels of people, particularly the daily wage earners, due to slowing activity in several sectors. With widespread fear and panic now increasing among people, overall confidence level of consumers has dropped significantly, leading to postponement of their purchasing decisions.

Non-essential commodities. Markets are likely to crash owing to low discretionary demand, thus enhancing risk on product shelf life. Over dependence on imports is posing a threat on various industries, such as consumer durables.

Impact on distribution market
The consequences of shutdowns and further spread across multiple countries has already affected supply chains and distribution markets heavily. Italy, as one of the most affected countries in Europe, is currently showing one of the highest declines in volumes. In the last 4 weeks, distribution markets in Italy decreased by –9 percent on average, which results in over 828,600 sales less compared to the previous year period. Other European countries like Great Britain and France are following this trend – however, at a weaker pace with –4 percent and –2 percent, respectively. Sector-wise, the tech and durables industries are currently contributing most to this picture, according to GFK Insights.

Although stock levels might still mitigate effects, production halts and logistics restrictions (vessels unable to onboard/deboard goods, cargos canceling flights) are leading to the first signs of downsizing for the tech and durables markets and rising prices on the other side. Consequently, distribution markets on the global level have already declined by –5 percent in the last 4 weeks compared to the previous year period. This is especially supported by decreasing volume shipped by distributors in Western Europe, where volumes dropped by –8 percent in the same weeks. In absolute figures, this means that around 10.4 million units have been shipped less in calendar weeks 5–8/2020. At the same time, prices have increased by around 19 percent on average.

No drop of e-commerce in China for now but a full-year forecast is down
When the Wuhan shutdown was initiated in the week of January 20, 2020, people immediately stopped moving freely and the footfall for physical retailers collapsed. In the following 3 weeks, the decline of sales in physical stores even exceeded 80 percent in the cases of smartphones, notebooks, televisions, and refrigerators. Basically, this implies that no sales were made at stationary retailers in the seriously affected areas in China – and retailers probably opened their stores only in regions where the virus had not broken out.

Online sales are not being cut by consumers generally, which means consumers are not in a state of panic. They are continuing to purchase tech goods but are avoiding leaving their homes while they do so. Consumers are still engaged in product launches – new products coming to the market in the past weeks led to significant sales jumps for the notebook category in China – via e-commerce. This means that the usual market dynamics are still in place, and consumers still want to get their hands on newly launched products even in times of COVID-19.

Categories like refrigerators are suffering more. The fan club and exciting new features factors are lower, so purchases which are not urgent (such as replacing a broken appliance) are being postponed even via e-commerce. The need to research or purchase offline – to touch and feel the product – makes all the difference.

Impact of COVID-19 on the retail sector
Across the globe, consumers plan to reduce short-term and mid-term spending, especially in non-essential categories. Consumer intent, of course, varies by individual economic situation and outlook. The impact of the crisis on consumer behavior, determined by McKinsey & Company, is expected to create or accelerate five trends in the retail sector that will have a lasting impact.

Shift to online and digital purchasing. As shelter-in-place orders proliferate and potentially extend, and consumer anxiety about infection persists, consumers across age groups have already shifted spend to online channels. The longer the crisis lasts, the greater the likelihood that online and omni-channel purchasing will become the next normal. While this shift is pronounced in grocery and other essential categories, the channel shift within discretionary products like consumer durable brands and retailers has not come close to making up for the lost brick-and-mortar sales.

Healthy, safe, and local. One of the biggest challenges facing retailers is the need to protect customers and employees from contracting or spreading COVID-19. Concerns about health and safety have never loomed larger for stakeholders across the value chain. The retailers with the highest degree of touchless automation, both in stores and in warehouses, may enjoy a clear competitive advantage, as they face lower risk to consumers, employees, and their overall operations.

Shift to value for money. As in any economic downturn, a post-crisis downturn will probably lead consumers to demand value for money across retail sectors. This is already happening in essential categories.

Flexibility of labor. The COVID-19 crisis underscores the need for more flexible resource allocation that deploys labor across a broader range of activities. This could accelerate the move toward more agile and dynamic resourcing from stores to distribution centers to corporate offices. It could drive new models of collaboration between retailers and their stakeholders to address scarce capabilities, and enable the labor pool to move more fluidly in order to meet demand across priority activities.

Loyalty shock. Scarcity of products has spurred trial of new brands, as customers trade up and down. In Asia and the United States, but less so in Europe, stores and brands are seen switching due to proximity, availability, ease of use, and safety considerations, creating opportunities for new habit creation.

E-commerce picks up
Mobile apps on the rise. With major cities hunkering down to avoid the spread of the virus, people are inevitably spending more time indoors and on their mobile devices. Apps in particular have played a major role in facilitating the transition from day-to-day life to lockdown. In a time of stress and uncertainty, e-commerce brands and platforms are leveraging their mobile apps to offer a more convenient online experience. Desktop orders on the other hand have seen a decline. In retail, where web orders usually represent the largest share, sales decreased by 15 percent. Post-coronavirus it will be interesting to see if consumers will come to rely on e-commerce apps.

SEO coronavirus checklist. The e-commerce landscape is changing rapidly. Consumer priorities have shifted in recent weeks in response to COVID-19, and this means that e-commerce platforms need to react quickly and nimbly in order to maximize organic traffic and revenue. At this moment in time, SEO is in a unique and opportune space because COVID-19 is forcing consumers to shift their buying habits to online. While it is unknown if these changes will be temporary or long-term, the immediate and lasting impact will be that more customers will move online for a greater percentage of purchases.

Increase in contactless payments. Another result of stay-at-home orders is a huge surge in demand for digital payment services. While these surges have been a challenge for payment platforms, many companies have contingency plans for high-demand events, which have been vital to their success in handling huge payment volume. Despite the success of payment processing companies so far, there are signs of the internet reaching capacity during this crisis. Netflix, YouTube, and Facebook have all agreed to reduce video-streaming quality to avoid broadband congestion. As it is seen with other shopping habits, the pandemic has triggered a change in behavior ahead of its time. Groups that may have been hesitant to convert to online payments before COVID-19 now use it as their primary option. Time will tell if this will be a lasting change in behavior.

Amazon reopens shipping
Amazon is set to reopen its shipping services for non-essential items. At the start of the outbreak, the e-commerce platform shut down the service to third-party sellers to prioritize products that would assist in the containment of the disease the most. With sellers making up 58 percent of Amazon’s sales, this is expected to offer a huge boost to the company. Each seller will still have limits on how much they can ship to ensure essential goods still have room in the warehouses.

The company is able to make this change partially due to the mass number of workers it has hired for its distribution centers and delivery network. In the past month, the company hired over 100,000 people, and is looking to fill an additional 75,000 roles. These jobs are a great opportunity when so many other companies have had to furlough employees. These jobs will be temporary work, similar to hiring during the holiday period, and will likely not be sustained after the crisis subsides.

No going back
As entire countries come under quarantine orders and consumers around the world start to shun human contact, retailers are scrambling to adapt. They recognize the global response to COVID-19 will have a significant impact on their business. They understand the situation is changing daily. And they know they have little time to respond.

Experts around the world have been trying to forecast what the aftermath will be of COVID-19. It is clear that it is changing consumer behavior, but the exact long-term consequences are still impossible to predict. One can only hope the effects will be temporary. Despite the first visible signs and downward tendencies in distribution markets, the COVID-19 impact on retail markets is yet to be seen. Over the last weeks, there has been no indication of any general change in dynamics.

The more realistic question is: When and how will the drying supply chain hit these markets? Once the supply of products or parts starts to dry (or seems likely to collapse), retailers will take action. When they do, it will almost undoubtedly lead to an increase in prices to live off the stock longer, or cut in promotions to increase margins and offset the expected loss of revenue for 2020. As supply dependency differs so much by product segment and manufacturer, quick decisions are needed to optimize the assortment and product mix. There are early signs that this may have started on a small scale already – and these will become more visible each week.

The long-term social, economic, and health impacts of the COVID-19 virus are still unknown. The hope is that current global efforts to contain the virus and its impacts are successful. And smart retailers are thinking about all of the scenarios and planning accordingly. Whether this situation lasts weeks or months, it is clear that the global response to this virus has fundamentally changed the reality for retailers. It is time to face that fact and start adapting.

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