Retail – Overcoming the COVID-19 Hurdles, Finding Opportunities

As regions throughout the United States enter different phases of a reopening plan, it is important for retail companies to look at the transitional implications of COVID-19 as they begin to move toward a new normal. For the retail sector, understanding and finding new solutions for moving forward will be key to their national comeback—leading to a major reassessment of business plans, as well as an array of potential opportunities.

While every industry was hit hard by the pandemic, retail was one of the sectors most affected and will likely continue to face considerable challenges as the reopening of the economy progresses. Understanding these challenges is essential for companies to develop strategies to successfully confront them and capitalize on opportunities that have presented themselves as a result of the crisis.

The Challenges:

Social Distancing and a Commitment to Safety – As the U.S. rebounds, retail will continue to reopen, but will not return to business as usual any time soon.  Starting with Phase One of Governor Cuomo’s New York Forward Plan (the “Plan”), retail stores with their own external entrances were able to commence operations through curbside and in-store pick up only. Phase Two allowed all in-store activities. However, this phase required the implementation of safety measures for the health and wellness of customers as well as employees. Retail owners and operators should adhere to the reopening regulations established in the states in which they operate. According to Phase Two guidelines released by New York State, social distancing regulations should be strictly enforced, which requires individuals to remain six feet apart. As such, some retail stores may only be able to operate at 50% capacity. Additionally, retailers must require all employees and customers wear masks, encourage hand washing with signage, provide hand sanitizer stations, and increase ventilation of outside air where possible. Although we are now in Phase Four, all guidelines issued in Phase Two remain applicable. The same guidelines apply to malls, which can open and operate as part of Phase Four, but only with enhanced HVAC systems since they are limited in their ability to increase ventilation of outside air.

It is further recommended that interpersonal contact and gatherings should be limited to workforce members only and, when required, to conduct necessary business activities. Stores must also ensure that fitting rooms are equipped with appropriate cleaning and disinfection supplies for employees and customer use. The reduction, or elimination, of product testing and/or the handling of products by multiple patrons is also recommended and should be a best practice implemented by all retailers in an effort to reduce the risk of increasing COVID-19 infections.

Financial Implications – It is no secret that retail stores of all sizes are facing financial hardships. Store closures and a decline in discretionary income due to the public health crisis, waning tourism and the recent onset of civil unrest across multiple U.S. cities have almost crippled non-essential retail. Major stores—such as J. Crew, Neiman Marcus, Brooks Brothers and Model’s Sporting Goods—have filed for bankruptcy and venerable mom and pop shops have been forced to close their doors.  It is evident that the pandemic has negatively impacted the entire sector. Although there were some options for government funded relief, including the Paycheck Protection Program, the Main Street Lending Program, and others, certain companies were unable to receive funding, causing them to furlough or lay off a significant percentage of their workforce. Even if business owners were able to negotiate with their landlords, the slower than expected reopening of our country and the restrictions of the opening continue to negatively impact retailers’ bottom lines.

Supply Chains – As the pandemic progressed, the supply chain was greatly affected as manufacturers in China, Peru, and other nations, that the U.S. is heavily reliant on, began to close. According to the Institute of Supply Chain Management Survey in March 2020, 75% of companies reported interruptions to their supply chain, suggesting that the manufacturing industry was going to take a major hit. As many retailers rely on manufacturing companies to supply goods, many retailers began to feel the hit even before the first case of COVID-19 was announced in the U.S. The nation continues to face the struggles of the supply chain interruptions even as many countries in the European Union and Asia markets reopen—making it necessary to explore new methods such as “re-shoring” manufacturing here to help reduce or eliminate future interruptions.  For more details on how the supply chain has been impacted by the COVID-19 pandemic, click here.

The Opportunities:

Despite this challenging environment, it is important to focus on the potential opportunities that lie ahead to help retailers come back strong. The rapid spread of the pandemic helped to highlight a company’s preparedness—exposing both its strengths and weaknesses. Owners and managers can leverage the lessons learned during this time to focus on their companies’ operations and make the necessary adjustments to ensure and sustain a successful future.

The Switch to E-commerce and a Digital Experience: As stores across the nation closed, many business leaders began to realize the growing importance of an online presence for selling their products. In an ever-expanding digital world, it is important for all stores, especially small shops, to make their web-presence known. This can be accomplished by:

• Developing or refining a well-designed and easy to navigate website with easily accessible links and the ability for visitors to view and purchase some, if not all, products. Additionally, the website should include the ability to arrange for curbside pick-up of purchased goods over shipping.
• The development of an app, which is typically less costly and simpler than a website is to develop, with the ability for users to purchase merchandise or view top selling products. This will increase accessibility for customers and potentially increase purchases and revenue.
• Enhancing marketing efforts, specifically on social media. A retail operator can pay for ad space, post pictures of popular items, and/or align with social media influencers. Additionally, incorporating innovation into marketing campaigns—such as hosting live streams and other online video methods—can be an effective way to enhance new customer acquisition.

These simple methods can help increase brand awareness and loyalty and if done strategically can result in providing a competitive advantage in today’s hyper-competitive environment.  As the world moves faster towards digital platforms, it is important for retailers to be ahead of the curve and implement various measures to differentiate themselves in the market.

Point of Sale (POS) and Other Technologies: The mandated closures have allowed business owners the time to reassess and evaluate certain internal processes or procedures that may improve their efficiencies. One of those processes is the adoption of an updated POS system. The switch to a POS system, or an update to an existing one, can help simplify accounting and other automated processes and enable companies to keep better track of inventory. Barcode scanners and other systems are excellent ways to see exactly what a company has on hand and adequately keep track of items sold. It is recommended to pick a system that will properly help to automate specific retail operations. The opportunity for touchless screens and easier payment options is also more important now than ever.

As technology continues to evolve and improve, the retail industry is presented with the opportunity to look for ways to leverage this technology in order to adapt to the post COVID-19 restriction and help streamline their current processes. One example is 3D body scanning technology for apparel retailers. This emerging technology allows consumers to use the camera and sensors on their mobile devices to capture precise body measurements, helping to verify proper sizing. Through this process, consumers will also have the ability to virtually try on clothing to help determine the best look and fit as well as help reduce the risk of having multiple people trying on the same items. Technologies such as this also help reduce the number of returns due to sizing issues – the main reason for returns – which will help increase customer satisfaction levels and loyalty as well as overall profits.

Reassessment of Inventory and Employees: Essential businesses that were able to stay open still faced the struggle of fewer customers, which led to reduced revenue streams, while still having the same expenditures. As a result, many were forced to furlough or let go of employees as a way to remain operational. As owners and managers begin to get a stronger grasp on how their businesses are performing during the pandemic and continue to prepare for the future, they may recognize that the business can effectively handle market demand with a permanently reduced headcount—cutting overhead and freeing up funds that can be invested in other opportunities to enhance sales, such as technology.

Companies should also assess their inventory management as they prepare for the coming months.   With disruptions to the supply chain as well as an overall reduction in sales, reassessing inventory could not only reduce costs associated with the supply chain, but may also help reduce having too many goods on hand. As we continue to reopen slowly, it is critical for stores to get a better understanding of the optimum amount of goods needed in order to meet customer demand. The results may lead to a realization that what was needed prior to the COVID-19 pandemic is no longer necessary.  For instance, a company can reduce the size or the number of warehouses to save money and increase the bottom line.

Mergers and Acquisitions: With a highly competitive and saturated retail industry, it may prove difficult for many companies that prospered pre-COVID-19 to continue post-pandemic. It is possible that the economic impact of the COVID-19 crisis may have completely reshaped the landscape of the industry, opening up opportunities for industry consolidation. Smaller and less profitable companies might now consider merging, while larger, more profitable companies can explore acquiring established brands that are now struggling due to the pandemic. Merging companies will not only increase their customer base, but can open up the opportunity of leveraging individual successes to create a collective and more profitable business plan.

The retail sector may not have been able to escape the economic impact of COVID-19, but hopefully with proper planning, will leverage this experience to ensure better efficiency and flexibility in the future. Despite the uncertain outlook, companies that make the difficult, demanding, and practical decisions will be in the strongest position to survive and prosper in the new normal.

For additional information on matters relating to the COVID-19 pandemic, please review Berdon’s COVID-19 Information Center and if you have any questions regarding this article or any real estate related matter, contact Marcy Greenfield at 516.806.3425 | [email protected] or reach out to your Berdon Advisor.

Berdon LLP New York Accountants