COVID-19 Industry Trends - Retail
Jul 17th, 2020
While much of the initial damage has been done, we believe investors should focus on the kind of economy COVID-19 will leave in its wake and its impact on how companies operate. Over the next several weeks, we will explore this question through the lens of startups – starting with the retail sector. Through these reports, we will highlight key trends we expect to emerge as these companies rebuild and discuss how startups, in particular, will fare amidst the changing crosswinds.
Retail has been one of the hardest hit areas of the economy as a result of stay at home orders and store closures. While the industry was already undergoing a transition, COVID-19 accelerated retail’s confrontation of hard economic realities. A return to pre-virus spending levels will be important for economic growth given that consumer spending accounts for almost 70% of the US economy. While we are seeing increased reopenings (that may also be compromised by a second wave), consumer behavior will not return to what it was pre-virus. The re-emerging consumer will have a new set of preferences and values that retail will need to adjust for.
Key trends we expect include:
- Accelerated shift to e-commerce channels – COVID-19 may mark a pivotal moment in e-commerce adoption. While the shift from physical to digital footprints was already underway pre-virus, the abrupt halt in traditional retail activity has forced many retailers to sharpen their digital strategies and consumers to become more comfortable in online purchasing patterns. At Lululemon, net revenue from direct to consumer sales jumped 68% in the first quarter of 2020 from the first quarter of fiscal year 2019. Even grocery – once thought to have a “stickier” physical footprint – has not been immune. A reported one-third of consumers resorted to online grocery shopping as the virus took hold. While traditional shopping patterns will not disappear, we expect that online shopping will retain much of the ground that it gained in the COVID-19 era.
- Retail infrastructure as a service in demand – As e-commerce adoption accelerates, retailers will have to look to improve their infrastructure for capturing market share through digital channels. To help manage the complexities of distribution and logistics, for example, partnering with Amazon or another large retailer with well-established e-commerce pipelines (e.g. Walmart, Target) may help. Even high-end fashion – which once shunned mass market retailers – has turned to this option, encapsulated with the partnership Common Threads: Vogue x Amazon Fashion. Outside of distribution, we believe that some software companies such as Shopify could benefit as retailers look to bolster other aspects of their e-commerce infrastructure.
- Second-hand / Rental – As consumers feel the pinch of lower paychecks and additional economic uncertainty, we believe the value propositions of clothing consignment and rental will increase. Clothing rentals offer consumers novelty (without breaking the bank). We do not believe that consumers will abandon ownership altogether; rather, a different kind of utility will be derived via direct ownership. Similarly, second-hand and consignment shopping will offer consumers a “treasure hunt” experience and sense of novelty, coupled with good value.
- Reining in supply chains – Rationalizing supply chains will become a key focus for brands, in our view, as it becomes increasingly important for companies to insulate themselves from supply disruptions. Some retailers may vertically integrate to gain even more control over their supply chains.
- The demise of the department store – Large retailers have been hamstrung by an inability to quickly respond to changing consumer tastes. Once highly influential in shaping preferences, these companies have become increasingly drowned out as consumers turn to the internet and social media for shopping inspiration. Carrying the weight of expensive physical footprints has only slowed these companies down in adapting to the new environment. As consumers increasingly become more fluent online, large retailers will need to become increasingly agile to succeed.
- Sustainability rises to the forefront – Consumers will pay more attention to environmental, social, and corporate governance (ESG) concerns. Good.Must.Grow said its Conscious Consumer Spending Index (comprised of purchases of socially responsible brands) jumped 15% in May from the previous study in November. 70% of respondents to the study, cited a company’s ability to make a positive impact on society and the environment as influencing their spending post-pandemic. Anna Wintour also recently called for the broader fashion industry to emphasize sustainability. With supply chains and travel disrupted, brands are taking this opportunity to strategize a sustainable future. This crisis has exposed the vulnerabilities of businesses and the absence of business continuity plans. Going forward, boards and executives will not be forgiven for failing to account for climate change scenarios.
- Seasonality is defunct – Gucci recently announced that it will leave the seasonal fashion week calendar behind. The pandemic has intensified concerns about the environmental impact of multiple shows a year and the consumption that it encourages. This may have ripple effects on fast-fashion retailers, who may choose to limit production of multiple collections. Inventory will be held and sold for longer periods and may rely less on seasonality.
How should our investors think about retail start-ups in this environment? Start-ups are relatively well-positioned, in our view. For starters, start-up retailers tend to have stronger e-commerce capabilities, as most were conceived on-line. Consumers have increasingly turned to these “digitally native” brands for captivating digital storefronts and experiences. Second, many brands have proven more agile in adapting to and shaping preferences among key consumer bases (Millennials, Gen Z). We particularly like brands that are mission-driven, as these retailers tend to resonate more with younger age cohorts. Third, start-ups tend to not face the burdens presented by complex supply chains (some are even vertically integrated) and large physical footprints – two factors that have greatly impaired traditional retailers’ agility. Outside of the retailers themselves, we also like software companies that provide underlying e-commerce infrastructure (e.g. enabling more efficient supply chains, logistics, and payment collection) as online capabilities become an even more vital part of retailers’ value chains in the years ahead.