Few sectors have been hit harder by the coronavirus outbreak than non-essential retail categories like apparel, footwear, health and beauty, and home goods. These retailers have had to close their brick-and-mortar stores in most states, putting them in an extremely difficult financial situation. Indeed, retailers everywhere are dealing with the new reality.
Ecommerce presents an opportunity to make up for some of that lost revenue, but it still accounts for just 16% of all retail sales. While grocery retailers have seen a huge spike in online sales, year-over-year ecommerce sales are down in most categories. Fulfilling ecommerce orders has its own challenges in the time of social distancing, and many companies have had to temporarily close warehouses after employees tested positive for the coronavirus. A few retailers, including Patagonia and TJX Companies (the owner of TJ Maxx, Marshalls and HomeGoods), have shut down ecommerce entirely in an effort to protect employees.
The average small retailer only has enough cash on-hand to last 19 days if no revenue came in, according to a 2016 study by JPMorgan Chase. Stores in some states have already been closed for that long.
As retailers rapidly cut costs to conserve cash on hand as much as possible, many have furloughed or laid off employees. But there are other steps retailers can take to reduce expenses and generate revenue right now.
Reallocate existing inventory
Retailers with physical locations have millions of dollars’ worth of inventory sitting on their store floors and in backrooms. This is no longer a short-term problem, as it could be a month or more before most stores can open their doors. They should consider moving that inventory to centralized distribution centers that fulfill online orders.
Sellers could also consider fulfilling orders from stores, though there would need to be enough orders for products they stock to justify the cost of labor.
Ask partners for help
Suppliers, utility providers and even landlords may be flexible during these challenging times. In the restaurant space, large food suppliers have reduced prices to help their customers, and retailers should ask vendors whether they can get any temporary breaks or set up payment plans for existing bills. If nothing else, retailers could cancel orders from suppliers or temporarily suspend production.
Many retailers have informed landlords they will not pay April rent, and some landlords may be willing to negotiate. Help could come in the form of rent relief, temporary discounts or rent deferrals (i.e., discounts that are paid back later). This crisis requires a team effort.
Drive new and existing customers online
Ecommerce is the most obvious way for retailers to keep money coming in right now, and they should pour whatever resources they can into this channel. Consumers have shifted their purchases online. Any improvements to the online customer experience will have an extended return on investment. The best ecommerce sites give customers the option for curbside pickup or local delivery, which has become popular during social distancing. Customers can order and pay online, which enables contactless transactions and may convince more shoppers to convert.
Social media and email marketing are critical in boosting online visits and orders. First, retailers can use these marketing channels to let shoppers know they’re still open for business online. Second, they can highlight sales or other promotions that provide a more immediate call to action. If any products seem to sell well right now – leisurewear, for example, as more people work from home – this is also an ideal place to feature those items. However, marketing is tricky right now and businesses need to be careful what they say in email marketing messages.
There are currently few retail-specific loans at the local and state level and no funding available through trade associations like the National Retail Federation (NRF) or Retail Industry Leaders Association (RILA). Relief funds that have appeared in the restaurant industry, for example, do not seem as common in retail – not yet, at least. For now, they can take advantage of two federal programs may free up money for sellers to invest in the initiatives mentioned above:
The CARES Act Paycheck Protection Program
The CARES Act includes $350 billion in relief for businesses with less than 500 employees under the Paycheck Protection Program. Small retailers can get a loan worth up to 250% of their monthly payroll costs. The federal government will forgive the loan if a business uses it to cover payroll, rent or other basic expenses and meets certain requirements.
In addition, The CARES Act offers extended unemployment benefits and an additional $600 per week on top of the state’s usual payment. That’s important to the many retail employees who have lost their jobs.
SBA Economic Injury Disaster Loans
The Small Business Administration’s (SBA) Economic Injury Disaster Loans are another good option for retailers and can be received in conjunction with the Paycheck Protection Program loan. Companies with less than 500 employees can get up to a $2 million loan to pay “fixed debts, payroll, accounts and other costs.” Retailers can also request a $10,000 advance during the application process from the SBA.
Planning for the future
When state and local governments reduce social distancing restrictions and stores can reopen, retailers will reenter a much different landscape than the one they left behind. Experts think the economic effects of this pandemic could deliver a fatal blow to a few large, national retailers that were already in dire financial straits. The effects of that alone would be far-reaching, as a number of wholesalers rely on the business of select large chains.
Consumer spending habits will change, as well, and retailers that sell non-essential goods may be hit the hardest. So how should retailers start planning for this new environment?
Manage inventory and purchasing carefully
Retailers should be wary not to over-purchase and target lower inventory levels. It’s dangerous to assume the apparel and footwear or consumer electronics market, for example, will immediately return to its status in January. Retailers should be conservative to start and adjust production and inventory based on demand.
Businesses need to account for the fact that they already have excess inventory due to store closures and the recent decline in spending. Some of that aging inventory is seasonal items, and selling those products will probably require deep discounts. Given their recent financial challenges, retailers cannot afford to have any more money than necessary tied up in inventory.
Explore liquidation options
Even hefty discounts will not move all of these leftover items, which means apparel and accessories retailers will sell more excess inventory than usual to off-price retailers. Although TJ Maxx, Ross and similar stores pay pennies on the dollar, it could help recover some losses on out-of-season merchandise. However, off-price retailers may become inundated with inventory because so many retailers have excess merchandise, driving down the value of those items even further. Discount stores may be purchasing some inventory now, but they must be careful, too, since they’re non-essential businesses and currently closed.
Map out multiple scenarios
Retailers should explore the financial impact of different moves they might make after reopening to see how it might impact cash reserves. For example, what would funds look like if the company resumed some cancelled or delayed orders from a supplier? What would it cost to invest more in ecommerce or target new strategic markets? If demand returns quickly, what is the workforce situation? A planning and budgeting solution makes it easier to calculate the financial impact of these what-ifs.
Prepare for a ‘new normal’
The coronavirus has changed consumer concerns and expectations for the near future, and retailers must be conscious of that when they reopen. The government may suggest employees and/or shoppers should wear masks and gloves in stores and wash or sanitize their hands frequently. Retailers must be prepared to adjust to this new environment by being ready to supply employees – and customers – with hand sanitizer, face masks and possibly disposable gloves where it makes sense.
Just as important, companies must communicate the changes they’re making to address consumers’ worries. Social media, emails and even ads are all effective ways for retailers to let consumers know the steps they’re taking to keep everyone healthy.
Evaluate sales channels and refocus
The shift to more online shopping may force retailers to invest not only in their ecommerce sites to ensure an easy shopping and checkout experience, but establish defined, scalable processes on the back-end to fulfill and quickly ship more online orders. Retailers with brick-and-mortar stores need to support curbside pickup and delivery since many have recently tried it for the first time and enjoy the convenience.
Finally, retailers should evaluate their stores and figure out if it makes sense to reopen all of them. The combination of growing online sales and persistent cashflow issues may mean it’s best to leave some closed, especially for brands that have many stores.
The retail landscape will undoubtedly look different post-coronavirus. Just how different it looks will depend on how long social distancing lasts and the scale of the pandemic’s total economic impact.
If legacy retailers struggle to recover and a few disappear, that opens the door for more small, nimble retailers to capture market share. Many of these are direct-to-consumer businesses that have already shown much promise and had success over the last few years. An industry that’s been a beacon of change for the past 10-15 years seems to have encountered yet another industry-shifting moment.
Learn about unifying financials and inventory.