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GUEST COMMENT Well-funded, easily distributed and ESG compliant: retail’s post pandemic winners

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Covid-19 has of course sent shockwaves through many sectors of the UK economy, but retailers have been affected more than most. Covid has dramatically accelerated the shift online that has been happening for a number of years, seeing the demise of retail giants such as Debenhams and Arcadia Group. Others such as Cath Kidson, Laura Ashley, Oasis and Warehouse have gone online only while other retailers such as Monsoon Accessorize, New Look and Jigsaw have used company voluntary arrangements to close stores and cut rents.But to oversimplify post pandemic losers as firms that didn’t properly adapt to online is to ignore the other, just as important, trends shaping the industry: the need for providing a resilient service offering, greater personalisation on deals and the need to deliver on environmental, social and governance (ESG) issues. First, it is important to take stock of where we find ourselves now.

A bleak beginning to 2021

The efficient rollout of the vaccine is great news for society and the economy, but the New Year starts with all non-essential retail closed in the UK’s third lockdown. 2020 saw the worst recession for 300 years, and though it marginally avoided a double dip recession – the current lockdown, which started on January 6th could see the economy shrink a further 3.5% in the first quarter of 2021.

The bottom line economically is that the consumer industry has, with a few notable exceptions and sub sectors, taken a huge hit. 40,000 retailers and 21,000 pubs are struggling. If monetary support falls short of the point at which reopenings are sanctioned, further damage will be inflicted and the situation will worsen before it improves.

Pain now for promise later?

Will the outlook improve once consumer confidence is restored and retail is available on all distribution channels once again? Yes, but not necessarily for everybody. It depends on how companies have handled the pandemic, and crucially, how well they have been funded.

Debt has been a defining feature of the last few months for retailers. Debt can be a vital lifeline, but it has left some companies in such distressed positions that they will be unable to take advantage of the expected recovery and increase in consumer spending the vaccine rollout will prompt owing to repayments. £72bn has been lent to business via Covid-19 support schemes alone, and by March 2021 it has been projected that there will be £100bn of unsustainable debt.

Meanwhile, those retailers that may have been struggling, but have more bullish backers, will be in line to benefit from the expected upturn in spending and relaxing of lockdowns. Publicly listed household names such as Hotel Chocolat and WH Smith, for example, were able to tap into investor support to raise £20m and £166m respectively. 

Others are on the acquisition march. JD Sports, whilst not having been hit too badly by the pandemic owing to its leisurewear offering being ideal for stay-at-home consumers, still raised eyebrows when announcing it was considering a £400m equity raise to fund potential acquisitions, even after the completion of a deal to buy Shoe Palace. Yet with so many assets priced at historically low levels, we expect plenty of M&A activity. 

Stay at home stocks to continue run?

The fiasco surrounding Gamestop notwithstanding, the fundamental factors of internet and physical retail outlets catering to a consumer base spending more time at home is set to continue, for the foreseeable future at least. Supermarkets enjoyed their best November ever with shoppers spending £10.9bn in store and online – with the six million online shoppers representing the highest figure ever, accounting for 13.7% of sales. Meanwhile garden centres, pet shops and local shops have also performed strongly. 

Online clothing sales are up 24.3% YoY. It tallies with the fact that online sales recorded five years of growth in 12 months owing to the pandemic, now accounting for 28% of all retail spending as against 19% in 2019. The main beneficiary of this is of course Amazon. It now accounts for 30% of the UK’s entire e-commerce market.

But Amazon hasn’t been the only winner from the shift online, which should be encouraging to all retailers. Watches of Switzerland saw its revenue decline just 2.6% – despite the closure of its stores – owing to a 65% surge in online sales, likely driven by consumers spending less on travel and entertainment costs. Similar shifts were enjoyed by Ted Baker, Joules and French Connection, who all registered muted results overall, but robust performance in the online element of their businesses keeping them resilient from the worst-case scenarios suffered by others during the pandemic.

There are many advantages of internet retail: open all hours, customers can shop from home, price discovery to name a few but their delivery puts ecommerce on a collision course with another element that has been propelled up the consumer agenda: environmental concerns. Research from Ipsos Mori shows that 65% of those surveyed think that it is important for climate change to be prioritised in the economic recovery after coronavirus. Given its ever increasing footprint in the transport sector, the logistics industry will have a huge say in improving environmental outcomes. Retailers would therefore do well to choose their delivery partners not just on price and efficiency, but on how carbon neutral that final process in a sale can be.

Further than a general ‘shift online’: rising post pandemic trends

Defining future retail winners won’t depend so much on who provides the best delivery models, nor will it be solely a case of delivering goods that customers can enjoy during the lockdown. Obviously, this is in part due to the fact that this period won’t last forever, but also because consumer trends are changing continuously, even if the lockdown life feels monotonous.

We may instead begin to see an increasing focus not on mass production, but mass personalisation – the development and deployment of algorithms to develop highly personalised offers and anticipate demand. Of course, this is easier to achieve online, with companies such as clothing marketplace Farfetch developing systems that create a more personalised touch for customers based on their previous views and purchases on the site.

Physical retailers can take advantage of this, too. AI can assess weather patterns, for example, to note where demand may fluctuate for customers. Or analyse Instagram trends to document changing tastes and suggest stocking shops accordingly (though admittedly social channels have made processing transactions within the platform, and therefore online, extremely convenient). 

Another area where physical retail can develop and excel is with increasing its offering. Take, for example, Pets At Home. Its model has been threatened by Amazon’s encroachment into petcare and ability to provide similar products for much cheaper, as well as the convenience of an extremely quick delivery model. Pets at Home has therefore beefed up its services offering, now generating 33% of customer sales from its services such as puppy and kitten clubs, as well as veterinary and grooming operations in stores. 

This is similar to the models of experience retail that were just beginning to take off prior to the pandemic. It’s an indication that while online retail is the future, physical retail serves the purpose of acting as a vector to promote the brand, or an extension of an advertising campaign as much as it is an actual delivery model for products. Through this lens, physical retail is still crucial for brand success.

A battleground between online and offline, or between retail and a weakened economy?

The story of retail during the pandemic has been framed as a tension between online and physical outlets. But, as algorithms and experiential retail blur the line between the two, defining the winners in the longer-term may be more about which companies are well enough capitalised, ESG compliant and adaptive to consumer trends.  

Whilst there is therefore cause for optimism for retailers across all sectors, there is no antidote for the fact that those still fighting face a tough recovery, in the shorter term. Employment levels are unlikely to return to their pre pandemic peak before 2024. Physical retail, which after all still accounts for the majority of retail activity, will still see reduced footfall given a staggered return to offices, later vaccinations for younger consumers and residual fears over vaccine efficacy.


Nigel Parson, Consumer Analyst at finnCap

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