The now prolonged COVID-19 pandemic is hitting the U.S. and global economy hard. U.S. GDP in the second quarter of this year fell a whopping 9.5%! And the unemployment rate remains above 10%, though it has improved in recent months. While the economy has recently been improving, the prospect of a prolonged pandemic raises serious economic concerns in the U.S. and around the world.
However, this pandemic also raises business opportunities as entrepreneurs attempt to anticipate the changing competitive landscape due to the new reality of living in a pandemic-prone economy. I have studied numerous industries for 30 years now and am fascinated as to how rapidly our free market economy adapts to economic challenges such as the current pandemic.
In this article, I focus on one of the business sectors which I have studied extensively, and which has been deeply impacted by the COVID recession: the retail sector. I discuss some of the current challenges but, more importantly, future business opportunities in this industry.
Pandemic Winners and Losers
The retail landscape has dramatically changed since I grew up in the 1970s. At that time, most retail shopping took place at local strip shopping centers with mom and pop retailers and large indoor shopping malls. But today, indoor shopping malls are dying in favor of outdoor lifestyle centers where you can shop, dine and be entertained. And while some mom and pop retailers have survived, the retail sector is largely dominated by large mass merchandisers (e.g., Walmart), big box retailers (e.g., Best Buy), clubs (e.g., Costco) and internet retailers (e.g., Amazon).
What can we expect to see in the retail sector amidst COVID-19 and other potential future pandemics? Well, the simple answer is “more of the same” only at an even more accelerated fashion. This is because those retailers who have best weathered the COVID recession are the same ones that have been gaining the most ground in recent decades.
One obvious beneficiary of the pandemic is e-commerce. In Q2 2020, Amazon’s revenue rose 40% over the same quarter last year and its net income doubled! Not surprisingly, Amazon’s stock price has increased by more than 50% since April.
Certain specialty e-commerce retailers have done even better than Amazon. For example, Wayfair’s stock price was under $30 in March and now it is over $300 – a greater than tenfold increase! Overstock has experienced a similarly dramatic increase in its stock price. And many other firms in the e-commerce sector have gained substantially as well including eBay and Chewy. This trend fares well not only for large e-commerce retailers but also for many smaller online retailers that, for example, make use of Amazon’s business model. Indeed, the new mom and pop business model in a pandemic-prone economy may well be made up largely of small specialized e-commerce retailers!
Another big retail beneficiary from the pandemic are the mass merchandisers and club stores. In large part due to their size and breadth of product offering, Walmart and Target stores were able to stay open during the pandemic, allowing them to gain sales from other retailers who were forced to close or shift to curbside only sales. Both Walmart and Target also substantially benefited from their substantial online presence, which facilitated the ability of shoppers to order their products online and pick them up at the store. Similarly, Costco and Sam’s Club have also gained ground during this pandemic. Clearly, living in a pandemic-prone economy will only strengthen the retail positions of Walmart, Target, and the club stores.
Many big box retailers have also done well amidst the pandemic. For example, Best Buy’s stock recently hit an all-time high despite the fact that it shifted to only curbside offerings in the spring. This is because Best Buy was able to keep sales relatively high (in large part due to people ordering online and picking up at the store) while cutting costs. Other big box retailers have also fared well, particularly Home Depot and Lowes, as many people have shifted their focus to home projects amidst the pandemic. And even the office superstores (e.g., Staples) and pet superstores (e.g., PetSmart) are sustaining themselves through the pandemic.
So, all of this begs the question, if the mass merchandisers, big box retailers, clubs and e-commerce retailers are doing well, which retailers are being hurt by the pandemic? Well, the answer is, pretty much everyone else. You just need to take a look at the relatively empty large shopping malls and strip centers and there is your answer. Department stores like JC Penney and Neiman Marcus have closed hundreds of stores and have declared bankruptcy. The same is true for national clothing store chains such as Brooks Brothers, Ann Taylor, Lane Bryant, J.Crew and Men’s Warehouse. And many other national and regional retailers that are typically located in large shopping malls and strip centers have also followed suit including Pier 1 Imports, Modell’s and GNC.
In addition, the available information indicates the smaller mom and pop retailers are struggling with reduced sales, though these smaller businesses have shown amazing resiliency and have adapted to the economic challenges of the pandemic. Many of those smaller retailers that have survived are doing so by offering curbside-service, reduced business hours and expansion of their online offerings.
The Future of Retail in a Pandemic Prone Economy
What does this tell us about the future of retail? It tells us several things:
- First, and most obviously, the movement towards e-commerce retail will accelerate including not only Amazon but also other online retailers such as Walmart and specialty online retailers.
- Second, large multi-product retailers such as Amazon, Walmart and Target will continue to dominate the retail landscape for the foreseeable future.
- Third, the movement towards retailers with a combination of strong brick & mortar and e-commerce operations will accelerate.
- Fourth, both small mom and pop specialty retailers and specialty retail chains that tend to locate in strip malls and large shopping malls will need to significantly change their business models. This the area of the greatest challenge but also with the greatest entrepreneurial opportunities.
Here are some of the changes that will need to be made for these latter businesses to continue to compete:
- E-Commerce – Most obviously, specialty brick & mortar retailers will need to expand their presence in e-commerce. This will be particularly challenging but necessary for smaller mom and pop retailers who will need to expand the prevalence of online order and curbside pickup in a pandemic-prone economy. This suggests an expansion of e-commerce platforms that will facilitate the ability of online retailer ordering and pickup (or delivery) for small businesses.
- Space – Specialty retailers have historically operated in relatively small retail spaces (e.g., 2000 square feet) with narrow aisles and limited outdoor space. These retailers will need to shift to larger footprints, including more outdoor space, to better accommodate pandemic spacing requirements and curbside pickup services.
- Prices – Greater spacing will likely translate into higher prices which will in turn alter the attractiveness of retail options for consumers. Specialty retailers will need to revisit their pricing strategies and focus on products that will remain attractive to customers at heightened price levels, particularly in comparison with mass merchandisers and internet retailers. Consumers may be willing to pay a heighted price premium for a prom dress or pair of Ray-Ban sunglasses, but much less so for a best-selling book or a pair of tennis shoes. [Note: bookstores and shoe retailers have been particularly hard hit by the pandemic.]
- Selection – Specialty retailers have typically focused on a narrow selection of products and services but the shift towards larger space environments is likely to be also associated with combining multiple products and services under one roof. Some larger retailers already include smaller retailers within their footprint (e.g., Walmart). This trend towards combined product and service retail operations under one roof will likely expand in a pandemic prone economy.
Final Thoughts
Overall, the retail landscape will go through significant economic changes as we move forward amidst COVID-19. And, while the future is challenging, particularly for specialty retailers and mom and pop operations, there are great business opportunities for those retailers who can weather the pandemic storm and adapt to the new reality of conducting business in a pandemic-prone economy!