Retailers: act now to recalibrate for the future

The coronavirus pandemic continues to challenge governments, health sectors and people around the world. The retail industry is playing a key role in the fight against the outbreak, ensuring that essential items are available for the public. The uncertainty of the situation makes it difficult for retailers to decide how to emerge from lockdown. By applying key learnings from previous crises, such as the 2003 SARS epidemic, the 2008 financial crisis and the 2011 Fukushima earthquake, as well as trends emerging from China as the restrictions there ease, retailers could be well positioned to emerge from this crisis stronger.

Lesson 1: understand how demand during and after a crisis will vary by category

Consumer demand patterns during and after a crisis tend to vary by category. Bain¹ has identified the following scenarios.

• Rapid stabilisation: demand spikes during the crisis due to panic buying then stabilises shortly afterwards. This applies to products such as everyday essentials and fresh food.
• Short-term pantry loading: demand spikes during the crisis then drops afterwards, as consumers find they don’t need to buy more. This includes health protection and home cleaning products. During the SARS pandemic, demand for household cleaning products in the 12 weeks to May 2003 was up 179% on the previous 12 weeks.²
• Dip and rebound: demand drops during the crisis then spikes as built-up demand is released. This includes clothing and personal care.

Recommendations

• Model your demand profile scenarios by category during and after the crisis.
• Apply this revised demand forecast to your 2020 business plan.
• Ensure you have sufficient stocks of discretionary items to take advantage of built-up demand when it is released.

Lesson 2: align your business to changes in consumer preferences

Consumer preferences often change after a crisis – and not just temporarily. Post-SARS, for example, fresh produce became important to Chinese customers and there was an increased interest in brands projecting an image of quality and reliability.

Analysts are predicting shifts in consumer behaviour post-coronavirus with an even greater focus on physical health and mental wellbeing.³ Some of these shifts are already occurring in China as COVID-19 restrictions are lifted.

• Home cooking: consumers are filling their quarantine time by cooking from scratch, a trend that is only likely to continue if incomes are squeezed in an economic downturn.
• Meal planning: reduced access to supermarkets is encouraging consumers to shop less frequently and not waste food.
• Community: retailers are coming together to support vulnerable people with specified shopping hours and delivery slots. These measures are likely to continue after the crisis as retailers tap into the newfound sense of community. Further, 77% of Chinese consumers expect brands to be helpful in the new norm post-lockdown.⁴
• Fitness: Chinese customers are beginning to show an increased interest in health and fitness. UK retailers are also seeing a rise in demand for home workout equipment. Exercise and activewear brands are connecting with consumers by offering free fitness videos on Instagram.
• Quality: 70% of Chinese consumers plan to increase spending immediately after lockdown but expect to be more selective over the longer term, signalling interest in quality over quantity.⁴
• Safety: safer shopping will permanently change consumer preferences, as consumers become more conscious of what they buy and how they shop.

Recommendations

• Evaluate your customer experience across all channels and assess how your marketing, communications and product development need to change in line with consumer preferences.
• Analyse how media consumption is changing and adapt your media plans and messaging.
• Make your product or service a brand which consumers can trust.

Lesson 3: accelerate digital and explore pivoting your business models

Crisis anxiety and a subsequent economic downturn will accelerate business model transformations. Companies find themselves looking to reduce costs, identify new categories to sell or change the way people shop. The SARS pandemic catalysed the growth of both JD.com and Alibaba, establishing digital sales as the key retail channel in Asia. This scenario is already beginning to be seen in the UK and Europe.

• Digital acceleration: before SARS, JD.com didn’t exist and Alibaba was a four-year-old B2B company. After the epidemic, JD.com was the second-largest e-commerce retailer globally and Alibaba’s C2C platform, Taobao, accounted for more than 56% of all online sales in China.⁵ In the UK, companies with a strong online presence and an effective e-commerce capability are outperforming those without.
• Right mix of online-offline: changing consumer trends meant we were already seeing a reduction in physical retail stores, but COVID-19 has expedited this further. Older generations have been forced to adopt online channels in the current environment, while consumers are generally becoming more comfortable buying a range of products online.
• Additional delivery channels: consumers are choosing ‘click and collect’ or drive-through options due to health concerns. In response to this, leading retailers have pivoted their business model to better serve their customers, for example, Aldi has recently launched an online delivery service to meet changing demand.
• Disruptive business models: the financial crisis of 2008 resulted in a decrease in discretionary spending. Disruptive companies, such as Airbnb and Uber, grew in popularity as consumers were forced to save money by sharing assets.

Recommendations

• Review your channel strategies and focus on strengthening your overall digitisation. Look at how you market, communicate and interact with your customers. Online is often less profitable, so you will need to model different financial scenarios to support the economics of operating online channels.
• Review your store portfolio and determine the right mix of physical and online stores to serve your future customer. Consider how retail rents will likely change after a period of lockdown.
• Perform a detailed review of how your customer journey has changed and pivot your business model accordingly. You should investigate options such as new categories, alternate delivery channels and subscription models.
• Consider disrupting your business model to enable you to come out stronger. Are there new products, propositions or even partnerships you can create?

Lesson 4: create resilience in your supply chain

Crises can create supply shortages, as well as unprecedented demand in some categories. An example of the former scenario is when the SARS virus paralysed just-in-time supply chains. In the case of COVID-19, it has been suggested that supply chain distribution may be felt for up to two years and cost up to USD$400 billion for business supply chains.⁶

• Global supply chain disruption: we are experiencing the first truly global supply chain disruption, where the over-reliance on Chinese production capacity has created knock-on supply impacts.
• Tier two and three suppliers: the Fukushima earthquake exposed unexpected vulnerability and disruption as many companies were unaware of the impact it had had on their second and third-tier suppliers and how long it would last.
• Coopetition: partnering with competitors can allow retailers to continue serving their customers, particularly during the crisis. Many companies have teamed up with competitors to serve communities together.
• Sustainable supply chains: with a shortage of essential products and increased focus on clean and safe products, the need for sustainable supply chains and responsible sourcing programmes will accelerate following the coronavirus.

Recommendations

• Explore local sourcing in the short to medium term to minimise the impact of the global supply chain disruption.
• Map your tier one, two and three suppliers to understand where potential delays may occur and explore alternative sourcing strategies down to your raw materials.
• Consider partnering with your competitors to explore how you can continue to serve existing customers or even capture new customer segments.
• Build greater agility and flexibility into your supply chain in the longer term to reduce your exposure risks and explore how you can increase sustainability in your operations.

Act now

Many retailers have been in survival mode, focusing on the immediate responses needed in the lead up to the peak of the crisis. It is now critical to apply the lessons learned and recommendations from previous crises to ensure that you hold a competitive advantage in the rebuild and recalibration phases that are set to come.