Sustainable growth in the new normal - how the retail industry is positioning for post COVID-19 life
The start of 2021 shows a much more varied global picture for the retail industry compared to the unique challenges brought about in 2020. While some European countries remain in lockdown with non-essential stores closed, other countries like Australia and New Zealand have seen a return of demand over the holiday season due to non-existent community cases. While shoppers in Australia are still wearing masks and observing social distancing, many retailers are seeing a boost in trade. But with ambitious vaccination programmes being rolled out and optimism beginning to return, the priority for businesses becomes positioning for future success.
COVID-19 provided some hard lessons for the retail sector. It is time to turn those into sustainable and well executed growth strategies.
Those that have performed best during the pandemic tend to have two things in common: a comfortable debt/EBIDTA ratio and an established omnichannel strategy in place before the disruption began. Retailers in the US saw a 40% jump in ecommerce sales in 2020, while internet sales represented 36% of total retail sales in the UK in November 2020[i].
But this doesn’t mean physical stores will disappear overnight. In fact, the move towards omnichannel retail means ensuring that customers moving from online to in-store to phone communication have a seamless experience. Sustainable growth demands resiliency and flexibility, which could mean reducing physical footprints and restructuring alongside growing online and creating a multichannel presence.
The pandemic has further demonstrated that retailers across the globe need to focus on creating a core group of loyal customers. This is always going to be the best way of dealing with disruption, and we can help you protect your business and restore value.
Mergers and acquisitions
Different parts of the retail sector are experiencing different pressures, and these represent significant opportunities for acquisitions and mergers. While apparel businesses have been hit hard by falling footfall and luxury retailers have not been able to hold big meetings and social events, other parts of the sector are thriving. In particular furniture and home goods retailers and sellers of outdoor recreational goods have been able to capitalise on consumer trends. Private equity firms are actively looking to invest in businesses that can tap into the outdoor activities and sports markets, as well as retailers with an established online presence.
A major theme throughout 2020 was the need for retail businesses to preserve cash and attempt to increase liquidity. All over the world governments have implemented measures allowing businesses to temporarily reduce their operating costs, particularly staff salaries and tax payments. However, many of these measures will begin to be phased out in 2021. Those retailers with an established online presence have been better able to weather the storm, but with lower profitability per individual sale this may not be a feasible strategy for many businesses.
It is common for retailers to carry little cash and have high-fixed costs, which is not a problem in times of regular consumer levels. The pandemic has created a serious strategic imperative to address cost management, with lease, infrastructure and physical footprint emerging as key areas of focus. But stock, property and labour are likely to remain the three largest costs, especially when employee furlough schemes end. Apparel retailers in particular could be sitting on large amounts of unsold seasonal stock, and subsequently, we are already seeing heavily discounted prices among some businesses.
Debt and restructuring
While many landlords and banks are granting payment holidays, there is still a lot of uncertainty about how long businesses can operate if demand remains low. Any appetite among lenders to reschedule debt payments will depend on what shape they think the business in question is likely to emerge from the crisis in. For many, this has meant putting together funding proposals for shareholders and using insolvency tools to restructure quickly.
We are currently working with retail businesses around the world to address the latest industry issues and achieve their strategic ambitions amidst the pandemic. For support navigating the year ahead, get in touch with your Grant Thornton Bahrain advisers or download our publication.