The impact of the coronavirus on retail

2020/03/05 Innoverview Read

As with major weather events, retailers' top priority as COVID-19 has spread globally in recent weeks is the health and safety of their workers and customers. Those concerns early in the year led Levi's, and many other retailers, to shutter stores within China and restrict employee travel into and out of the country.

Several weeks on, the virus has arrived in the U.S. and other countries outside China, with 93,000 cases tracked worldwide as of March 4, according to the World Health Organization. Many details about the flu-like disease, which is caused by a member of the coronavirus family, remain unknown, and health officials are still working out how far and for how long it might spread. But as more cases of the disease have been reported globally, problems for the retail industry have emerged. 

Perhaps most disrupted is the supply chain, as factories shutter within China (compounding issues introduced by the Trump Administration's tariff policies last year). This week, the epidemic also hit home for Amazon and REI, which both operate in the Seattle area where a few U.S. cases are clustered, according to KOMO NewsAn employee at Amazon was diagnosed with COVID-19. REI closed three Seattle-area campuses after two employees reported possible exposure to coronavirus. 

The National Retail Federation at the end of last month maintained its prediction for retail sales growth this year of 3.5% to 4.1%, to more than $3.9 trillion, despite uncertainty around the trade war, the COVID-19 outbreak and the presidential election. At that point, however, coronavirus was already coming up in dozens of earnings calls, even pushing down guidance in some cases, and that has only escalated since.

Amid so many unknowns, Retail Dive will continue to monitor the situation for retailers and consumers. Here are some of the impacts.

Supply chain disruptions

Concerns around the virus's impact on supply chains have been brewing for weeks as COVID-19 spread through China. Across retail, concerns have mounted. Sellers on Amazon's marketplace are reportedly struggling to bring goods into the country.

As a Berkeley Research Group report noted, the virus shut down factories and kept workers home in China, while also stalling travel, reducing both production and shipping of goods. Indeed, by late February, the COVID-19 outbreak had rendered almost 9% of container shipping fleets inactive, according to Alphaliner. Chinese manufacturing indices hit their lowest point since the Great Recession, the result of manufacturing operations staying closed after the Lunar New Year break to stem the spread of COVID-19.

In toys — of which China accounts for more than 80% of imports — the impact could be pronounced. S&P Global analysts led by Emile Courtney said in February that there is "much uncertainty" over the virus' effect on the second quarter "and beyond" for toy companies Mattel and Hasbro, which could face supply chain disruptions.

Hasbro, in its Feb. 11 earnings release, added coronavirus to its list of risk factors to investors along with the possibility of "work slowdowns, delays or shortages in production or shipment of products, increases in costs or delays in revenue."

The apparel supply chain is potentially vulnerable as well as the outbreak intensified and slowed travel across China, Moody's analysts said in a February report. "A worsening outbreak could materially disrupt the global apparel supply chain, which could hurt companies that are more reliant on China for sourcing, either directly or indirectly," the analysts said.

As financial markets gyrate, analysts have peppered retail executives with questions about how coronavirus will impact their supply chain and businesses. Best Buy executives addressed the topic in late February, describing the situation as "incredibly fluid" and saying the company expected impact to be limited to the first half of the year, according to a Seeking Alpha transcript. CFO Matt Bilunas said the company expected supply chain disruptions, but did not quantify them for analysts. Ross CEO Barbara Rentler said in a statement Tuesday that her company was monitoring the situation but "there remains a high level of uncertainty over supply chain disruptions in China."

Dollar Tree CEO Gary Philbin said the company's sourcing, merchant and supply chain teams were "meeting daily and updating our progress on visibility to individual purchase orders," according to a Seeking Alpha transcript. He added, "Generally, we are seeing production pick up and factory attendance is increasing each week." Meanwhile, ports and freight consolidators were open and operating at "near normal levels," he said. 

'Aggressive shopping' at Walmart and Target

For mass merchants like Walmart and Target, the virus could have multiple, and countervailing, effects. While they could face some supply chain disruption and decreases in casual shopping like other retailers, they also are sources of groceries and disease-fighting essentials that consumers are stockpiling.

Walmart sources 15% of its goods from China, and Target 30%, according to an emailed report from Cowen & Co. Target CFO Michael Fiddelke described the situation as "fluid" but said his company doesn't expect the spread of the virus to have an impact on the retailer's results, according to a Seeking Alpha transcript. "[B]ecause of our size and the flexibility that comes from our multi-category portfolio, we haven't seen anything so far that would cause our financial expectations for 2020 to deviate from our longer-term algorithm," he said. 

CEO Brian Cornell said the company is monitoring the situation "hour by hour," and, in response to an analyst question, noted that, "certainly from a merchandising standpoint, we know that we're going to see some periodic delays." To adjust, he said the retailer is "making changes in our assortment and our promotional and presentation plans."

Asked about stockpiling, Cornell said, "we've certainly seen a U.S. consumer that's starting to stock up on household essentials, disinfectants, food and beverage items, all those staple items that the CDC has recommended they add to their pantry." He added, "And certainly we've seen aggressive shopping across the country in our stores."

As mass merchants, Walmart and Target's stores are also potential vectors of the disease as well. To address that, Walmart in late February issued a memo to employees with best practices for avoiding the spread of infection. And while the retailer told employees to stay home if they are sick, the group United for Respect said that "employees report being afraid to use their sick time because they could be fired."

Threats to luxury

The luxury market is responding much like the rest of the world when it comes to coronavirus — by shutting things down and pulling back. 

One of the biggest signs of the industry's response has been its reaction to various fashion weeks. A number of designers dropped out of Paris Fashion Week, including Chinese brands Shiatzy Chen, Calvin Luo, Masha Ma, Maison Mai and Uma Wang. Additionally, LVMH Moët Hennessy Louis Vuitton canceled a reception for its 2020 LVMH Prize for Young Fashion Designers (although it did not formally give a reason for dropping the event, it occurred the same day that France reported its first death from the coronavirus).

For the first time in the company's history, Georgio Armani canceled its live show in Milan, although the fashion house did stream footage of models walking down the runway online. Also during Milan Fashion week, Dolce & Gabbana announced that the company made a donation to private Italian university Humanitas University to support coronavirus research. Then, at the end of February, Seoul Fashion Week was called off.

"If your customers are worried about human contact, therefore, your business has a new and unexpected challenge."

Alan Behr

Fashion Industry Attorney and Partner at Phillips Nizer

Many luxury brands have also closed store locations in China, including Burberry, Tapestry, Capri and LVMH, according to a report by Coresight Research. "The coronavirus outbreak is a threat to luxury brands and retailers as Chinese consumers have become the world's leading luxury spenders," the report stated. 

Indeed, the luxury market leans heavily on Chinese shoppers to propel it forward. In 2019, luxury goods saw 20% growth in China for the second year in a row, according to a Bain & Company report. Additionally, luxury spending by Chinese shoppers accounts for 33% of the global market.

"Luxury retail is still primarily a personal experience," Alan Behr, fashion industry attorney and Partner at Phillips Nizer, wrote in emailed comments. "If your customers are worried about human contact, therefore, your business has a new and unexpected challenge."

Luxury retailers can position themselves during this time, though, Behr stated. "Above all, have stylists, personal shoppers and others who are on the front line with customers stay in contact with them, sending notes, reminders and private offers," he said.

Avoiding brick-and-mortar stores

With such uncertainty, many people are understandably hesitant about gathering in crowded public spaces, and that is hurting traffic to physical retailers, especially at malls, according to Coresight Research.

More than a quarter of U.S. respondents told Coresight that they're avoiding public areas at least somewhat, and 58% said they plan to if the outbreak worsens. Of those who have already altered their routines, more than 40% say they are "avoiding or limiting visits to shopping centers/malls" and more than 30% are avoiding stores in general.

At the time of the study, shopping centers and malls were the third most likely to be shunned, just behind public transportation and international travel. For those most likely to change their routines if reports get worse (and they have since the survey), avoiding malls becomes their top priority, with 74.6% expecting to limit their visits. Other shopping, like grocery shopping, is less vulnerable, "although over half of avoiders could steer clear of, or reduce their visits to, retail stores," Coresight said.

Coronavirus "will be like adding jet fuel to an already exploding segment of retail. Amazon and a handful of others will be the beneficiaries of a windfall."

Doug Stephens

Author of "Reengineering Retail: The Future of Selling in a Post-Digital World"

It isn't just traditional retail stores. Duty-free sales, conducted mostly in airports, are expected to take a hit, especially in the Asia-Pacific region. While GlobalData previously forecast APAC duty-free sales to reach $43.4 billion this year, the firm has cut that by 19.1% to $35.2 billion, due to the COVID-19 crisis, according to a note emailed to Retail Dive. And Phillips Nizer's Behr warned that sporting events and concerts will sell less merchandise as people avoid those, apparel and accessories sales will fall as people eschew charity events, and vacation-related spending on camping gear and mementos will fall as people cut down on travel.

"The problem of a potential pandemic iterates throughout the chain of supply, sale and consumption," Behr said. "The winners will likely be online retailers and services providers."

A boost for e-commerce

It stands to reason that, as Behr notes, digital sales will rise as shoppers stay away from physical retail. Pradeep Elankumaran, co-founder and CEO of online grocer Farmstead, told Retail Dive in an email that delivery volume rose more than 30% this week over normal levels, "most likely due to coronavirus concerns" as more people work from home and avoid crowds.

Farmstead ran low on some staples, "but tweaked its predictive models to better predict demand during this unusual crisis, and now inventory levels are back," the company said.

Indeed, IHL Group founder and President Greg Buzek expects the crisis to spur investments into omnichannel technologies. "It is our view that the trends to optimize click and collect and delivery will double their previous investment as a result of people to avoid crowds for the next 90 days," he wrote in blog post this week, adding that he expects "significant increases in remote tools, moves to decentralize the supply chain and AI/[machine learning], Forecasting technologies, and Analytics."

Doug Stephens, author of "Reengineering Retail: The Future of Selling in a Post-Digital World," told Retail Dive in an email that the emerging epidemic "will be like adding jet fuel to an already exploding segment of retail. Amazon and a handful of others will be the beneficiaries of a windfall."

But online retail won't escape unscathed. For one thing, many luxury players "will be the big losers" because they haven't fully embraced e-commerce, according to Stephens. "Some luxury brands may be rethinking that stance now," he said.

Resale may suffer as consumers get more germ-phobic. Online player Rent the Runway this week sent a notice to customers: "In light of developments regarding COVID-19, we want to proactively provide details and additional transparency around our cleaning process." More, e-retailers can't avoid the supply issues so many retailers are facing.

(Source: Retail Dive