COVID-19 and the Retail Sector
The COVID-19 crisis is having a devastating effect on the retail industry. This is because COVID-19 has pushed the world towards uncertainty, and consumers are not willing to spend on anything apart from the bare essentials. Also, social events such as proms, weddings, and other engagements have been cancelled. Most people are spending their time locked up in their houses. This is the reason that sectors such as clothing and accessories within the retail industry are witnessing an unprecedented decline. Their sales have literally gone to zero since most retailers have had to close their outlets to prevent the virus from spreading. Only retailers who sell groceries and other essential food items are seeing an uptake in their business. As far as the others are concerned, it seems like the future will be gloomy for some time, at least.
This article provides details about how the retail industry is likely to be negatively affected because of the COVID-19 crisis.
Low Sales and High Overheads: Firstly, it is important to understand that the retail industry has very high operating leverage. This means that overheads i.e., fixed costs make up a large percentage of the cost structure. For instance, retail establishments have to rent out the most expensive piece of real estate on the high street. Also, they have to pay large sums of money as electricity bills and salaries to their workers.
All these expenses are not related to sales. The only expense related to sales is the actual cost of goods sold, which forms a very small percentage of the total cost. Hence, now since lockdown is being extended to most parts of the world, the sales of retailers are plummeting close to zero. However, their expenses are going to remain pretty much the same. As a result, they are likely to lose more money compared to other businesses that do not have high operating leverage.
Piling Up Of Inventory: The modern retail industry is characterized by a supply chain that encourages fast movement of goods across the globe. Fast fashion companies, such as H&M and Zara, manufacture a lot of goods. These clothes are used by consumers only for short periods of time. Now, since sales are not happening in almost two seasons’ viz. spring as well as summer, a lot of inventory is going to pile up in stores. This means that these companies will not manufacture any more goods for some time until the existing stock is already cleared off. Hence, their manufacturing units in countries like Bangladesh and the Philippines will see a temporary hiatus.
Clearance Sales: Once the business resumes, the retail sector will still take some time to get back on its feet. This is because almost all companies operating in the sector will have large inventories to clear. This is likely to trigger a price war, and deep discounting will become a norm. Big brands will face a problem. This is because they cannot use deep discounting in order to clear their stocks. Deep discounting will hurt their brand image, and people will stop buying at full price in the future. This is the reason that bigger brands may sell these products to discount stores at lesser prices. At the lower end of the market, the competition will make it even more difficult to offload inventory. This is because people will just be coming out of recession and will not be willing to splurge much on items like clothing.
Emphasis on Online Sales: The mall culture is also likely to reduce in the future. Till a vaccine or a permanent cure is found, people are unlikely to start visiting crowded places such as malls. High street shopping may not pick up for some time even after the coronavirus crisis gets over. The crisis is bound to leave a deep impact on the psyche of the consumers.
Hence, even if people have to shop for products, they are more likely to do so online instead of personally going to the stores. This has significant implications for retailing brands. It would mean that they have to make significant changes to their strategy in the future. For instance, many high street brands will have to completely revamp their online presence. This could mean tying up with sites like Amazon, which see huge traffic apart from having their own websites. Also, all the marketing efforts will have to be geared towards the digital consumer. Instead of placing signage and billboards on the high street, marketers will have to use options like search engine optimization and social media marketing if they want to improve their sales in the future.
Decline in Capital Expenditures: Lastly, retail chains may be forced to delay or abandon their expansion operations in the future. The current crisis may continue for a few months. Even after the crisis resolves, it would have left a huge dent in the pockets of big retail companies. Hence, for some time, these companies would focus on cutting costs in order to recoup their losses. Expansion and opening of new stores is often a risky venture and requires upfront capital to be invested. The gestation time can also be long, particularly in a slow market. Retail companies would be better off increasing the efficiency and profitability of their current stores.
The bottom line is that the retail sector is going to be one of the worst-hit. The COVID-19 crisis is going to cause significant losses to the investors and employees of the retail sector.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.